ENG-1999 — Page 123

FINANCIAL AND MONETARY AFFAIRS

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 Unified Exchange Compensation Fund from a maximum compensation limit based on a per defaulting broker basis to a maximum compensation limit per- investor basis. The new compensation scheme will also include reinsurance as its second tier financing source for compensation. While the review focuses on the stockbroking industry, the new 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 at end-December 1998 and the SFC would discuss with the industry and the newly established Hong Kong Exchanges and Clearing Limited (HKEC) on the proposed new compensation fund arrangements.

Financial Market Review

In 1997, the Government proposed a series of measures under the Report on Financial Market Review and the 30-point programme with a view to further strengthening the regulatory and operation systems and enhancing the discipline and transparency of the securities and futures markets. With the co-operation and efforts of the SFC and the relevant market bodies, most of those recommendations have been completed. The remaining ones are either under implementation or consideration. The Government will work closely with the SFC and the HKEC to bring the outstanding measures to completion as soon as possible.

Market Structure Reform

The international financial market and the exchange industry are changing rapidly. Hong Kong must respond proactively to secure its leadership within the region and to reinforce its position as a global financial centre. Against this background, the Government announced on March 3 a comprehensive reform for the securities and futures market, which included the merger of the two exchanges (SEHK and HKFE) and the three clearing houses (Hong Kong Securities Clearing Company, the SEHK Options Clearing House and HKFE Clearing Corporation) under a new holding company, namely the Hong Kong Exchanges and Clearing Limited (HKEC).

HKEC would be a performance and growth driven commercial entity allowed to make profit and distribute dividends to its shareholders. On the other hand, it would be required to perform important public functions to maintain a fair and orderly market and ensure prudent risk management. Upon merger, ownership of exchanges and the right of access to the market would be separated to avoid conflict of interests between the exchanges themselves and their shareholders and to allow more effective competition in the market. The integration of the market structure would also achieve economies of scale thus reducing the operational costs and enhancing competitiveness The schemes of arrangement for the merger had been approved by members of the two exchanges with overwhelming majority on September 27 and subsequently sanctioned by the court on October 11. The enabling legislation for the merger was also introduced into the Legislative Council on November 10 and is expected to be

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