Sunday, March 01, 2009

Why merge the stock exchanges?

Ok, Hong Kong use to have 4 exchanges.

They were finally merged into one in 1986.

VC asked in a previous entry, why were the exchanges forced to merge in this supposed freest economy in the world.

The process could be traced to this 1980 speech, made by the then acting Financial Secretary. No there's no Chinese version, for bi lingual record keeping only began after the joint declaration in 1984.

Anyhow, just a quick comment, in the part where the Financial Secretary COMPLAINED about brokers arbitraging price differences between exchanges, implies that the same stock traded on different exchanges.

Which means the 4 day shut down of HKEx could have been avoided, because if one exchange closed down trading... Trading would have migrated to the other 3.

And the one incident that triggered this cascading trend of ever more regulation led by the dumb asses over at SFC would have NEVER HAPPENED.


Page 1060



THE FINANCIAL SECRETARY moved the second reading of :―‘A bill to provide for the establishment of a single, unified stock exchange in Hong Kong; to provide for an Exchange Company to operate the Unified Exchange; to provide for the winding up of existing exchanges; to make consequential and incidental amendments to the Securities Ordinance; and to provide for related matters’.

He said:―Sir, I move that the Stock Exchanges Unification Bill 1980 be read the second time.

There are two main functions of stock exchanges: first to provide a means of raising capital for industry and commerce and second to provide a market in which investors can deal in the securities they acquire as a consequence of the first function. These functions involve exchanges in a public responsibility to those who have committed funds to the market by way of investment and to those who may wish to invest and provide new funds to finance future corporate development. In particular, investors need to be satisfied that:

(a) adequate information about listed companies is available, and that the conduct of listed companies and those connected with them is subject to effective regulation;

(b) the conduct of members of the stock exchanges is subject to effective regulation; and

(c) the stock market is conducted with maximum efficiency. Hong Kong is unusual in having as many as four exchanges. To a large extent, the four exchanges have been regulating their affairs in an efficient manner. But in respect of the three aspects on which I have said investors particularly need to be satisfied, the quartet has particularly unsatisfactory features:

(a) the fact that they compete to attract additional companies, tends to lead them to adopt a flexible interpretation of their own listing rules;

(b) the Government has greater difficulty in regulating the conduct of the members of the four exchanges than it would if there was only one exchange; and

(c) one exchange could be run more efficiently and economically than four exchanges. In such circumstances, the growth of local and international confidence in Hong Kong as a securities and financial market has been hampered by the presence of four exchanges.

Obviously, the answer lies in unification. As well as rectifying the three unsatisfactory features to which I have just drawn attention, one market would be less erratic than four, in that brokers would not be able to indulge in arbitrage between exchanges. It would also provide a better service in that it would have greater liquidity. And we think overseas investors in particular will find one exchange a greater attraction than four.

So the Stock Exchanges Unification Bill 1980 provides for a single unified exchange. It is the result of detailed investigation and discussion by the Working Party on Unification established in May 1977 under the chairmanship of the Commissioner for Securities. The Bill also reflects the advice of the Securities Commission and the views expressed in response to two questionnaires which were sent to all members of the existing exchanges. I would like to comment on five aspects of particular importance: the Exchange Company which will set up the unified exchange, the Transitional Committee, membership of the Exchange Company, the eventual establishing of the unified exchange and the liquidation of the existing exchanges, and the Compensation Fund.

First, the Exchange Company itself. The Bill (clause 3) empowers the Securities Commission to recognize a company formed and registered under the Companies Ordinance as the Exchange Company, the principal object of which will be to establish and operate a stock exchange in Hong Kong. As a prerequisite to such recognition, the Company must satisfy the Securities Commission that it has, in its Memorandum and Articles of Association, adequately provided for matters relating to membership, Listing Rules and the Compensation Fund. Subsequent amendments to the Memorandum and Articles of Association can be made only with the Commission's approval in writing.

The Exchange Company will be empowered (clauses 34 and 35) to draft the Board Trading Rules and By-laws, its Rules and Regulations and its Listing Rules, all of which will be subject to the final approval of the Securities Commission. If the Company fails to do this the Commission can direct it to make the necessary rules. The management of the Exchange Company will be vested in a committee to be elected by its members (clause 10). Only members of the Exchange Company are eligible for election. The Chairman of the committee will be elected from amongst the members each year by secret ballot. He may be re-elected, but cannot serve for more than two terms consecutively.

Second, the Transitional Committee. Until the Exchange Company has elected its first committee, a Transitional Committee, comprising two representatives from each of the existing exchanges, will be responsible for the management and operation of the company (clause 5). A primary task for the Transitional Committee will be to send out and process applications for membership from members of existing exchanges. The Transitional Committee is obliged (clause 19) within one month from the commencement of the Bill to invite to all members of the four stock exchanges to subscribe for a share in the Exchange Company. Those who are interested must apply within three months and the Transitional Committee will then have three months to accept or reject the applications. A person aggrieved by the decision of the Transitional Committee may appeal to the Securities Commission.

Within a given period after the closing date for applications for membership, the Transitional Committee will be obliged to hold elections for the committee of the Exchange Company (clause 9). If no elections take place, the Commissioner for Securities may cause them to be held.

If either the Transitional Committee or the committee of the Exchange Company fails to discharge its functions the Financial Secretary may appoint a person to act in its place (clauses 8 and 11). He may exercise this power only on the advice of the Securities Commission and if the public interest so demands.

Third, membership. Initially, only existing members and overseas members of the present exchanges will be eligible to apply for admission to membership of the Exchange Company (clause 17). Existing full members can opt for membership or associate membership, but existing overseas members are eligible for admission as associate members only. The admission of existing overseas members as associate members will mean little change in their present position―they will continue to have no substantive voting rights and will still have to deal through a member.

Each applicant for membership must demonstrate that he is of sound financial standing (clause 15) and specifically that he will be able, when the Unified Exchange starts operation, to meet the requirement (clause 25) that each member and associate member must maintain in his stock-broking business a net capital of at least $1 million.

The current restrictions contained in the Securities Ordinance debarring directors and employees of licensed banks and solicitors and professional accountants holding practising certificates from admission to the exchanges will continue to apply (clause 13). But it is proposed also to continue to permit practising solicitors and accountants who were members of existing exchanges at the time the relevant section of the Securities Ordinance was brought into effect and who still are members, to apply for admission. This, I believe, is known among the exchanges as the grandfather clause (laughter).

The restrictions on membership have been amended in three aspects. First, on the advice of the Deposit-taking Companies Advisory Committee, deposit-taking companies are placed on a footing similar to licensed banks (that is to say, directors and employees of deposit-taking companies are excluded from the Exchange Company) (clause 13). In addition, directors and employees of companies associated with licensed banks and deposit-taking companies have been declared ineligible. Second, except in the case of existing associate members that are firms or corporations, firms and corporations will be inadmissible for admission (clause 14). Third, while members or associate members can trade in partnership, the Articles of Association of the Exchange Company will provide that all partners must be shareholders of the same class.

Once the processing of applications for membership has been completed, to avoid possible speculation, shares in the Exchange Company will not be transferable for a period of three years (clause 18). This prohibition will only be relaxed in such circumstances as death, bankruptcy, expulsion or insanity. Even in these cases, any proceeds of sale in excess of the sum the vendor paid for his share will be payable to the company. After the three-year period, shares will be freely transferable, with the vendor receiving the full proceeds of sale.

Fourth, the establishing of the unified exchange and the liquidation of the existing exchanges. Clearly the Exchange Company will not be able to establish the unified exchange overnight. But when it is ready, on a day to be appointed by the Financial Secretary, it will have the exclusive right to operate a stock exchange in Hong Kong (clause 27). The preliminaries cannot be allowed to drag on too long and the Bill prescribes that the Financial Secretary must appoint his day not later than three years after the date of commencement of the Bill. Personally, I consider three years to be generous. I trust the Transitional Committee and the Exchange Committee will tackle the job diligently, and so be ready well within this time.

Then, within one year of the commencement of the Unified Exchange, the existing exchange companies will have to start voluntary liquidation (clause 30). The Financial Secretary is empowered to petition the court for the winding-up of an exchange company which fails to comply with this requirement (clause 31).

Fifth, the Compensation Fund. When the Unified Exchange starts operation, the Exchange Company will be required (by virtue of an amendment to section 104 of the Securities Ordinance included in the First Schedule of the Bill) to contribute to a new Compensation Fund which will replace the existing Stock Exchanges Compensation Fund.

The amount that the Exchange Company will have to contribute on behalf of each membership held by its members and associate members will be $50,000 in cash. All claims relating to defaults occurring before the opening of the Unified Exchange will be allowed only if lodged with the Stock Exchange Compensation Fund within about six months. As soon as the old fund has disposed of all claims, the remaining assets will be distributed among the existing four exchanges.

Finally, I would like to record my appreciation for the support and cooperation of the members of the four existing exchanges. It has not been easy for them to participate in the demise of the institutions they have carefully and painstakingly built up over the years. But they have themselves taken one major and significant step towards unification by voluntarily achieving the incorporation of the Exchange Company already. And a word of praise for the Securities Commission and its Chairman, and the Commissioner and his staff, all of whom have patiently helped to get us thus far down a difficult road of some significance for Hong Kong, would not be amiss either.

Sir, I move that the debate on this Bill be adjourned.


  1. OK too long. Summary please. I'm lazy.

  2. 多謝對我的問題有回應,不過"行"o左o的o番。