THE possibilities are boundless, the arguments complex, the issues confused, the vested interests massive, the sub-plots blatant and the potential for disaster extreme. Welcome to the world of the Stock Exchange of Hong Kong (SEHK) circa 1995. It is possible by June the SEHK will be involved in one of the most dramatic metamorphoses in its 91-year history. It is possible it will lose its exclusive right to run securities markets. It is possible there will no longer be a transaction levy or a fixed minimum commission. It is possible the exchange may be running its own finances. It is possible its ownership structure will be revised drastically. All this is possible, but is it probable? The situation is, at best, confused. The three protagonists in this particular comedy of errors are the stock exchange itself, the Government and the Securities and Futures Commission (SFC). But entering stage left and stealing the show is the International Securities Consultancy (ISC), which has unashamedly brought various market issues out of the wings and into the spotlight. Added to this complex financial cocktail is a truck-load of vested interests, a tonne of regulatory zeal, bucket loads of Government bureaucracy and almost missionary-like fervour from four separate bodies, with four separate agendas, going in four different directions. It is, if ever there was one, a recipe for disaster. What is at stake? All four players agree on this: the long-term viability of the exchange. There the agreement ends. Their arguments can be summarised as follows. The stock exchange wants to remain the sole body permitted to run a securities market in Hong Kong, but wants more control over its finances. It wants to take Hong Kong's securities market into the 21st century with itself in charge. The SFC appears to want more than one securities market, authorised by the SFC, but not run by the SEHK. It wants to give Hong Kong the freedom to develop in tandem with global capital markets. The Government wants to do what is best - whatever that may be. It wants dealing costs to be reduced and may give the exchange more control of its finances if it agrees to reduce or abolish fixed commissions and the transaction levy. The ISC wants just about everything: the abolition of the monopoly status of the exchange, the abolition of the transaction levy and fixed commissions and a change to the ownership structure of the exchange. All of these issues have been festering over the last few months, but only now does it look like the cauldron is coming to the boil. The unlikely catalyst has been a document almost universally dismissed as being as dull as ditch-water. For the second time in its history the stock exchange has released a document called The Way Forward . The first was tartly rebuked by a trouble-shooting report from the ISC which barely concealed a smirk when it called its own document The Right Way Forward. The latest document has fared, if anything, worse, generating a reaction as close as some elements in the financial industry can get to blatant boos and hisses. William Woods, a director of the ISC, described The Way Forward as, 'a collection of old cliches going nowhere'. A Hong Kong-based economist said: 'Calling it The Way Forward indicates only an advanced sense of humour on the part of the stock exchange. One thing is for sure, it is no Magna Carta.' NOT surprisingly, the exchange views the document rather differently. 'Our mission,' the document says, 'is to promote capital formation in Hong Kong and China by providing issuers and investors with a fair, transparent and efficient central securities market.' Exchange chairman Edgar Cheng stressed the paper was a 'macro' view on the future of the exchange. 'I spent weeks working on this paper to provide a strategic plan of where I believe the exchange should go and how it should get there. I don't want to get involved in who pays for what and how much. The details are issues we will sort out internally.' But for detractors, it is a cop out. They allege the exchange has failed to address fundamental issues which have to be faced if it is to remain a successful, active and competitive bourse. For them, the only interest in the document is what it does not say, rather than what it does. What it says is easily summed up. It wants 'more'. More international standards, more Chinese expansion and more institutional advancement. It envisages more technology, more efficiency, more investment vehicles and more consultation. What it does not say is more complicated. It does not address the monopoly status of the exchange, the transaction levy, fixed commissions or the ownership structure of the exchange. In other words, it does not address all the bugbears. For detractors, The Way Forward is, in fact, the way backwards. But tucked away at the back is the exchange's attempt to get more control over its finances. The SEHK has argued its funds are limited by being subject to the approval of the Financial Secretary and it intends to lobby the Government to allow it to control its financial destiny. This, Mr Woods from the ISC argued, opened the negotiation gates. 'The SEHK wants financial freedom, but the Government won't give it unless the transaction levy is abolished and may also insist on a relaxation of the monopoly. We are seeing the lines being drawn for the start of negotiations.' The SFC is also drawing up a white paper requesting the power to authorise more than one securities exchange in Hong Kong, which could become law if sanctioned by the Government. The SEHK has a financial year-end in June and will want a decision on its finances by then. This means the discussions on all these points will begin in March and will have to be concluded by April. The debate, then, is live. WHAT will happen? Is it possible the monopoly will be abolished, the transaction levy removed, fixed minimum commissions halted and the ownership structure of the exchange altered? The answer, it appears, is no. Some of it may happen, but certainly not all. The most contentious issue, the removal of the exchange's monopoly, is also the most devious, with circumstantial evidence pointing to a hidden agenda on the part of the SFC and the Government to manipulate the SEHK to alter its ownership structure. There is a growing belief within the financial community that the argument over the monopoly status of the exchange is a piece of high-powered negotiation designed to break the control of smaller brokers over its affairs. Although small local brokers generate only about 20 per cent of market turnover, with large institutions making up the balance, they control the political structure of the exchange. Exchange policy is set by the 31-member Stock Exchange Council, whose membership and elective process in turn is dominated by small brokers. The SEHK has commissioned an investigation into the compilation of the council after open-vote rigging last year. The fact is small brokerages can ensure the policy of the exchange favours their needs and not those of large institutions, even though small firms generate far less business. It has been alleged small brokers have acted against the interests of the market by deliberately slowing up the development of a regional exchange, options trading and various technological developments, the reason being they do not want to pay for something they believe will benefit only large brokerages. The large firms have said the smaller houses are playing politics with the long-term success of the Hong Kong bourse and point out that while they are in control they are hardly likely to disenfranchise themselves by giving bigger brokerages more clout in exchange affairs. John Mulcahy, managing director of UBS Securities and a candidate in the Stock Exchange Council election last year, said the SEHK should remain the sole forum for trading securities in Hong Kong, but urged the authorities to tackle the dominance of smaller brokers. 'The comfort of knowing no one can challenge your position leads to the worst kind of complacency. Small brokers dominate the political structure of the exchange and that bubble needs to be pricked,' he said. Mr Cheng admitted there were 'difficulties' on the issue of member brokerages, but called for unity in the face of the pending changes to the exchange's structure. 'At the end of the day, I will have to convince the Government and the SFC that we are a solid exchange, despite some problems. If I cannot convince them we're doing a good job, then they can do whatever they want. But that doesn't mean we don't have a right to defend our own position. The Government should not be perceived to have a policy that threatens small brokers.' The outcome of the debate would appear to lie in the hands of the SEHK executive, and the exchange council, which is going to have to wave goodbye to some of its more blatant vested interests. How they will feel about being manipulated is another question. As for the other areas of contention, the transaction levy looks likely to go. There is a huge surplus and the exchange will be willing to sacrifice it as long as it gains control of its own finances. On the fixed minimum commission, small brokers may well insist it stays if they give more control to institutions. If they do not, the Government may require it to be removed. But no matter what the exchange does to avoid it, the fact remains that practically every issue it has to deal with boils down to one thing: small versus large brokers. Endless debates about monopoly status, commissions and the like are fine, but all the energy dedicated to these issues could be better used addressing the fundamental issue: who controls the exchange, why, and should it be so?
