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Pursuing a continuing and stabilized financial security

Hong Kong is ranked one of the world’s top three international financial centres and we have always been committed to enhancing the competitiveness of our financial services industry, growing its size and strength, and maintaining its leading position. Meanwhile, we must properly manage the potential risks to prepare for the challenges that may emerge suddenly in the future. In doing so, we ensure rapid and sustainable development for the industry and benefit the society.

Last week, I introduced at a seminar Hong Kong’s efforts in maintaining financial security which I would like to share with you in the following paragraphs.

Factors affecting financial security
Safeguarding Hong Kong’s financial security is no easy task.

First, it is quite unique that the scale of Hong Kong’s financial market is much larger than that of our economy. For example, the $34 trillion total market capitalisation of the Hong Kong stock market is 11.6 times the size of our GDP while the $24 trillion banking assets is 8.9 times as much as our GDP. Moreover, Hong Kong’s market has a high degree of international participation. For instance, two-thirds of the $24 trillion assets managed by our asset and wealth management business come from non-Hong Kong investors. Internationally renowned banks, insurers, investment banks, various funds, and professional service companies actively conduct their businesses in Hong Kong.

Second, international financial markets are fast-changing and interconnected with asset prices constantly affected by the flow of global “hot money”. Past experience shows that when external uncertainties arise, as an open economy which allows free movement of capital, Hong Kong becomes a convenient source of liquidity for investors who wish to repatriate their funds from Asia. Hong Kong’s economy and financial market are therefore susceptible to external forces and we shall stay vigilant and plan ahead.

Third, although different asset markets vary in nature and products, volatility in one market can be contagious, thereby affecting the overall financial stability. For example, when the property market is affected by fluctuations in the stock market, the banking system might also be affected by sharp corrections in property prices.

Fourth, “confidence” is the cornerstone of the entire financial market and the key to financial stability. This includes the confidence of Hong Kong people as well as the confidence of local and international investors in our financial system.

Changes in the factors above can take place separately or concurrently. Coupling with each other, they may give rise to complicated and challenging circumstances.

Supervision of the financial markets
In reality we cannot eliminate all the risks but have to learn to “co-exist” with them in the long run and maintain better control over them. The key is to establish a robust and effective regulatory system with suitable measures, stay vigilant about the latest local and international developments with a forward-looking approach, and identify the potential risks and adjust our response having regard to the market situation. At the same time, we need to constantly enhance the resilience of our financial system and build up our strength so as to maintain market and stakeholder confidence.

The Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC), and Insurance Authority (IA) supervise our banking system, our securities market, and our insurance market respectively.

Taking our securities and futures markets as an example, our regulatory objective is to ensure the transparency and orderliness of the securities and futures industry and to reduce systemic risks. In this respect, the most important work is to ensure the stability of the clearing houses and their normal functioning under extreme situations. Therefore, each clearing houses has a comprehensive risk management framework in accordance with international regulatory standards and best practices, which comprises the following five elements: (1) rigorous requirements on all clearing houses, including financial requirements; (2) adjustable margin rate having regard to market situation; (3) an effective mechanism to ensure the proper functioning of clearing houses in case of liquidity difficulty; (4) an emergency arrangement with HKMA on Lender of Last Resort to provide sufficient liquidity to clearing houses to avoid systemic risks; and (5) a series of statutory powers given to SFC to slow down the build-up of stock price bubbles, protect client assets, monitors risk management of brokers, and maintain market order in extreme situations.

Moreover, as a significant portion of our citizens’ capital is managed by fund houses, SFC needs to monitor the liquidity of the SFC-authorised funds on an ongoing basis, including identifying any unusual or untoward activities, such as significant redemptions, suspension of dealing, and liquidity problems. In view of the recent volatility in local and international markets, SFC will ensure that funds are managed in a fair and orderly manner serving the best interests of investors.

Challenges arising from application of technology and cyber security
Innovation and technology are bringing challenges to our banking industry, securities industry, and insurance industry. With the advance of technology, cyber security has become increasingly important to the financial service industries in Hong Kong and beyond. For the banking industry, they are now implementing by phases the Cybersecurity Fortification Initiative proposed by HKMA in 2016. The overall resilience of Hong Kong’s banking system against network attack is satisfactory. For the securities industry, SFC regularly reviews the compliance and resilience of licensed corporations regarding their network security, and reminds the industry about possible loopholes to improve their supervisory measures against potential network attack. To strengthen the cyber resilience of the insurance industry, IA is now drafting industry guidelines to be introduced by the end of this year.

Coordination among regulators to block the loopholes
With the development of technological innovations and fast-transforming modes of transaction, cross-sectoral financial activities are growing rapidly. To keep people from taking advantages on the loopholes or conducting regulatory arbitrage, we have set up a coordinated mechanism to conduct comprehensive monitoring of the markets. First, I chair the Council of Financial Regulators, the members of which include representatives from HKMA, SFC, IA, Mandatory Provident Fund Schemes Authority, and Financial Services and the Treasury Bureau. The objective of the Council is to facilitate the effective cooperation and coordination among regulators in regulating and monitoring of the financial markets (especially on issues that may have a cross-sectoral impact) to minimise duplication or gaps in the regulation. Moreover, the Financial Stability Committee chaired by the Secretary for Financial Services and the Treasury gathers representatives of financial regulators to closely monitor the functioning of the financial system of Hong Kong and report to me regularly.

Conclusion
To conclude, the Government should maintain a fine balance between the role of a facilitator and the role of a regulator. We should neither be too restrictive to dampen the vitality of the markets, nor too loose to allow potential threats to take roots, hampering the sustainability of the markets. While providing the markets the room for proactive development, we also need to set up relevant monitoring frameworks in response to the changing markets, control systemic risks, and protect investors’ interests.

The ever-growing mutual market access between Hong Kong and the Mainland has been bringing enormous opportunities to Hong Kong’s financial services industry and its overall economy in recent years. At the same time, Hong Kong plays the unique and important roles of “firewall” and “testing ground” for the opening up of the country’s markets and the internationalisation of Renminbi. Therefore, ensuring Hong Kong’s financial security is crucial not only to our economy and society but also the financial security of our country.

April 21, 2019