HK expertise to prevent a new collapse

HONG KONG is crowing about its role in drawing up the US-based Futures Industry Association's recommendations designed to prevent another Barings collapse.

Hong Kong Futures Exchange managing director Leong Ka-chai said the exchange was the only Southeast Asian operator to be invited to help draft the report.

He said Hong Kong's own handling of the collapse and its risk management regulations had impressed other countries.

The Financial Integrity Recommendations were released on Monday and Mr Leong expected full details to be revealed to the world next month.

'The handling of the Barings incident reflected that Hong Kong has reached the international level in the management of market operations,' he said.

'We also have the strictest regulations in some areas.' An example was the ceiling on the number of contracts a brokerage could hold in Hong Kong, Mr Leong said.

The measure, introduced after 1987 market crash, set an absolute limit on the size of company positions.

The limit for both proprietary and client trading was based on the paid-up capital of the Hong Kong subsidiary involved.

Mr Leong said linking the limit to the adjusted net asset value of a Hong Kong futures trading arm of an overseas firm would help prevent the subsidiary from being preyed upon if the parent company encountered catastrophe.

'There is almost no other place having the same requirement,' he said.

'The nearest I know is Sydney.

'Singapore does not have the requirement and neither does Japan.

'That is why they have these difficulties.' Mr Leong said futures exchange clearing houses were usually exempted from bankruptcy laws in other international markets, but not Hong Kong's - yet.

The stock exchange's clearing house was already exempted, and similar proposal for the futures exchange had been submitted to the Legislative Council, he said.

The report addressed exchanges and clearing houses, brokers and intermediaries, and customers.

The task force recommended that if a trading firm held positions of similar instruments in more than one exchanges, each exchange where beneficial treatment was sought should have access to details about the participant's positions in other exchanges.

A crucial reason for the Baring crash was that the bank had been buying SIMEX and the Nikkei contracts at the same time and was doubling its bet instead of hedging against risk.

The association task force said exchanges should have access to information about the ulti-mate ownership of customer positions.

The task force said: 'Regulatory authorities should have ready access, on a need-to-know basis, to the size and ultimate beneficial ownership of customer positions, including the positions of customers carried in or through omnibus accounts.' A total of 60 exchanges were surveyed with 31 responding.