CONFIDENTIAL
BACKGROUND
1.
The Hong Kong Stock and Future Exchanges were hard hit by the turbulence in world markets last October. Both exchanges closed for four trading days and when trading resumed on 26 October the Hang Seng index fell by over 30%. It had become apparent that speculators on the Futures Exchange would be in severe difficulty when markets reopened. Accordingly, the Hong Kong Government put in place a support package in the form of a HK$ 2 billion load facility for the Futures Guarantee Corporation ($1 billion from the Exchange Fund, with a matching $1 billion provided by financial institutions). When it became clear that this would be insufficient to cover the potential loss of the Futures. Guarantee Corporation, the Hong Kong Government announced that a further HK$2 billion would be made available ($1 billion from the Exchange Fund and $1 billion shared between the Hong Kong and Shanghai Bank, the Standard Chartered Bank and the Bank of China).
2.
In November the Hong Kong Government announced the appointment of a Securities Review Committee, led by Mr Ian Hay-Davison, the former Chief Executive of Lloyds, with the task of reviewing the constitution, powers, management and operation of the Hong Kong Stock and Futures Exchanges, the Securities and Commodities Trading Commissions and the office of the Commissioner for Securities and Commodities Trading. The object of the review was to recommend what changes would be desirable to ensure the integrity of the markets and to protect investors. Mr Hay-Davison's report is expected
to be completed in May.
3.
On 2 January, following several months of covert investigation by the Independent Commission Against Corruption (ICAC) Mr Ronald Li, former Chairman of the Stock Exchange, and at the time one of the Vice-Chairmen, and two other members of the Stock Exchange Committee were arrested in connection with allegations of corrupt practices relating to the listing of new companies on the exchange. A number of other members of the Listings Committee are also under investigation by the ICAC. Following the arrests (and under pressure from the Hong Kong Government), management of the Stock Exchange was handed over to a newly-formed management sub-committee composed of people unaffected by the ICAC investigation. The Hong Kong Stock Exchange opened for business as normal on 4 January. Although share prices fell sharply initially (in line with prevailing international trends) they have since substantially strengthened.
CONFIDENTIAL
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