ENG-1998 — Page 106

FINANCIAL AND MONETARY AFFAIRS

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framework introduced by the Basle Committee is its proposal on incorporating market risks into the capital adequacy regime, which was finalised in early 1996. Market risk is defined as the risk of loss in on- and off-balance sheet transactions arising from movements in market prices. It covers transactions relating to foreign exchange, interest rates, equities and commodities.

The HKMA implemented a market risk supervisory framework in Hong Kong with effect from December 31, 1997, which is essentially an extension to the capital adequacy regime, and is based on the Basle Committee's recommendation but simplified where appropriate to take into account the local situation. The level of market risk exposures of local authorised institutions was generally low in terms of impacts on the capital adequacy ratios. Most of the derivatives and trading activities involved only simple products. These were confirmed by the various market risk surveys conducted since 1993 as well as statistics collected from quarterly prudential returns on market risk exposures put in place since December 1996. To avoid undue reporting burden of authorised institutions, 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 September 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 government will introduce Banking (Amendment) Bill in 1999 to bring Hong Kong's supervisory framework fully in line with the Core Principle for Effective Banking Supervision published by the Basle Committee on Banking Supervision, and to improve the provisions governing the publication and submission of annual audited accounts by authorised institutions. The Bill will also include amendments necessary to improve the operation of other provisions of the Banking Ordinance.

In 1998, consultants appointed by the HKMA conducted a study on the future development of the Hong Kong banking sector. Specifically, the study involved a strategic review of the banking sector and analysis of the current and future competitive pressures affecting Hong Kong in the medium term and the sector's ability to compete effectively in this environment. The study also covered a review of certain important features of the present regulatory system and the HKMA's supervisory operations in the light of the external developments. A report based on the study has made recommendations on improving the competitiveness of the sector and enhancing HKMA's supervisory regime. A full scale public consultation on the recommendations will be conducted. The HKMA will consider whether and how these recommendations should be followed up in the light of public views collected.

The HKMA has been considering an appropriate policy and regulatory framework to provide a sound and secure basis for the development of electronic banking in Hong Kong. A Study Group on Electronic Banking (the Study Group), comprising experts from both information technology and banking industries was established in