III Briefing on the work of Hong Kong Monetary Authority
Investment environment and investment performance of the Exchange Fund
In view of the uncertainties in the external investment environment, members were concerned about the impact of the geopolitical situation on the stability of Hong Kong’s financial system, and enquired about HKMA’s investment strategies of the Exchange Fund (“EF”), including whether a more conservative investment strategy would be adopted to increase the proportion of cash deposits to total assets under EF. Members expressed concern about the loss of $28.3 billion recorded by the Long Term Growth Portfolio (“LTGP”) of EF and asked for a comparison between the loss of EF’s equity assets as a result of the decline in its share value and that incurred from the decline in investment income. In addition, members asked whether HKMA would, in selecting external fund managers, consider if the fund managers had imposed a cap on the investment in virtual assets (“VA”), so as to enhance the risk control over EF’s investment.
HKMA advised that while financial markets might remain volatile amid worries over the factors such as uncertainties in the economic outlook and geopolitical situation, Hong Kong’s financial system, including financial institutions, had accumulated considerable experience in coping with such uncertainties and volatility. Regarding the investment of EF, HKMA had been adopting a relatively defensive investment strategy over the past few years, including increasing its holdings of cash and bonds with shorter maturities (i.e. one to three months). In considering increasing the proportion of cash, HKMA would take into account the deposit-taking capacity of the banking system and strike a proper balance, given the sheer size of EF. With regard to LTGP of EF, the private equity investment performed quite well in overall terms. Although the performance was affected by the downward adjustment of the valuation based on market value, it was estimated that the return in the long run should be good if the companies concerned remained sound in their business operation.
HKMA advised that while financial markets might remain volatile amid worries over the factors such as uncertainties in the economic outlook and geopolitical situation, Hong Kong’s financial system, including financial institutions, had accumulated considerable experience in coping with such uncertainties and volatility. Regarding the investment of EF, HKMA had been adopting a relatively defensive investment strategy over the past few years, including increasing its holdings of cash and bonds with shorter maturities (i.e. one to three months). In considering increasing the proportion of cash, HKMA would take into account the deposit-taking capacity of the banking system and strike a proper balance, given the sheer size of EF. With regard to LTGP of EF, the private equity investment performed quite well in overall terms. Although the performance was affected by the downward adjustment of the valuation based on market value, it was estimated that the return in the long run should be good if the companies concerned remained sound in their business operation.
IV Budget of Securities and Futures Commission for the financial year 2023-2024
Estimated income and expenditure
Noting that in projecting the estimated income for 2023-2024, SFC had adopted the assumption that the average securities market turnover would be $107 billion per day, which was lower than the actual turnover for the first six months of the previous year averaged at $112 billion per day, members enquired whether SFC would project the estimated income for 2023-2024 again with reference to the recent rebound in the trading volume of the securities market. SFC was also asked to explain why the budgeted investment income for 2023-2024 (i.e. around $230 million) was well above the projected investment loss of $64.63 million for 2022-2023.
SFC advised that in preparing the annual budget, the assumed securities market turnover level was derived from an internal statistical analysis model in order to maintain consistency in its estimates. Based on the statistical analysis model, the securities market turnover for 2023-2024 would be approximately $107 billion per day. As it was impossible to predict precisely the market turnover, there were bound to be discrepancies between the estimates and actual figures. An increase in market turnover would help SFC increase its income and reduce its deficit. On investment income, SFC expected that investment valuations in the stock market would rebound in 2023-2024, and as a lot of its reserves were invested in fixed income products and bank deposits, return would increase following a hike in interest rate. The 2023-2024 investment income was therefore budgeted to be around $230 million.
Human resources issues
Members noted an increase by 9.7% in SFC’s staff cost in 2023-2024 compared with the forecast for 2022-2023, arising from a provision of $72.64 million representing the full-year effect of new staff hires, as well as four new headcount in the Intermediaries Division (“INT”). In addition, SFC intended to continue the two-year fixed term contract pool, involving an expenditure of around $68.8 million. Members enquired about the reasons for hiring staff on two-year fixed term contracts, the difficulties encountered in recruiting staff, and whether SFC would consider recruiting overseas talents to fill the vacancies.
SFC advised that it had made a provision in 2022-2023 for the two-year contract pool of 50 project staff for specific initiatives or projects, but was unable to fill all the 50 posts due to recruitment difficulties. SFC would continue the two-year fixed term contract pool in 2023-2024. Regarding recruitment, experience showed that SFC had encountered more difficulties in identifying suitable candidates to fill vacancies in the professional grades. With the recent relaxation of anti-epidemic measures and the resumption of customs clearance between Hong Kong and the Mainland, SFC would expedite the recruitment exercises and consider recruiting suitable talents from around the world (including the Mainland) to fill the vacancies.
V Regulation of Depositaries of Public Collective Investment Schemes
Noting that globally major markets had already put in place years ago a direct regulatory handle over entities which provided trustee, custodial or depositary services for public funds, members enquired about the reasons for the Administration to introduce RA 13 at this moment, and the details on the cases involving deficiencies in the performance of depositaries’ obligations. Regarding the comments received by SFC during the public consultation, members asked whether the Administration had already revised or fine-tuned the current proposal to address the concerns of the public and the industry.
The Administration advised that there had been robust regulation on public CISs (including their depositaries) through SFC’s Product Codes and applicable requirements of the financial regulators, covering the eligibility and conduct requirements of key CIS operators. Having regard to the development of CISs in Hong Kong in recent years, the final report on Standards for the Custody of Collective Investment Schemes’ Assets issued by the International Organization of Securities Commissions in 2015, and the international practice, the Administration proposed to introduce RA 13 and had conducted public consultation exercises in 2019 and 2022. Respondents generally supported the proposal while raising enquiries and expressing views on certain issues, including compliance with the proposed requirements and the impact on compliance costs. On cases involving deficiencies in the performance of depositaries’ obligations, the Administration replied that SFC had received dozens of complaints in the past five years, which included problems of pricing errors due to inadequate internal controls of depositaries, involving over 90 complainants and about HK$2.3 million in compensation.
Members sought a breakdown by industry of the 20-plus depositaries which were anticipated to require an RA 13 license or registration, and the division of work among SFC, HKMA and IA in respect of the regulation on depositaries.
SFC responded that among the 20-plus existing depositaries, two were banks, four were subsidiaries of insurance companies and the rest were subsidiaries of financial institutions or banks. SFC had been in close liaison with HKMA and IA on the regulatory regimes for various regulated activities.
Members requested the Administration to give an account of the proposed amendments to the Securities and Futures (Client Securities) Rules (“CSR”) and Securities and Futures (Client Money) Rules (“CMR”), and the reasons for imposing different RA 13 requirements in respect of the handling of client securities and client money.
In response, SFC pointed out that the proposed amendments to CSR and CMR were made in accordance with the practice for the subsidiary legislation under the existing SFO. As the time needed for intermediaries to handle different types of securities (including local and overseas securities) varied, CSR simply required scheme securities to be deposited in segregated accounts established and maintained with banks, approved custodians or corporations licensed for dealing in securities as soon as reasonably practicable upon receipt. On the other hand, money could normally be handled and deposited in bank accounts within a short period of time and hence CMR required scheme money to be deposited in segregated accounts established and maintained with banks within three business days after receipt.