TNAG-1765-FCO40-2519-Hong-Kong-stock-market-and-exchange-rate-1989 — Page 75

ARPAZK (2)

CONFIDENTIAL

Background

1.

The Hay Davison Securities Review Committee published its Report

on 2 June. It does not pull any punches. It concludes that there was a lack of effective self-regulation and market self-discipline

and that the supervisory bodies had lost control over the markets.

It was critical of the management of the Stock and Futures Exchanges

and of the Securities and Commodities Trading Commission whose

function was to supervise the operation of the Exchanges.

2. The Report contains some 160 recommendations, some for immediate

action, some for the longer term. The key recommendations are:

(a) reorganisation of the Stock and Futures Exchanges;

(b) the establishment of a new independent statutory authority

outside the Government (to be known as the Securities and

Futures Commission);

(c) the establishment of a central clearing and settlement system

for securities.

3.

The Hong Kong Government have accepted the main thrust of the

recommendations and are now implementing them. They recently

appointed Mr Robert Owen, ex-Lloyds, to advise on the setting up of

the new Securities and Futures Commission, which they have decided

to establish, hopefully by the end of the year. Many of the reforms will require legislation; others will be for the Stock and Futures Exchanges themselves to implement.

4. On 20 July the Management Committee of the Stock Exchange decided unanimously at an extraordinary general meeting to introduce

a new organisational structure incorporating all the key elements of

the Hay Davision recommendations, including a new Chairman, new

Chief Executive and a more representative Committee.

5. Mr Cox's question provides a useful opportunity to place on

record the main steps being taken by Hong Kong to put its house in

order and to enhance its position as an international financial

centre. The draft reply, which has been prepared in consultation with the Hong Kong Government, is therefore necessarily somewhat

CONFIDENTIAL

Page 75Page 76

lengthy.