ENG-1998 — Page 126

FINANCIAL AND MONETARY AFFAIRS

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mechanism would be designed in such a way that it would be capable of extending to other sectors of the securities and futures markets in due course. The public consultation on the proposed scheme was completed in end-December 1998 and the SFC began to finalise its recommendations in the light of the comments received.

Financial Market Review

Though Hong Kong rode through the most stormy period during the financial turmoil with the currency remaining stable and the securities and futures markets operating in an orderly and efficient way, the government considered it prudent to conduct a comprehensive review on the monetary and securities and futures markets with a view to identifying areas at a technical and operational level where improvements were warranted.

The Report on Financial Market Review was published in April 1998, which included a total of 24 recommendations relating to the regulation over market activities and intermediaries, system improvement, market transparency, risk management and investor protection and education in relation to the securities and futures markets. The progress of implementation of these recommendations was satisfactory and the administration has worked closely with the relevant market institutions to bring them into full implementation as soon as possible.

The impact of the Asian financial turmoil on the Hong Kong insurance industry has not been as significant as in the other sectors of the financial services industry. Only three insurers were identified to have suffered solvency problem. The Insurance Authority (IA) had, in consultation with the relevant insurers, taken immediate actions to address the problems which were subsequently resolved satisfactorily. The industry has remained financially sound and stable. The IA will continue to monitor vigilantly the financial position of insurers to ensure that they comply with the solvency requirements and to take interventionary action as and when necessary for the protection of policy holders' interests.

Financial Market Situation

Monetary conditions in 1998 were mainly affected by the Asian financial turmoil. Notwithstanding the three rounds of speculative attack on the Hong Kong dollar in early January, mid-June and early August, the exchange rate of the Hong Kong dollar against the US dollar remained stable throughout, moving within a narrow range of 7.736 to 7.75. In the latest round of attack in August, some hedge funds sought to engineer extreme conditions in the money market in order to benefit from large short positions in the stock and futures markets the so-called double market play.

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The severity of the speculative attack and the manipulative element involved were unprecedented. To frustrate this strategy and restore market order, the government operated in the stock and futures markets and successfully fended off the speculators. In early September, a package of seven technical measures to strengthen the currency board arrangements was introduced to follow through on the market operations, further stabilising the foreign exchange and money markets.

In early January, financial problems in Japan and Korea and the sharp depreciation of the Indonesian Rupiah led to significant selling pressure in regional currency and stock markets. During the first two weeks of January, stock markets in the region.