ENG-1998 — Page 125

FINANCIAL AND MONETARY AFFAIRS

systems of Hong Kong had weathered the storm well, some major financial institutions, including the Peregrine Group and the C. A. Pacific Group, did not survive the challenge and collapsed in 1998.

Incidents of defaults

The first incident was the default of the Peregrine Group, one of the largest local investment firms. It took on substantial exposure to certain fixed income investments in the region and the associating exchange risk of currency which became non- performing. This led to the group's insolvency and the eventual applications for provisional liquidation on January 13, 1998.

The second incident occurred with the C. A. Pacific Group. The default occurred when its finance company subsidiary exceeded its credit limit to the banks as a result of the default of its major debtors and its assets being tied up in a significant non- securities related loan. As a result of this financial problem of the finance company subsidiary, C. A. Pacific Securities, which was a regulated securities dealer and which relied on the former for finance to settle its trade could not perform its obligation with CCASS. This prompted the SFC to apply for the appointment of provisional liquidators in respect of the securities company on January 19, 1998, in order to safeguard the interests of its clients. Three other incidents of broker default occurred in mid-1998.

Regulation of securities margin financing activities

In late 1997, the administration began a study on the regulatory issue in relation to securities margin financing activities and their operators. The collapse of the C. A. Pacific Group, which operated inter alia securities dealing and margin financing businesses, added urgency and impetus to the study. A proposal on the regulation over securities margin financing was put to public consultation in May 1998, which seeks to subject the activity and its operators to the regulation by the SFC. Under the proposed regulatory framework, such operator would in future be required to be registered with the SFC and comply with more stringent financial resources and business conduct requirements. Relevant legislative amendments will be submitted to the Legislative Council in the first quarter of 1999.

Unified Exchange Compensation Fund (UECF)

Following the collapse of the C. A. Pacific Securities and its affiliated finance company in January 1998 and in light of the market conditions and fragile investor confidence at the time, the administration together with the SFC and the SEHK announced that a flexible approach would be taken to compensating the clients of the securities firm. Subsequently, the legislative amendments necessary to implement the announced arrangement were endorsed by the Legislative Council in October.

New investor compensation scheme

As a longer term objective to render better protection to investors, the SFC conducted a comprehensive review on the existing compensation arrangement in the summer of 1998, the outcome of which was put to public consultation in September. In essence, the reform proposes to change the current UECF from a lump sum fund to one that also includes re-insurance as its second tier financing source for compensation. While the review focuses on the stockbroking industry, the new

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