Hong Kong to Revisit Regulatory Structure for Stock Market

The structure for regulatory supervision of the Stock Exchange of Hong Kong could be in for a revamp, with the stock market regulator and the exchange operator planning to consult the market in the near future on a more coordinated approach to supervision. Ashley Alder, the chief executive of the Hong Kong Securities and Futures Commission ("SFC"), said the growing complexity and risks of modern markets called for a more coordinated regulatory effort and better strategic foresight in policy formulation, to ensure that Hong Kong's market remains relevant and competitive. 

"We think that now is the right time to re-visit the regulatory structure for the listed market, focusing on how the SFC interacts with the exchange," he said, noting that the SFC and the Hong Kong Exchanges and Clearing ("HKEX") would issue a joint consultation on the topic shortly. 

"We think that there is a compelling case for a far more coordinated approach towards listing regulation," he said. "We believe that this requires greater interaction between listing policy and the Listing Rules, which are administered by the exchange, and the regulation of listed companies and intermediaries by the SFC under the Securities and Futures Ordinance."

Alder said the current structure, in which the SFC and the exchange have separate but overlapping functions and powers, was conceived more than two decades ago and did not adequately address the complexities and risks of today's markets. 

He said he was "not convinced" that Hong Kong's regulatory system had evolved with market developments over the years, and that the SFC was now focusing on ironing out some of the "anomalies" in the current regulatory structure. 

One of the main issues, he said, was whether sharp market movements in certain individual stocks have been a consequence of legitimate capital flows or "something else".

"The question is whether there are any common themes or causes behind instances of extreme volatility and, if so, whether this should prompt regulatory action," he said. 

He noted SFC statistics showing that between 2013 and 2015, the market capitalisation of 860 listed companies doubled within six months, and the share price of 56 of them increased by 10 times within six months. Of those 56 companies, 39 were loss-making and 10 had price/earnings ratios of over 50 times.

As the total market capitalisation of those 56 companies was close to $400 billion by the end of 2015, some of them were included in major market indices as a result, he said, noting that this led many institutions to buy their shares, further adding to the stock price. He also said a fair number of these companies were subject to SFC high shareholding concentration warnings. 

"Given the market size of these companies at their peaks, any single instance of misconduct related to their share price performance could seriously dent investor confidence, threaten our market reputation and even raise issues about systemic risk," he said. 

Alder also noted concerns over companies listed on the Growth Enterprise Market ("GEM"), which he said was initially conceived with high-growth companies in mind, particularly technology companies. However it was re-positioned in 2008 as a stepping stone to the Main Board, with a streamlined process for transfer. As a result, more than 80 percent of the companies that listed on GEM in 2015 came from traditional sectors such as construction, industry, consumer goods and services, he said, a far cry from the original concept of GEM. 

"We have also seen that newly-listed GEM companies are often associated with extreme price fluctuations, small public floats and high shareholding concentrations," he said. "In many cases, IPO proceeds are minimal – far too small to justify the expense and effort of an IPO. It goes without saying that we have been very concerned about these and other developments in our listed market."

As a result, the SFC has been working with the exchange on an overall review of a range of listing policies, including a holistic review of GEM, backdoor listings, shells and prolonged suspensions, he said. 

Alder was speaking at a luncheon hosted by the Hong Kong Securities Institute on June 2.

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North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.