I refer to your editorial headlined 'Time is right for HKEx to end its conflict of interest' (October 6) and to the invitation to readers on the letters page (October 7) which again cites an apparent conflict of interest 'which tarnishes Hong Kong's image as a financial centre' and states that 'HKEx has declined once already to transfer some of its powers to the SFC'.
Contrary to the impression created by your editorial and the invitation, HKEx (Hong Kong Exchanges and Clearing) has been one of the main advocates of giving more responsibility to the SFC (Securities and Futures Commission) for setting and enforcing disclosure and other standards for listed companies. Our submissions to the expert group make this clear. Regrettably, the issues have become confused by people who might not have understood (and in many cases not even read) HKEx's proposals for reforming the listing regime.
The problem in Hong Kong does not lie in the content of the listing rules or the body which administers them. The problem is excessive reliance on the stock exchange's listing rules to perform functions which should be done by the law. Hong Kong still lacks statutory ongoing disclosure obligations for listed companies and their directors. This gap in Hong Kong's statutory framework was only addressed to a limited extent by the 'dual filing' regime introduced in the new Securities and Futures Ordinance. HKEx has repeatedly advocated addressing this regulatory gap through the enactment of statutory requirements in primary legislation which would be enforced by the SFC.
If this is done, the problem of the perceived lack of 'teeth' in listing regulation would be solved. The SFC would use its powers to enforce statutory requirements enacted by Legco, together with appropriate sanctions. There is no need for the statutory regulator to take over the administration of the exchange's listing rules, the vast majority of which deal with matters related to the operation of the marketplace which is owned and operated by HKEx. This is the division of functions between the statutory regulator and the exchange(s) which applies in all major overseas markets. There is nothing about such an arrangement which 'tarnishes the image' of these other financial centres. For the same reason, there is nothing about our current regulatory structure (other than the above-mentioned absence of statutory ongoing obligations for listed companies) which 'is not conducive to Hong Kong's image as a world class financial centre'.
The HKEx board of directors is representative of all stakeholders in the market. Fully half the directors are appointed by government and the chairman is elected among the board members and is appointed by the chief executive of the special administrative region government. In addition, the chief executive of HKEx is appointed by the board and is approved by the SFC. HKEx supports proper statutory regulation of listed companies by the SFC pursuant to laws enacted by Legco.
HKEx's objective is that the regulation of listed companies should be up to the highest international standards. What HKEx does not support is the dismantling of the present 'three-tier' regulatory system in relation to listing matters. This contains many vital checks and balances which ensure that listing regulation is carried out in a balanced and fair manner, and with understanding of the way markets work. A fundamental feature of the three-tier system is the 'watchdog' role performed by the SFC over the stock exchange's administration of its listing rules. If the entire listing function were placed in the hands of a single statutory regulator, a layer of oversight in the regulatory process would be destroyed. The roles of proposing rules, approving rules, administering and interpreting rules, prosecuting breaches, and adjudicating in such cases, would all be carried out by a single administrative body.
