The Government may be forced to intervene in the dispute between the stock and futures exchanges to avoid a delay in its proposed market reforms, according to sources. The Government has ordered the exchanges to reach an agreement on their valuations in a proposed merged exchange within two weeks. However, this timetable may be difficult to achieve. Stock exchange chairman Lee Hon-chiu yesterday hardened the exchange's resolve in the rift. He said it was not wavering in its support of the valuation by its financial adviser Merrill Lynch. 'Merrill Lynch is our financial adviser,' he said. 'Of course, we need to support its valuation.' The futures exchange apparently has no plan to compromise either. Sources said it would stick to the valuation offered by its adviser, Morgan Stanley. 'The Government has indicated that it would not like to intervene in the valuation dispute,' sources said. 'However, the Government has to change this position, or we could expect the deadlines of the reform to be missed.' According to the Government's timetable, a merger-proposal document is to be sent to brokers on August 5. However, the exchanges must first agree on their valuations in the new merged entity. The Government wants the two exchanges to vote on its market-reform plan on September 13. It has proposed that the stock and futures exchanges and their associated clearing houses be merged into a new entity to be called Hong Kong Exchanges and Clearing (HKEC). For the reforms to go ahead, 75 per cent of the SAR's 500 stock brokers and 75 per cent of its 130 futures brokers need to vote in favour. Merrill Lynch met yesterday with the 500 stock brokers to report on the progress of the reforms. Many brokers at the meeting said they were concerned about whether the two exchanges' advisers could reach an agreement on valuation, stock exchange chief executive Alec Tsui Yiu-wa said. Merrill Lynch said last week the stock exchange should get about 89 per cent of the HKEC. According to Morgan Stanley, the futures exchange should get 47.8 per cent of the ownership. The gap is a result of how to view the Hong Kong Securities and Clearing Corp (HKSCC). Merrill Lynch added the value of the HKSCC to the stock exchange's valuation, while Morgan Stanley excluded it. Mr Tsui said the HKSCC's business derived from the cash market. He said that 'it is natural that the HKSCC's business value should be treated as part of the stock exchange valuation'. He said brokers were also concerned about trading rights. According to a Government paper released on Thursday, new trading rights may be issued by the HKEC two years after its inception. However, new brokers would need to pay a one-off admission fee to the HKEC. Many brokers are opposed to the move. They say the offer of new trading rights would effectively remove the cap on the number of brokers and force small brokers out of business. At yesterday's meeting, they demanded the Government postpone the offer of new trading rights for five years or more. They also demanded that the Government set the admission fee at $1 million to $5 million. A high admission fee would encourage newcomers to buy their trading rights from existing brokers instead of applying for new ones, they claimed. This would help protect the value of the rights owned by existing brokers. Brokers also said the abolishing of the 0.25 per cent minimum brokerage commission fee would result in cut-throat competition among brokers. They said this would also hit small players.
