HKMEx saga puts spotlight on regulatory slips

Why was it allowed to be called an exchange when it was unable to get licence from the SFC

PUBLISHED : Tuesday, 28 May, 2013, 12:00am
UPDATED : Tuesday, 28 May, 2013, 3:52pm

Five arrested, three charged, and its chairman Barry Cheung Chun-yuen having to quit all public posts, including that in the Executive Council. The unravelling of the scandal-ridden and short-lived Hong Kong Mercantile Exchange has not been any less dramatic than a film.

As the HKMEx story still unfolds, it has turned the spotlight on certain regulatory oversights that might have contributed to the saga. One key concern: its name.

Allowing the HKMEx to be called an exchange was simply misleading. This, along with "professional investors" and "capital preservation funds" were the three most misleading terms that had escaped regulatory scrutiny and undermined investors' interests.

HKMEx sounds similar to HKEx - Hong Kong Exchanges and Clearing - but they are as different as chalk and cheese.

The HKEx operates the stock and futures markets, handling an average HK$70 billion in daily turnover that once reached a record HK$210 billion in October 2007. The stock market has about 400 broker members and a history of more than 100 years.

The HKMEx, founded two years ago and chaired by Cheung, traded only gold and silver futures with only a few contracts dealt each day. It has 37 broker members.

According to regulatory insiders, the HKMEx initially applied to the Securities and Futures Commission for a licence to operate an authorised exchange, giving it the same status as the HKEx. But since it did not have enough cash to support a clearing facility, it got a lower-grade licence as an automated trading services (ATS) provider.

This raises the question why an ATS operator was allowed to be called an exchange when it failed to qualify for an authorised exchange licence. This misled investors and brokers into thinking that it had the same status as the HKEx.

The "professional investors" issue, which is now in the SFC radar, is another example of inexact nomenclature.

As pointed out in this column before, professional investors are defined under the law as investors who have knowledge and experience in investment and an investment portfolio of more than HK$8 million.

But they are not really professionals the same way as insurers or fund managers are. They are merely wealthy and can be pensioners or housewives. They, however, are allowed to trade the same risky products as the more sophisticated institutional investors.

There is clearly a case to create a separate category for them, such as "experienced investors", or something along those lines.

The Mandatory Provident Fund Schemes Authority is actually moving faster than the SFC in terms of fixing misleading names.

In recent years, it has renamed "capital preservation fund" to "conservative funds".

Since its launch in 2000, the law stipulated that all MPF providers must have "capital preservation funds", which created the perception that the initial investment would be preserved in these funds. In reality, these funds only mean fund managers cannot charge fees if returns are poorer than local bank interest rates.

To avoid this confusion, the MPFA sought a change in law and rebranding of these funds as "conservative funds".

If MPFA can do it, what is stopping the SFC?


Running for a good cause

Janine Canham, the chief operating officer at Sanford C. Bernstein, and Alison Cooke, the managing director at Starr CV International, will next month swap their power suits and heels for shorts and trainers as they set off on a gruelling adventure on the mainland.

The two will participate in the Gobi March, a self-supported footrace across the Gobi Desert covering 250km in six days. No kidding.

They will have to carry their food, clothing, sleeping bag, medical supplies for the week in backpacks weighing about 10kg.

Canham and Cooke are trying to raise funds to support the Mandalay Projects, a small but tightly managed charity focusing on improving the living conditions for children at risk of abuse and prevent trafficking of children into slave labour, pornography and prostitution.