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HKEx’s Strategic Plan 2004 – 06 Achievements in 2004 and New Initiatives in 2005. Paul Chow Chief Executive, HKEx Hong Kong Securities Institute, 11 November 2004. Agenda. 1. HKEx Current Status 2. HKEx Strategic Plan 2004-06 3. 2004 Achievements and 2005 New Initiatives 4. Conclusions.

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HKEx’s Strategic Plan 2004 – 06 Achievements in 2004 and New Initiatives in 2005


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    1. HKEx’s Strategic Plan 2004 – 06 Achievements in 2004 and New Initiatives in 2005 Paul Chow Chief Executive, HKEx Hong Kong Securities Institute, 11 November 2004

    2. Agenda 1. HKEx Current Status 2. HKEx Strategic Plan 2004-06 3. 2004 Achievements and 2005 New Initiatives 4. Conclusions

    3. Hong Kong cash and derivatives markets –Key statistics YTD October 2004 2002 2003 Total turnover (HK$tr) 3.1 15.3 16.2 79,554 56 69.2 237.3 2.5 10.5 14.5 59,011 73 59.1 213.8 1.6 6.7 11.0 45,018 117 52.0 110.5 Average daily turnover (HK$bn) Total # of derivatives contracts traded (mn) Average daily # of derivatives contracts traded # of new listings – equity Funds raised by IPOs (HK$bn) Total funds raised (HK$bn)

    4. HKEx currently ranks 8th among global exchanges by market capitalisation … US$ billion Sep 2004 14,000 Singapore: 11,657 12,000 21st position 10,000 8,000 Shenzhen: Shanghai: HK: 8th 24th position 14th position 6,000 position 4,000 3,127 3,124 2,505 2,095 2,000 1,047 1,013 764 760 725 648 637 381 345 342 334 149 201 0 Italy Tokyo Korea NYSE Taiwan London Toronto Nasdaq Australia Euronext Germany Shanghai Shenzhen Singapore Hong Kong Switzerland Johannesburg Spanish Exchanges (BME) Sum of HK, Shanghai and Shenzhen ranks 6th in the world (Market cap = US$1,258 bn) Source: World Federation of Exchanges, includes main board and parallel markets

    5. … 16th by cash market turnover value … US$ billion Jan - Sep 2004 Singapore 28th position 8,000 8,485 Shenzhen: 7,000 20th position 5,336 6,000 Shanghai: 17th position 5,000 HK: 16th 4,000 position 3,809 3,000 2,465 2,000 1,840 1,151 1,082 1,000 694 609 579 471 441 365 361 343 316 264 156 83 0 Italy Amex Korea Tokyo NYSE Taiwan London Nasdaq Toronto Australia Euronext Germany Shanghai Shenzhen Stockholm Singapore Hong Kong Switzerland Spanish Exchanges (BME) Sum of HK, Shanghai and Shenzhen ranks 8th in the world (Turnover = US$736 bn) Source: World Federation of Exchanges, includes main board and parallel markets

    6. … 35th by # of derivatives contracts traded … Millions Jan - Sep 2004 1,952 2,000 1,600 HK: 35th 1,200 position 804 800 617 603 447 400 262 259 179 170 150 16 13 10 0 CME HKEx CBOT CBOE Int'l S E EUREX Euronext MEXDER Korea F E Brazil BOVESPA Derivatives Italian SE - American S E Exchange Boston Options Exclude warrant market Source: World Federation of Exchanges, includes main board and parallel markets

    7. … and 2nd by equity funds raised US$ billion Jan - Sep 2004 90 82.9 80 Singapore: 28th position 70 Shenzhen: 60 20th position 50 HK: 2nd Shanghai: position 40 13th position 28.4 30 23.9 18.7 17.5 20 15.4 15.0 15.0 11.8 9.9 10 6.4 5.6 5.2 1.3 2.7 0 India Tokyo NYSE London Nasdaq Mumbai Spanish Euronext Shanghai Australian Shenzhen Singapore TSX Group Hong Kong JSE South Africa Sum of HK, Shanghai and Shenzhen ranks 2nd in the world (Capital raised = US$36.3 bn) Source: World Federation of Exchanges (not including exchanges for which statistics are not available). Includes capital raised by issuers cross-listed on other exchanges, ie. double-counting involved

    8. Mainland China dimension of the Hong Kong market Total HK market Mainland enterprises* Listed issuers 1,084 5,998 15.3 58 69.2 237.3 286 1,760 7.4 33 49.9 82.9 26% 29% 48% 57% 72% 35% Market capitalisation (HK$bn) Avg daily turnover (HK$bn) # of new listings – equity Funds raised by IPOs (HK$bn) Total funds raised (HK$bn) * Includes H shares, red chips and private enterprises As at 31 Oct 2004 or Jan-Oct 2004

    9. The 10 largest IPOs in HK since 1993 were all by Mainland enterprises Largest IPO in the world in 2003 • Capital Raised • (HK$ bn) RankingCompany 1 China Unicom 43.6 2000 2 China Mobile 32.7 1997 3 China Life 26.7 2003 4 Sinopec 26.7 2000 5 PetroChina 22.3 2000 6 BOC (Hong Kong) 20.5 2002 7 Ping An Insurance 14.3 2004 8 SMIC 13.9 2004 9 China Telecom 11.8 2002 10 CNOOC 11.0 2001 • Date of Listing 11 MTRC 10.8 2001

    10. Agenda 1. HKEx Current Status 2. HKEx Strategic Plan 2004-06 3. 2004 Achievements and 2005 New Initiatives 4. Conclusions

    11. Global situation analysis: Fundamentals of a securities market Key Drivers Participants Supporting mechanisms • Market Infrastructure • Regulation Market quality • Business culture & environment • Director quality • Management expertise • Companies Ordinance (Companies Registry) • Statutory Rules (SFC) • Listing Rules • Corporate Governance Issuers Listed companies Enhance investor confidence • Self regulation • Licensing regime (SFC) • Exchange & Clearing Rules • Product & service • Operational efficiency • System reliability & efficiency • Risk management Intermediaries Attract order flow • Sponsors & IFAs • Exchange/Clearing participants • Professionals • Investor protection • Disclosure & transparency • Investor education • Information dissemination • Transaction costs Investors Increase liquidity Retail Institutional

    12. Local situation analysis: Unique opportunities and competitive advantage of Hong Kong & HKEx Opportunity Competitive advantage of HK/HKEx • One of the most open financial markets in the world: • No foreign exchange controls & withholding tax • No capital gain tax • No controls on foreign investment and investors • No restriction on foreign securities firms (110 foreign-owned EPs) • Freely convertible currency • Active retail & institutional participation • Regional proximity to Mainland; securities trading within the same time-zone Tremendous growth of Mainland economy requires capital • A platform allowing Mainland companies to subject to market discipline to further enhance standards in: • Corporate Governance • Accounting • Management practices Demand for management and professional expertise

    13. HKEx strategic vision • Operate a quality market through enhancing regulation and market infrastructure Goal • Focus on Hong Kong and Mainland China Geographical focus • Focus on core market operations: • Listing • Trading • Clearing • Information Services • Market systems Business focus

    14. HKEx will base its 2004 – 2006 strategy plan on three building blocks • Expand Mainland China offerings • Strengthen co-operation with Mainland entities Becoming a Mainland partner • Strengthen regulatory regime • Foster Corporate Governance culture • Improve market infrastructure • Increase market liquidity • Raise customer satisfaction & investors’ confidence • Improve investor education & information dissemination Building a quality market • Cost rationalisation • Prioritise projects & streamline internal processes • Upgrade obsolete systems • Improve operational efficiency • Strengthen staff team • Strengthen risk management Consolidation Time

    15. Agenda 1. HKEx Current Status 2. HKEx Strategic Plan 2004-06 3. 2004 Achievements and 2005 New Initiatives 4. Conclusions

    16. 2004 achievements and 2005 new initiatives – 6 areas

    17. 1. Listing Consolidation Becoming a Mainland Partner Building a quality market • Streamline IPO vetting process* • Refine compliance & monitoring practices* • Streamline enforcement process* • Implement case database for Listing Div* • Enable e-Submission of IPO forms* • Implement Code of CG Practices & CG Report • Issue rule amendments to CG issues & initial listing criteria • Consultation conclusions on listing regulation (FSTB) • Publish Listing Committee Annual Report • Enhance regulation of Sponsors & IFAs • N/A 2004 achievements • Review role & structure of Listing Committee • Introduce a more effective mechanism for delisting • Support enshrining key listing rules in statute • Support enhancing the regulation of accounting profession • Further enhance CG culture • Facilitate simultaneous listing of A & H-shares 2005 new initiatives * On-going initiative continues in 2005

    18. 2. Business Development & Investor Services Consolidation Becoming a Mainland Partner Building a quality market • Establish new Business Development & Investor Services Division • Strengthen Beijing Office; station representatives in Shanghai and Guangzhou • Launch SIMart to enhance investor education • Organise training seminars for investors and Exchange Participants* • Conduct training seminars for listed issuers/potential issuers in the Mainland* • Organise listing promotional conferences in the Mainland* • Working Group with SZSE* 2004 achievements • N/A • Organise large-scale local investor conferences • Promote listing of foreign-controlled companies with Mainland operations (e.g. Japan, Taiwan) 2005 new initiatives * On-going initiative continues in 2005

    19. 3. Trading – Cash Consolidation Becoming a Mainland Partner Building a quality market • Review usage of Trading Hall upon expiry of lease* • Launch relinquishment programme for on-floor terminals • Review narrowing of Trading Spreads* • Review market making for ETFs* • Launch Hang Seng Index ETF (with tick rule exemption) • Launch iShares FTSE/Xinhua A50 China Tracker (with tick rule exemption) 2004 achievements • Explore feasibility of Callable Bull/Bear Contracts (CBBCs) • N/A • Align disciplinary framework of the cash & derivatives markets 2005 new initiatives * On-going initiative continues in 2005

    20. 3. Trading – Derivatives Consolidation Becoming a Mainland Partner Building a quality market • Terminate trading of low-volume product • Revamp stock option market* • Launch HSCEI Futures & Options • Launch 4 stock options on H-shares 2004 achievements • Rationalise trading right of HKFE products and stock options • Align disciplinary framework of the cash & derivatives markets • Further enhance derivatives surveillance system • Review position limit • Review market making obligations • Recruit Option Trading EPs • Promote HKEx derivatives products • Explore feasibility of FTSE/Xinhua China 25 Index Futures & Options • Launch additional stock options/futures on listed Mainland enterprises 2005 new initiatives * On-going initiative continues in 2005

    21. 4. Clearing Consolidation Becoming a Mainland Partner Building a quality market • Upgrade of IVRS & call centre system • Conduct a comprehensive review of Guarantee/Reserve Funds* • Conclude way forward for scripless market • Launch IP Quick-wins • Implement enhancements to eIPO • Implement SI matching process in CCASS • MOU with China Securities Depository and Clearing Corporation Limited* 2004 achievements • Implement a general collateral policy • Implement scripless market • Strengthen nominee services • Consider the possibility of T+2 finality • Facilitate agency arrangement and overseas access to CCASS • Review feasibility of Third Party Clearing • N/A 2005 new initiatives * On-going initiative continues in 2005

    22. 5. Information Services Consolidation Becoming a Mainland Partner Building a quality market • Revamp HKEx Website • Streamline internal process to handle substantial workload increase due to new DI regime* • Disseminate odd lot market data • Launch Issuer Information Services • Recruit new information vendors (e.g. TVB)* • Expand HK Market Data coverage in Japan through Quick • Expand Mainland Discount Programme for dissemination of HK market data (e.g. Shanghai Quanlong, Xinhua News Agency)* • Develop market data agency business with SZSE* 2004 achievements • Expand information dissemination in selected regional markets • N/A • Review information vendors’ reporting and compliance regime 2005 new initiatives * On-going initiative continues in 2005

    23. 6. Market Systems Consolidation Becoming a Mainland Partner Building a quality market • Develop & implement IT Strategic Plan* • Launch HKATS • Launch DCASS • Maintain 100% system uptime* • Gold Award Winner in 2004 IT Excellence Award • N/A 2003 - 2004 achievements • Implement network consolidation • Review consolidation opportunities for satellite applications • Replace obsolete technology for AMS/3 • Consider outsourcing of one-off peripheral projects • Upgrade host capacity and network due to sales of throttles • Conduct feasibility study for OMex 19.x upgrade • N/A 2005 new initiatives * On-going initiative continues in 2005

    24. HKEx would continue to strengthen its organisation to meet the challenges ahead Consolidation • Implement HKEx Strategic Plan 2004 – 06* • Continue to recruit high-calibre senior executives* • Enhance internal communications* • Streamline internal decision-making process* • Implement initiatives in career development & training* • Strengthen performance culture* 2004 achievements • Review internal process in dealing with complaints and enquiries • Further enhance customer-focussed culture • Implement succession plan for management team • Strengthen risk management function 2005 new initiatives * On-going initiative continues in 2005

    25. Conclusions Situation Analysis • Enhancing investor confidence, attracting order flow and increasing liquidity are the key drivers of a successful securities market • Hong Kong and HKEx are positioned uniquely to capture the opportunities presented by the Mainland market Implications to HKEx • HKEx’s strategy focuses on 3 main areas: • Consolidation • Building a quality market • Becoming a Mainland partner

    26. Thank you Copy of this presentation is available @ www.hkex.com.hk