TNAG-1765-FCO40-2519-Hong-Kong-stock-market-and-exchange-rate-1989 — Page 38

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Comment or recommendation

27. Paragraph 7.54 "We recommend that the

installation of the fundamental reforms proposed in this Chapter - the new structure and the new form of guarantee - should be pre-conditions for the continuation of the HKFE after the temporary arrangements expire in October 1989."

28. Paragraph 8.11 "In summary we recommend

(a) that the current balance between GCMs, ICMs and NCMS on the HKFE should be reviewed (b) that great stress should be placed on the quality of Clearing Members - both financial and operational; in particular there should be no dilution of standards in an attempt to achieve a balanced tiered market. The market must be as big or as small as the number and quality of the GCMS permit; and (c) that cooperative GCMS should not be allowed."

Action taken by the HKFE

The Exchange is well aware of the need to provide a healthy and stable fund and negotiations are already current with a view to providing additional financial resources to that fund. Insurance cover may be possible to arrange only once there is a track record by reference to which insurers are able to measure their likely risk.

It is very much hoped that all of the proposals will be in place before the end of November 1988 so that the threat of withdrawal of existing privileges need never be used against the Exchange.

It is hoped that the new proposals and, in particular the levels of purchase price payable in respect of Memberships, will achieve the desired result of a tiered system. There are some indications that this will be the case, but the acid test will be the introduction of the proposals themselves. The Rules of the Clearing House and the Exchange have been harmonised so as to ensure that the capital requirements of both are in line with one another. This is felt to be important since it has been confusing for Members in the past to have to comply with different provisions and to meet different standards in relation to the two entities. In general, the capital requirements will be slightly relaxed from the existing

capital requirements and greater emphasis will be placed on the use of position limits on Members where the Chief