ENG-2001 — Page 120

FINANCIAL AND MONETARY AFFAIRS

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On derivatives trading, the HKEx successfully migrated the stock options trading to the Hong Kong Futures Automated Trading System (HKATS) on August 6. Trading of the HSI futures and options contracts had already been migrated from the open outcry system to the HKATS in 2000. Derivatives Trading Integration is the first step in the integration of the derivatives market infrastructure. The second step will be the integration of futures and options clearing on the new Derivatives Clearing and Settlement System, or DCASS. The HKEx aims to complete Derivatives Clearing Integration in the second quarter of 2002.

The Hong Kong Securities Clearing Company (HKSCC), a wholly-owned subsidiary of the HKEx, operates the Central Clearing and Settlement System (CCASS) for securities trading at the SEHK. The CCASS is an automated book- entry system that handles the settlement of securities. In addition to brokers and custodians, CCASS services are also available to retail investors. The HKSCC has also expanded its clearing and settlement systems to cover a wider range of financial instruments including the Exchange Fund Notes (EFN) and Hong Kong Mortgage Corporation (HKMC) Notes. Development for an upgraded system, CCASS/3, with modernised system architecture, an open access layer and new functions for risk management and investor protection, is under way.

Securities and Futures Commission

The Securities and Futures Commission (SFC) was established in May 1989 following enactment of the Securities and Futures Commission Ordinance (SFCO). This represented the first important phase in the overhaul of the regulation of securities and futures market in Hong Kong and the implementation of one of the most important recommendations made by the Securities Review Committee in May 1988. Established as an autonomous statutory body outside the Civil Service, the SFC has 12 directors (six of them executive) appointed by the Chief Executive. It must present the Financial Secretary with its annual report, budget and an audited statement of its accounts, which are also required to be laid before the legislature.

At the end of 2001, the SFC registered 29 184 persons, of whom 648 were corporate securities dealers, 155 were corporate commodities dealers, 653 were corporate investment advisers and eight were securities margin financiers. As regards the regulation of leveraged foreign exchange trading, the SFC had issued 11 foreign exchange trader licences by the end of 2001.

Following the merger and demutualisation of the SEHK, the HKFE and their associated clearing houses and the establishment of the HKEx on March 6, 2000, the SFC has assumed responsibility for front-line supervision of exchange participants and taken over the disciplinary matters involving these intermediaries. A Memorandum of Understanding was signed in February by the SFC and the HKEX to formalise the SFC's oversight of the HKEx and its subsidiaries, the supervision of Exchange Participants and market surveillance.

The SFC is funded largely by the market and partly by the Government, although no funding has been sought from the latter in the past nine years. Its operating expenditure budget for 2001-02 was $423 million and it had an establishment of 361 in the same financial year.

The SFC seeks advice on policy matters from its Advisory Committee, which comprises three executive directors of the SFC and 12 independent members. They

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