ENG-1997 — Page 114

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FINANCIAL AND MONETARY AFFAIRS

adequacy regime, and is based on the Basle Committee's recommendation but simplified where appropriate to take into account the generally low level of market risk exposures of the local authorised institutions. The latter has been confirmed by the various market risk surveys conducted since 1993 as well as statistics collected from a quarterly prudential return on market risk exposures with effect from December 1996. To reduce the regulatory burden, the HKMA has also set out exemption criteria so that institutions with minimal market risk exposures are exempted from the new framework. An amendment to the Banking Ordinance was approved in August 1997 to give statutory backing to the new requirement. A guideline was subsequently issued to explain in detail how the adequacy of capital to support market risk will be assessed under the new requirement.

The HKMA has strengthened its supervisory efforts in the fast-growing derivatives market. In 1995, it established a specialist team with expertise on derivatives products and financial models to conduct treasury visits/examinations on authorised institutions' derivatives/treasury activities. Two guidelines have been issued by the HKMA — one on high-level risk management for derivatives and one on the operational aspects of risk management for derivatives and other traded instruments.

The HKMA is committed to improving the transparency in financial disclosure by authorised institutions. As a result of these efforts, Hong Kong banks are considered to have the highest standards of disclosure in Asia. The 1997 financial disclosure package covers areas such as the maturity profile of institutions' major assets and liabilities, a more detailed and standardised disclosure of institutions' loan books, institutions' progress in relation to addressing the Year 2000 problem' of their computer systems and the capital adequacy ratio adjusted for market risk.

With the joint effort of the HKMA and the industry associations, a Code of Banking Practice was formally issued by the industry associations in July 1997. It is intended to improve the standard and transparency in the provision of banking services, establish a fair and cordial relationship between banks and customers, and enhance banking stability by fostering customer confidence and loyalty in banks. The code is non-statutory but the HKMA will monitor authorised institutions' compliance with it as part of its regular supervision.

Pursuant to the Memorandum of Understanding signed between the HKMA and the Securities and Futures Commission (SFC) in October 1995, the two authorities continued in 1997 to strengthen co-operation to ensure that there will be no gaps in regulation and to minimise unnecessary duplication of effort in their supervision. Regular meetings were held between the two authorities to discuss policy matters and supervisory issues relating to institutions in which they both have an interest.

The HKMA has formed a study group which comprises representatives from the banking industry and other relevant experts and professionals. It will review the current state of electronic banking in HK, assess the capabilities, potential and impact of such developments and advise on specific aspects of electronic banking. The ultimate objective is to develop a policy and regulatory framework which could provide a sound and secure basis for the development of electronic banking in Hong Kong.

The HKMA became a member of the BIS in November 1996 in recognition of the size of Hong Kong's financial markets and its contribution to international monetary