ENG-1994 — Page 106

FINANCIAL AND MONETARY AFFAIRS

84

banks are required to demonstrate that netting arrangements are legally enforceable in each of the relevant jurisdictions involved in a transaction. Following consultation with the banking industry and the Hong Kong Law Society, which deems that Hong Kong law is generally supportive of netting, the HKMA will issue its new policy on netting in early 1995.

In August, the HKMA introduced a new regular Return on Interest Rate Risk Exposures of authorised institutions. In the first half of 1995, the HKMA will participate in a Bank for International Settlements global survey on foreign exchange and other financial derivatives activities in Hong Kong. This survey will provide the HKMA with updated information on authorised institutions' exposure to market risks.

At the same time, the HKMA is closely monitoring the proliferation of financial derivative products in the territory, with a view to issuing formal guidelines on the risk management requirements of derivative activities. The guidelines would reflect the broad principles set out in a paper issued by the Basle Committee on the same subject.

In view of the sharp rise in property prices and speculation in the property market, the government issued in 1991 several warnings calling for greater prudence in residential mortgage lending. In November that year, a number of leading institutions responded to these warnings by lowering their loan-to-value ratio for residential mortgages to 70

per cent, which has since become an industry norm. In February 1994, the HKMA issued a letter through the industry associations to all authorised institutions, recommending that those - institutions whose percentage share of property-related loans to total loans was above the industry average of 40 per cent should stabilise or reduce their percentages and that the growth of such lending should generally not exceed the nominal rate of GDP growth, at about 15 per cent.

In August, the HKMA, the Stock Exchange of Hong Kong Limited and the Securities and Futures Commission announced joint recommendations on additional disclosures to be included in the accounts of both listed and non-listed authorised institutions for accounting periods ending on, or after, December 31, 1994. The joint disclosure package will provide greater transparency on a bank's actual level of profits, nature and quality of earnings and assets, cost structure and sources of funding. It represents a major step taken by authorised institutions in Hong Kong towards improving transparency of their financial reporting and bringing the territory's standard of disclosure substantially into line with that of other major financial centres.

Discussion between the HKMA, the Stock Exchange of Hong Kong Limited and the Securities and Futures Commission is continuing on further disclosures to be included in the 1995 accounts. These include additional information on off-balance-sheet exposures, segmental analysis and the cash-flow statement. The HKMA will also undertake a review on the disclosure of balance sheet inner reserves in mid-1995.

Hong Kong is a member of the Financial Action Task Force, an organisation with a mandate to encourage international efforts in the fight against drug money-laundering. To help combat money-laundering, a guideline on the prevention of the criminal use of the banking system for the purposes of money-laundering was issued in 1989 by the then Commissioner of Banking. This guideline was revised in 1993, in the light of the new anti- money-laundering initiatives taken by the international community. It spells out clearly the HKMA's expectations of the internal policies and procedures which institutions should