Enhancing Hong Kong’s Role as a Centre for
Regional and International Financial
Institution Operations: Booking
September 2015
FSDC Research Paper No.15
TABLE OF CONTENTS
EXECUTIVE SUMMARY 1
I. INTRODUCTION AND KEY ISSUES 3
II. LIST OF RECOMMENDATIONS TO DEVELOP HONG KONG AS A PREFERRED
BOOKING CENTRE
8
III. BOOKING MODEL 10
A. Hong Kong as a Booking Centre from Current Economic Perspective 10
B. Reasons for Enhancing Hong Kong’s Attractiveness as a Booking Centre 11
C. ‘Push’ Factors 14
D. ‘Pull’ Factors 15
a. Regulatory Regime 15
b. Capital Rules and Capital Costs 19
IV. HONG KONG’S ROLE AS A RELATIONSHIP CENTRE 23
A. Maintaining Hong Kong’s Relationship Centre Status 23
B. Section 115 of SFO Considerations 23
V. OTHER CONSIDERATIONS 26
A. Resolution Regime 26
B. Holding Company and Tax Considerations 27
C. OTC Derivatives 29
D. Market Infrastructure 29
Appendix A. Current Economic Perspective : Hong Kong as a Booking Centre 30
Appendix B. Summary of Main Regulatory ‘Push’ Factors in US, UK and EU in Light
of Latest Regulatory Reforms
36
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EXECUTIVE SUMMARY
1. Traditionally, London and New York are the prime locations for booking banking
related, derivatives and securities transactions for major global financial
institutions. Although Hong Kong hosts many global financial institutions and
possesses a strong economic and business infrastructure, the level of booking
activity in Hong Kong lags behind London and New York. When it comes to
booking centres in Asia, Hong Kong also competes with Singapore and Tokyo.
2. This paper aims to provide recommendations for Hong Kong to further enhance
its financial markets and reputation as a preferred booking centre for regional (in
particular) and global financial institutions. 'Booking entity' here refers to the
entity to which a banking related, securities or derivatives transaction is
contracted, the entity with which the relevant account for a client or
counterparty is opened and maintained, and/or the entity which has the primary
obligation for delivery or payment with respect to a financial product.
3. We support Hong Kong in becoming a key booking centre because we believe it
would offer both quantitative and qualitative benefits for Hong Kong flowing
from greater economic activity. For example the increased asset allocation,
liquidity and volume of transactions will not only translate into significant
financial revenues for Hong Kong but will also promote an increased pool of
talent, and in turn, job creation in areas of operations, risk management and
compliance. However, there are also policy issues concerning Hong Kong's
potential to accumulate risk as a result of increased booking in the city, for which
the government would need to engage policies to mitigate that risk. Hong Kong
at the very least must encourage booking of transactions with a Hong Kong nexus
or connection, especially with respect to China-related transactions.
4. We have identified various 'push' factors which may potentially push financial
institutions to establish a new booking centre outside their current booking
location, and 'pull' factors which may attract financial institutions to establish a
booking centre in Hong Kong. Although Hong Kong has actively implemented
and proposed changes to its regulatory environment to align its standards with
international benchmarks1 since the financial crisis, inconsistencies still exist and
financial institutions may take advantage of potential regulatory arbitrage in 1 Currently, while the objectives remain consistent there are no commonly agreed upon
international standards for capital requirements, although since the financial crisis the international community under, for example, the auspices of the Basel Committee on Banking Supervision and International Organization of Securities Commissions (IOSCO), has been striving towards greater alignment of capital adequacy requirements.
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picking other more favorable booking locations. Separately, inconsistent regimes
also exist within Hong Kong, for example, financial institutions are subject to
different regulatory capital regimes administered by the Hong Kong Monetary
Authority (HKMA) and Securities and Futures Commission (SFC).
5. On a positive note, the SFC has recently published its Consultation Paper on
Proposed Changes to the Securities and Futures (Financial Resources) Rules in
the context of the over-the-counter derivatives licensing regime which is
anticipated to go a long way to enhancing the SFC’s regulatory capital regime to
achieve consistency with international standards2, as well as maintaining Hong
Kong's position as an international financial centre. Whilst the development in
the capital regime directly affects the ‘pull’ factor, any one regime cannot be
considered in isolation; the Government will need to ensure the enhancements
in interrelated regulatory regimes complement each other.
6. Although Hong Kong may not yet be a preferred booking centre, Hong Kong plays,
and will continue to play, a significant role as a relationship centre supported by
its sophisticated infrastructure, strong financial depth and strategically important
geographic location. When Hong Kong introduces changes to develop into a
major booking centre, authorities should be mindful that Hong Kong's status as a
preferred relationship hub must also remain equally important.
2 See footnote 1 above.
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I. INTRODUCTION AND KEY ISSUES
7. Hong Kong is one of the world's leading international financial centres. It
possesses a highly competitive economic and business infrastructure and a well-
developed regulatory framework. Many areas of the Hong Kong financial sector
(including banking and asset management) are strong, both in terms of
reputation and size. However, despite this, the level of bookings of banking-
related, derivatives and securities transactions (collectively, financial products) in
Hong Kong has traditionally lagged behind that of the major international hubs of
London and New York. Specifically, financial institutions ‘book’ far fewer
transactions in Hong Kong than in New York or London. In this context, it is
important to differentiate between traditional offshore booking centres on the
one hand and, on the other, the operational structure of major financial
institutions choosing where to amalgamate activities for regulatory purposes.
Historically, offshore booking centres allowed financial institutions to book
offshore transactions through their more lightly regulated jurisdictions. Prior to
the global financial crisis of 2008, major financial institutions focused their
operating structures on amalgamating their activities for regulatory objectives.
In general, the majority of major international financial institutions chose the UK
as the primary jurisdiction from which to base their international operations.
8. In this proposal, we consider ways to enhance Hong Kong's competitiveness as a
major jurisdiction for financial institutions' regional and international operations,
focusing both on its role as a booking centre and as a hub for financial
institutions' operations.
9. The first point to make is that, while there may be policy concerns about the
potential for risk accumulation in Hong Kong as a result of increased booking, the
major Mainland financial institutions are primarily looking to Hong Kong as an
operational hub for their international business, and not necessarily London or
New York. It is this aspect – Hong Kong's attraction as a major jurisdiction for
regional (and international) operations for financial institutions – that is the
focus of this proposal and not simply increasing Hong Kong's role as an offshore
booking centre, although the two go hand in hand.
10. The second point to make is that supporting Hong Kong in becoming the
preferred Asia-Pacific regional and, potentially, a key international booking
centre (especially for Mainland financial institutions) offers both quantitative and
qualitative benefits for Hong Kong. The increased asset pool, liquidity and
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number of banking/securities trading activities will encourage more economic
activities in Hong Kong which in turn will create additional job opportunities, not
only around the middle and back office but importantly, in respect of control
room functions including compliance and risk management. By way of
illustration, and referring to Figure 1 later in this paper, it can be seen that
historically Hong Kong’s legal and accounting sector accounted for lower levels of
employment than its peers London and New York, the more favorable booking
centres.
11. The latest sea of change in regulation and macroeconomic developments around
the world also creates new opportunities as well as challenges for Hong Kong, on
both a regional and global scale. Hong Kong needs to react and respond in order
to seize the opportunity to become a preferred booking centre. In particular,
considering Hong Kong's unique comparative advantage with its relationship
with the Mainland, Hong Kong should seek to become the first choice destination
in establishing a booking centre for Mainland financial institutions expanding
abroad, as well as other financial institutions (in particular those considering
Mainland Chinese securities market access) looking for an attractive centre in
place of their present booking centres.
12. Enhancing Hong Kong's role as a preferred booking centre will facilitate the long-
term development of Hong Kong's financial services industry and promote Hong
Kong's position and reputation as an international financial centre. However,
there is a clear need to balance opportunities and risks if we wish to increase
Hong Kong’s role as an international financial centre3.
13. This paper aims to provide recommendations for Hong Kong to further enhance
its financial markets and reputation as a preferred booking centre for financial
institutions (global or regional) in the Asia region. In preparing this paper, we
have assessed the existing position of Hong Kong from a global perspective and
have considered various 'push' factors (i.e. the existence of external global
regulatory or macroeconomic factors that may potentially push financial
institutions to establish a new booking centre in a new jurisdiction) as well as
'pull' factors (i.e. potential regulatory or macroeconomic initiatives that Hong
Kong may undertake to attract financial institutions to establish a booking centre
in Hong Kong). Particular areas of attention focus on capital requirements and
regulatory structure.
3 The recent speculation about HSBC relocating its headquarters from the UK back to Hong Kong
provides an apt example.
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14. One of the major hurdles we have identified in developing 'pull' factors for Hong
Kong is the existing separate capital requirement regimes for financial
institutions and the resulting inconsistencies across regimes. Currently,
authorized institutions (AIs) (i.e. licensed banks, restricted licence banks and
deposit-taking companies authorized under the Banking Ordinance) are subject
to the banking capital requirements supervised by the Hong Kong Monetary
Authority (HKMA). In contrast, licensed corporations (e.g. licensed securities
companies, brokerage companies, asset managers, etc.) licensed by the
Securities and Futures Commission (SFC) are subject to the capital requirements
under the financial resources rules supervised by the SFC. In addition, insurance
companies are subject to the rules of the Office of the Commissioner of
Insurance (OCI). This gives rise to complications when financial institutions seek
to establish a new booking centre in Hong Kong, as well as consideration such as,
for example, inconsistency with approaches in other major jurisdictions,
particularly the US and EU (increasing operational/compliance costs and
resources), choice of entity structure (branch vs subsidiary), and potential
regulatory arbitrage in 'picking' the more favourable capital regime.
15. The current regulatory capital regime of the SFC is liquid-asset based, which
tends to demand a higher capital requirement than other comparable financial
centres where the Basel type of risk-based capital regime is adopted. For
example, if a typical market access business is contemplated in a SFC licensed
corporation, approximately 1.2 times of trade notional amount will be required
for regulatory capital4 while it is comparably minimal in other markets such as
London or New York.
16. Thus there is a need to consider aligning the capital requirement regimes in Hong
Kong, particularly those for similar types of operations, and to achieve
consistency not only within Hong Kong, but also with other major jurisdictions, in
order for Hong Kong to maintain its competitiveness regionally and
internationally. Having made this point, on 17 July 2015 the SFC published its
Consultation Paper on Proposed Changes to the Securities and Futures (Financial
Resources) Rules (FRR Consultation) to update its financial resource
requirements in the context of the new over-the-counter (OTC) derivatives
licensing regime, and to update the requirements in certain areas of the FRR in
light of recent market developments. In drawing up its proposals the SFC has
4 For details, please refer to "Capital Rules and Capital Costs" under the 'Pull' Factors section where
market access business is used as an example to illustrate the regulatory capital requirement of major financial centres.
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conducted a detailed review of its FRRs by comparing the capital requirements
for OTC derivatives activities with similar capital requirements in other major
financial centres, including the US, UK, Australia and Singapore. The SFC also
referred to the capital rules for AIs authorized by the HKMA, the Hong Kong
Exchange and Clearing Limited (HKEx) Listing Rules' net asset requirement for
issuers of listed structured products, and the capital requirements of local and
overseas counterparties for their clearing members. The SFC notes that its
intention is to identify a suitable capital regime for its licensees engaging in OTC
derivatives activities which are commensurate with the risks they are
undertaking and to promote the adoption of more advanced risk management
standards and the conduct of business involving OTC derivatives activities in a
safer and sounder manner5.
17. As for the 'push' factors, there are of course factors that are outside the control
of Hong Kong which differ from market to market. While international capital
standard setters have been in discussion about developing approaches to align
capital adequacy requirements, it appears doubtful that this will be achieved in
the short term, although there are similarities in the different approaches which
generally have the same objective – to ensure a financial institution holds
sufficient capital to protect customers and creditors from losses and delays if it
were to fail.
18. In addition, ongoing discussions at the Financial Stability Board (FSB) and Basel
Committee on Banking Supervision regarding total loss absorbing capital (TLAC)
will also clearly impact Hong Kong’s regulation of cross-border financial
institutions' operations and provide further scope for consideration of gaps and
inconsistencies across regulatory standards impacting booking decisions.
19. Although this paper focuses on Hong Kong as a centre for the regional and
international operations of major financial institutions, Hong Kong also remains a
very important relationship centre where transactions are booked elsewhere.
Accordingly, Hong Kong needs to retain the flexibility where the relationships are
‘maintained’ in Hong Kong, albeit transactions are booked elsewhere, either
because clients actually contract directly with other centres but maintain front
office relationships with investment professionals in Hong Kong, or
arrangements are delegated or outsourced by the Hong Kong intermediary to
those other centres. In particular, there are different types of securities
transactions and activities that are currently typically booked to another centre,
5 In this paper we do not propose to analyze the proposals contained in the FRR Consultation.
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including for example, derivatives transactions, securities/equities transactions
(including margin transactions), futures, treasury, and private wealth
management. The same is true for asset management, where an asset
management group's expertise for a particular market, sector or type of financial
instrument (for example, US equities or fixed income) may be found outside
Hong Kong. Accordingly, and aside from regulatory factors and capital
requirements, booking in another centre may be due to other reasons, such as
client preference, established location of infrastructure and back office support,
development of relevant markets, operational structure of international financial
institutions, etc. at a time when clients and investors are increasingly looking for
customized investment solutions.
20. In this respect, it is important for Hong Kong to recognize the above while
developing itself as a preferred booking centre; it needs to maintain sufficient
flexibility from a regulatory perspective in allowing offshore booking models. In
particular consideration needs to be given to the application of Section 115 of
the Securities and Futures Ordinance (SFO) which imposes restrictions on
'actively' marketing regulated services by offshore entities in Hong Kong. This, in
turn, potentially restricts the ability of Hong Kong entities from ‘maintaining’
relationships with clients while transactions are booked to offshore entities – as
the offer of booking services by such offshore entities may be deemed to be
'actively' marketing a regulated service in Hong Kong.
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II. LIST OF RECOMMENDATIONS TO DEVELOP HONG KONG AS A PREFERRED BOOKING CENTRE
21. To develop Hong Kong as a preferred booking centre we make the following
recommendations:
(i) To align the regulatory capital regimes administered by the HKMA and
SFC in Hong Kong respectively and to achieve a level of consistency with
major international jurisdictions at the same time. Whilst the SFC has
proposed changes to its financial resource requirements in the context of
OTC derivatives licensing through its recently published FRR Consultation,
we need to keep a close eye on the conclusions of the consultation, and
especially when international capital standards are finalized, to see
whether more needs to be done6.
(ii) The SFC to provide additional guidance as to the permissibility of the
offshore booking model and clarification as to its position under Section
115 of the SFO; and, if necessary, consider amendments to Section 115.
(iii) To implement a consistent and consolidated resolution regime, applicable
to AIs and licensed corporations respectively (in particular as part of the
initiative under the ongoing Consultations on an Effective Resolution
Regime for Financial Institutions in Hong Kong), as part of bringing Hong
Kong's resolution framework into line with international standards and
agreements, of which TLAC may be an important aspect.
(iv) The HKMA and SFC to coordinate to ensure consistency of approach with
respect to the operational needs of the industry, whether HKMA or SFC
regulated, regarding booking models. This coordination will also need to
extend to the expected new Insurance Authority in due course.
(v) To review Hong Kong tax structure and deductions to incentivize, or
reduce deterrence for, financial institutions to set up booking entities in
Hong Kong.
(vi) To promote collaboration and discussion between the HKMA, SFC, HKEx,
OCI and financial institutions to develop action plans to further enhance
market infrastructure in Hong Kong for booking centre operations.
6 See the IOSCO Final Report dated February 2015: A Comparison and Analysis of Prudential
Standards in the Securities Sector.
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(vii) To enhance international cooperation with foreign regulators, to promote
a more joined up approach to supervising financial institutions with a
global footprint.
(viii) To actively promote Hong Kong's rule of law and well developed
regulatory framework.
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III. BOOKING MODEL
22. First, an important preliminary point is to recognize that the term 'booking' is a
term of art and not one that has any particular legal meaning. However, for the
purposes of this paper we use the term 'booking' to refer broadly to the entity to
which a banking related, securities or derivatives transaction (collectively,
financial products) is contracted, or the entity with which the relevant account
for a client or counterparty is opened and maintained, and/or the entity which
has the primary obligation for delivery or payment with respect to a financial
product. Financial institutions typically identify a booking entity within the group
in a particular jurisdiction to handle the booking process, where the transactions
in different financial products will be 'booked' to the balance sheet of such
booking entity.
23. From an operational perspective, clients (whether the actual underlying client or
an intermediary, including intra-group intermediaries, acting as agent on behalf
of an underlying client) will enter into direct contractual relationships with the
booking entity, such that 'accounts' will be opened and maintained with that
booking entity for trading and carrying out the booking process for the relevant
financial product. Such booking entity may act as principal (e.g. trading with the
clients as counterparty on a proprietary basis) or agent (e.g. trading as agent on
behalf of the client on market) when performing trades for the clients.
24. An international financial centre seeking to enhance its attractiveness as a
booking centre for financial transactions should focus on issues related to
various 'push' and 'pull' factors as discussed further below.
A. Hong Kong as a Booking Centre from Current Economic Perspective
25. Overall, Hong Kong is generally well-ranked in terms of international financial
transactions but, except in terms of overall external banking claims, its volumes
are far behind other major centres.
26. By way of background, indicators of Hong Kong's comparative standing are
shown in each case for the most recently available data period (between 2013
and 2014) in Appendix A. The data cover aspects of markets in external banking
claims, OTC derivatives, foreign exchange, equity issuance and exchange
turnover, and wealth management.
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B. Reasons for Enhancing Hong Kong's Attractiveness as a Booking Centre
27. While Hong Kong is playing host to a large, highly developed and sophisticated
financial services industry and is a major international financial centre with a
highly competitive economic and business infrastructure and a well-developed
regulatory framework, the level of bookings of financial products in Hong Kong
lags behind other major booking centres around the world. Hong Kong not only
competes with Singapore and Tokyo, but because most Asian trading books are
booked offshore, it also competes with London and New York.
28. As part of the development and reform to strengthen and enhance Hong Kong's
role as an international financial centre, it is important for Hong Kong to develop
as a preferred booking centre, at least for transactions, clients or counterparts
having some nexus or connection with Hong Kong. Hong Kong should allow
financial institutions to centre at least their regional operations for regulatory
and management purposes in Hong Kong, and potentially (particularly for
Mainland institutions) to centre their international operations (including from a
regulatory standpoint) in Hong Kong. There are both quantitative and qualitative
benefits derived from making Hong Kong the preferred booking centre for these
financial institutions.
29. In light of the sea change of regulation and macroeconomic developments
around the world in the wake of the 2008 global financial crisis, Hong Kong faces
new opportunities and challenges on both a regional and global scale. Hong
Kong should react and respond now if it wishes to seize the opportunity to
become a preferred booking centre for financial institutions being pushed out of
their existing booking centres. Failing to do so will mean that Hong Kong will
miss out on economic, reputational and other benefits which will instead be
enjoyed by other international booking centres. In particular, in the Financial
Services Development Council (FSDC) Research Paper "Development and Reform
of Mainland China's Financial Sector and the Strengthening and Enhancement of
Hong Kong's Pivotal Role as a Financial Centre", the comparative advantages of
Hong Kong as an international financial centre were highlighted, including (i)
favourable geographic location and time zone; (ii) unique political position; and
(iii) acting as the entrepot hub for the Mainland, as well as the centre of shipping,
tourism, exhibition and consumption. That research paper also highlighted the
choice of a development model that can bring the best out of Hong Kong's
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characteristic as an international financial centre – with the main feature being
‘Backed by the Mainland and Engaged Globally’.
30. As one prime example where Hong Kong is not maximizing its advantage, under
the Shanghai - Hong Kong Stock Connect program, financial institutions are
allowed to trade eligible shares listed on the Shanghai Stock Exchange as part of
their own trading positions and offer different types of service to clients such as
market access business. Generally, this type of business activity is booked in a
broker-dealer entity which is locally regulated and subject to regulatory capital
requirements prescribed by the respective regulator. It should be noted that
financial institutions are developing their business utilizing the Shanghai - Hong
Kong Stock Connect program through the use of swap or market access products
where these positions are being booked to the relevant financial institution's
booking centre, and not Hong Kong7. As demonstrated in the example set out in
the section "Capital Rules and Capital Costs" under the 'Pull' Factors section, a
typical market access business, if booked to a SFC licensed corporation, requires
approximately 1.2 times of trade notional amount for regulatory capital which is
less favourable than in other markets such as London or New York. With the
likelihood of similar arrangements in the future, including the Shenzhen – Hong
Kong Stock Connect, and ‘Bond Connect’, as well as the mutual recognition of
funds, there exist clear opportunities for Hong Kong in underpinning its role as
the major centre for finance, going both into and out of China.
31. The current regulatory capital regime of the SFC in Hong Kong is liquid-asset
based, which tends to demand higher capital requirement than other
comparable financial centres where the Basel type of risk-based capital regime is
adopted. For reference (albeit with certain assumptions), if a typical market
access business is contemplated in a Hong Kong SFC regulated entity,
approximately HK$1.2million regulatory capital (based on HK$1million trade
notional) will be required while it is comparably minimal in other markets, such
as London or New York. Internationally, under the auspices of IOSCO, concerns
have been raised on the lack of a uniform global standard for capital adequacy
within the securities sector – see the Final Report of IOSCO dated February 2015
on A Comparison and Analysis of Prudential Standards in the Securities Sector.
7 Other reasons to use swap or market access products to tap the China A-Share market include
operational reasons as well as PRC regulatory considerations.
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32. The point is that, currently, it is not capital-efficient for international groups to
book Stock Connect synthetic positions and conduct related business in Hong
Kong.
33. In addition, considering Hong Kong's unique comparative advantage due to its
relationship with the Mainland, it is important for Hong Kong to seek to become
the first choice destination for establishing a booking centre for Mainland
financial institutions expanding abroad, as well as for other financial institutions
looking for an attractive centre in place of their present booking centres
especially those showing interest in accessing the Mainland securities market.
34. The financial services industry is a major source of employment for Hong Kong,
accounting for 6.1% of the total labour force in 2013. The industry is
characterized by a high level of knowledge and skills, with 67% of workers with
post-secondary education, compared to 35% for the overall economy8. There
are both quantitative and qualitative benefits associated with promoting Hong
Kong as a preferred booking centre for Mainland and global financial institutions.
A drive in employment in the financial services sector will support Hong Kong as
a knowledge-based economy.
35. Apart from the legal and accounting sector, where Hong Kong currently
maintains lower levels of employment than its London and New York peers (see
Figure 1 below), there are also significant growth opportunities in back office,
operations and risk-management functions if the overall level of booking activity
is increased. Driving employment in the financial services sector plays a crucial
and strategic role in the Hong Kong economy, particularly in supporting the
economic integration between Hong Kong and Mainland, and reinforces Hong
Kong's status as an international financial centre.
36. Nonetheless, Hong Kong should not be indiscriminate in promoting itself as a
booking centre. There are clearly policy issues concerning the potential for risk
to accumulate in Hong Kong as a result of increased booking, including the
necessity to avoid a ‘too big to save’ scenario. Hong Kong must position itself so
as to make it efficient and, at the very least, encourage transactions with a Hong
Kong nexus or connection, including RMB transactions, to be booked to Hong
Kong9.
8 FSDC Paper No.13, “Developing Hong Kong's Human Capital in Financial Services”, January 2015
9 An interesting, and topical, case study is the discussion about HSBC relocating its headquarters
back to Hong Kong. HSBC's balance sheet at US$2.6 trillion is nearly eight times the size of Hong Kong's economic output.
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Figure 1: Share (%) of Total Employment for Hong Kong, London and New
York for Year 2000-2011
Source: Wojcik & Zhao (2014), calculations based on data from LEHD, Census Hong
Kong, and NomisWeb
C. 'Push' Factors
37. From an economic and operational perspective, maintaining a single booking
centre for a financial institution's global operations may be preferred as, in
theory, economies of scale can be achieved and it is easier operationally to
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maintain and support. However, differences in laws and regulations across
jurisdictions (including differences in regulators' risk-preferences) would still
create substantial road-blocks. Moreover, the extra-territorial application of
certain legislative provisions could make booking in any one jurisdiction harder.
38. Of course, Hong Kong cannot control these 'push' factors. Nonetheless,
Appendix B sets out a summary of the main regulatory 'push' factors in the US,
UK and EU in light of their latest regulatory reforms.
D. 'Pull' Factors
a. Regulatory Regime
39. Currently Hong Kong adopts separate regulatory regimes with respect to
financial institutions operating banking and securities trading business under the
Banking Ordinance and the HKMA on the one hand, and the SFO and the SFC on
the other (with insurance intermediaries being subject to a new regulatory
regime under the Insurance Companies (Amendment) Ordinance 2015), where:
(i) AIs (i.e. licensed banks, restricted licence banks and deposit-taking
companies authorized under the Banking Ordinance) are supervised by
the HKMA. This supervisory regime applies to banks operating via both
locally incorporated bank subsidiaries, and those operating via a local
branch of an overseas bank. The branch model is currently the
predominant model for global banks although there is a subsidiarisation
theme that has emerged.
(ii) Licensed corporations (e.g. licensed securities companies, brokerage
companies, asset managers, etc.) are supervised by the SFC.
(iii) AIs that also engage in securities business in Hong Kong would (a) register
with the SFC as registered institutions for the relevant regulated activities
(however the HKMA would remain the primary regulator) or (b) establish
a local subsidiary securities company to be licensed by the SFC (where the
SFC would be the primary regulator over such licensed subsidiary).
40. The majority of inbound global banks doing business in Hong Kong currently
operate via a business model whereby a SFC licensed corporation (being a
subsidiary of the bank entity) serves as the relationship entity (being the client
facing entity), but trades are ultimately booked offshore, either at the holding
company level or in a foreign banking entity (please also see discussion under
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"Hong Kong's role as a relationship centre" below). The principal rationale for
this model is that greater efficiency with respect to capital and funding, plus
benefits with respect to credit ratings and other regulatory constraints (e.g.
exposure limits) are achieved through booking into the large group booking
entity rather than a local subsidiary. However, the 'push' factors described
above are placing increasing pressure on the present global booking model
employed by many financial institutions, resulting in consideration of local
booking options whereby business originated in Asia Pacific would instead be
booked into a local entity.
41. The current regulatory regime in Hong Kong presents challenges to financial
institutions considering booking into this location, as the status quo does not
currently present a competitive proposition in comparison to either global hubs
(e.g. US or UK) or, in some key respects, regional competitors such as Singapore.
The separate regulatory regimes in Hong Kong could give rise to complications
when financial institutions seek to establish a new booking centre in Hong Kong
(including incentive for potential regulatory arbitrage in 'picking' the more
favourable regulatory regime), for example:
(i) The choice of entity structure is restricted for SFC licensed corporations in
practice. AIs under the Banking Ordinance can typically be established as
a branch or a Hong Kong subsidiary of an entity established outside Hong
Kong. However, there appear significant, albeit valid, practical obstacles
in granting licences to a non-bank entity established outside Hong Kong
but wishing to operate in Hong Kong through a branch. It is practically
very difficult to obtain a SFC licence for the Hong Kong branch of an
overseas company (albeit it continues to be relatively easier to register a
HKMA licensed bank with a Hong Kong branch10), it being the SFC's clear
preference to grant licences to separately incorporated Hong Kong
subsidiaries. In part, it is worth noting that the practical obstacles include:
(i) the set up of a branch in Hong Kong may affect the ability of the
overseas company to comply with requirements under the SFO and its
relevant rules11, in particular with respect to supervision and record
keeping; (ii) the overseas company will often have difficulties in compiling
10
This also comes at a time when the SFC is taking a more restrictive approach to Section 115 of the SFO.
11
In particular the SFC may conduct site inspection and gain access to relevant records under Section 180 of the SFO which may extend to the overseas parts of the company and the overseas company (as a whole) is also subject to notification obligations of any fitness and properness issues according to the Securities and Futures (Licensing and Registration) (Information) Rules.
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the relevant financial resources returns and audited accounts in
compliance with the Securities and Futures (Financial Resources) Rules;
and (iii) local auditor requirements.
(ii) Additional analyses are required in assessing the regulatory implications
for setting up a booking centre in Hong Kong as an AI versus a licensed
corporation. AIs are subject to the supervision of the HKMA (including
regulations, rules, codes and guidelines issued by the HKMA), while
licensed corporations are subject to the supervision of the SFC (involving
different regulations, rules, codes and guidelines issued by the SFC). In
particular AIs and licensed corporations are currently subject to a very
different capital requirement regime and the inconsistency with
international standards may increase operational/compliance costs and
resources for financial institutions setting up booking centres in Hong
Kong (see discussion further below).
(iii) Insurance companies are subject to the rules of the OCI.
42. The complexity of capital rules and level of capital costs are amongst the main
considerations for financial institutions in determining the establishment of a
new booking centre. Through its recently published FRR Consultation the SFC is
now seeking to enhance its regulatory capital regime to achieve consistency and
a level playing field with international standards, such that it maintains its
competitiveness internationally.
43. It is important to recognize that while international capital standard setters for
the securities industry have been in discussion about developing approaches to
align capital adequacy requirements, it appears doubtful that this will be
achieved in any meaningful way, at least in the short term. For example, the Net
Capital Rules (NCR) of the US Securities and Exchange Commission (SEC) for US
broker-dealers is primarily directed towards ensuring that securities firms have
sufficient balance sheet assets whereas the EU Capital Requirements Directive
(CRD) (which is founded on the Bond approach applicable to banks) is primarily
about solvency of firms. It is not clear there will be any further agreed alignment
between NCR and CRD (See IOSCO's February 2015 Final Report on A Comparison
and Analysis of Prudential Standards in the Securities Sector). Nonetheless, both
approaches contain the same objective, which is to ensure that securities firms
hold sufficient capital to protect customers and creditors from losses and delays
if they were to fail. Also, as noted above, with the consultation of the SFC's
financial resource requirements in the context of the new OTC derivatives
-18-
licensing regime in process, alignment to the HKMA's approach for banks is
already underway.
44. These all give rise to complications when financial institutions seek to establish a
new booking centre in Hong Kong – for example, inconsistency with approaches
in other major jurisdictions, particularly the US and EU (increasing
operational/compliance costs and resources), choice of entity structure (branch
vs subsidiary), and potential regulatory arbitrage in 'picking' the more favourable
capital regime.
45. In developing the ‘pull’ factors to make Hong Kong a more favorable booking
centre destination, the following are recommended, as a priority:
(i) Implement a consistent and consolidated resolution regime applicable to
AIs and licensed corporations respectively (in particular as part of the
initiative under the ongoing Consultations on an Effective Resolution
Regime for Financial Institutions in Hong Kong).
(ii) Further develop the coordination and communication between the HKMA
and the SFC. While the HKMA and SFC have dedicated resources to
coordinate their efforts in regulating the banking and securities industries
(e.g. in adopting memoranda of understanding between them and
establishing communication lines within their committees), the HKMA
and SFC could seek to devote additional resources to enhance the
coordination and communication between them. In this respect the
HKMA and SFC may seek to further develop the expertise and knowledge
of relevant case officers (both junior and senior officers) with respect to
the operational needs of the industry regarding booking models. This will
enhance the ability of the HKMA and SFC to provide clearer guidance on
the establishment of booking entities in Hong Kong covering areas such as
permissibility of booking models, processing time, and infrastructure
requirement.
(iii) In addition, if a specific remit for supervision of systemically important
financial institutions (SIFIs) were to be implemented (e.g. giving the
HKMA power to designate SIFIs and take the lead in their regulation,
similar to the approach being increasingly adopted internationally), this
could potentially address issues at least with respect to larger institutions
in terms of consistency of treatment. A more fundamental approach
would be consideration of the overall regulatory approach, as has been
done in the UK, EU and Australia, among others, with consolidation of
-19-
prudential regulation of major financial institutions under a single
prudential regulator (the Bank of England / Prudential Regulatory
Authority, European Central Bank and Australian Prudential Regulatory
Authority, respectively).
46. As a final point, encouraging the booking of transactions to Hong Kong also
provides regulators with more visibility over the activities being undertaken by
financial institutions in and from Hong Kong.
b. Capital Rules and Capital Costs
47. The majority of comparable financial centre regulatory capital regimes (including
the HKMA regime for banks) are based on the globally employed risk-based
capital regime established under the various Basel accords. While some local
variations exist within these Basel implementations, the fundamental approach
is consistent and variances in capital requirements across jurisdictions are
unlikely to be significant.
48. However, the current capital regimes in place for securities companies in Hong
Kong (supervised by the SFC) and the NCRs of US SEC for US broker-dealers
employ a liquid-asset based capital requirement which results in a much higher
level of required capital for comparable exposures.
49. The following table highlights the key components of capital regimes in place
within major financial centre jurisdictions and illustrates the outlying
characteristics of SFC and SEC standards12:
12
Consistent with Hong Kong, the US requires a SEC regulated corporation as the client facing
entity. However, globally, the impacts of the SEC requirements on booking model selection will
be limited in future as the majority of leading global banks active in the US and operating via a US
broker-dealer will also be subject to the US Intermediate Holding Company (IHC) rule described
above which will require a version of US Basel rules to be applied to the holding company
(including the broker-dealer) and as such the broker-dealer capital requirement will no longer in
itself be the binding constraint.
-20-
-21-
50. The comparative impact of this variation in regulatory capital approach on a
typical product portfolio can be illustrated in the following example:
(i) Market access business facilitates investors to gain access to the listed
equity exposure of a restricted market through a bank (B) and a broker-
dealer (B/D) who are licensed/registered to conduct the business locally.
Generally, B and B/D acquire the listed equity exposure and concurrently
sell a fully-funded derivative underlying the same listed equity to the
investor. There is neutral market risk to B and B/D while the investor
obtains the desired listed equity exposure from the derivative trade.
(ii) The table below indicates the current regulatory capital requirement of
such market access business as described above under Hong Kong,
Singapore, UK, and the USA regulatory capital regimes. The regulatory
capital requirement in the table is based on current provisions in the
respective regulatory capital rules applicable to all participants and does
not take into account modifications/exemptions allowed by respective
regulators on a case-by-case basis. In many jurisdictions, the regulatory
capital requirement may be reduced if modifications are approved. The
participants tend to seek risk-based modifications as the capital required
from capital regimes that are liquid-asset based (such as the current
capital regime applicable to B/D in Hong Kong) can be large.
Table 2: An Example of the Comparative Impact of Variation in Regulatory
Capital Approach on a Typical Product Portfolio
*For illustration, the trade notional is assumed at $1 million and the OTC equity option underlying the same quantity of listed equity that B and B/D holds is a delta one instrument,
-22-
where any change in the value of listed equity exposure will have the equivalent change in the value of derivative trade. And, there is no collateral requirement.
51. In identifying the appropriate minimum capital for licensed corporations under
its FRR Consultation the SFC's key objective has been to ensure that capital
requirements are in line with international standards to minimize the risk of
regulatory arbitrage. E.g. the SFC is proposing Basel-style risk-based capital
requirements for market risk and OTC derivatives related counterparty credit risk.
Should the aforementioned market access business be assessed according to the
SFC’s proposed changes to the FRR under consultation, the respective regulatory
capital requirement will likely be reduced.
-23-
IV. HONG KONG'S ROLE AS A RELATIONSHIP CENTRE
52. Although Hong Kong and other Asian locations have lagged behind London and
New York as international booking hubs, Hong Kong is widely recognised as a
leading international financial centre with leading global banks and other
intermediaries having established major presences in the city. Currently Hong
Kong plays a significant role as a relationship centre, supported by its
sophisticated infrastructure and strategically important geographic location.
Whilst there is a need for Hong Kong to introduce changes to address the
challenges and develop into a major booking centre, it is equally important that
Hong Kong's model as a relationship hub be maintained.
A. Maintaining Hong Kong's Relationship Centre Status
53. Apart from regulatory considerations, operational efficiency and business
considerations are also important when financial institutions decide on the
establishment of booking centre. Despite the push factors discussed above,
global financial institutions may still prefer to maintain a single booking centre
(in one jurisdiction or geographic region) for global operations rather than
setting up separate booking centres. In this respect, it is not uncommon for
global financial institutions operating various relationship centres (local or
regional) around the world while transactions are booked into a single booking
centre.
54. Although this paper focuses on Hong Kong as a booking centre, Hong Kong does
remain a very important relationship centre, where transactions in financial
products are booked elsewhere. Accordingly, Hong Kong needs to retain the
flexibility where the relationships are ‘maintained’ in Hong Kong albeit
transactions are booked elsewhere, either because clients actually contract
directly with other centres but maintain front office relationships with
investment professionals in Hong Kong or arrangements are delegated or
outsourced by the Hong Kong intermediary to those other centres.
B. Section 115 of SFO Considerations
55. In particular there are different types of transactions and activities in financial
products that are currently typically booked to other centres. In addition many
groups delegate some or substantial part of their activities to other group
entities where they maintain their centres of excellence. The same is true for
-24-
asset management, where an asset management group's expertise for a
particular market (for example the US or Europe), sector or type of financial
instrument (for example, equities or fixed income) is likely to be found elsewhere
outside Hong Kong. Accordingly, and aside from regulatory factors and capital
requirements, booking in another centre may be due to other reasons such as
client preference, established location of infrastructure and back office support,
development of relevant markets, operational structure of international financial
institutions, etc., at a time when clients and investors are increasingly looking for
customized investment solutions. In this respect, it is important for Hong Kong
to recognize this while developing itself as a preferred booking centre; it needs
to maintain sufficient flexibility from a regulatory perspective in permitting
offshore booking models to continue to operate. In particular consideration
needs to be given to the application of Section 115 of the SFO which imposes
restrictions on offshore entities 'actively' marketing regulated services in Hong
Kong.
56. Section 115 of the SFO has extra-territorial application and applies to any person
who ‘actively markets’ to the Hong Kong ‘public’ 13 any services (even if
performed outside Hong Kong) which, if provided in Hong Kong, would be a
regulated activity; in which case such person is required to be appropriately
licensed by the SFC. Section 115 is part of Hong Kong law, and the SFC is obliged
to enforce it.
57. However, Section 115 of the SFO may potentially restrict the ability of Hong Kong
entities from ‘maintaining’ relationships with clients while transactions are
booked to offshore entities – as the offer of booking services by such offshore
entities may be deemed to constitute marketing a regulated service in Hong
Kong. As noted above, Section 115 prohibits an overseas person (or a person in
Hong Kong on behalf of that overseas person) from actively marketing its
regulated services to the public in Hong Kong. The stress point comes when an
overseas group wishes to set up a presence in Hong Kong but does not wish,
perhaps initially, to set up a full service operation in Hong Kong and instead rely
on group companies elsewhere, often under a delegation model or as an
overseas booking centre. On the one hand, Section 115 prevents any active
marketing of the overseas affiliate's regulated services while on the other hand
the SFC in practice will not license a branch of that overseas affiliate. There are
many examples in both the securities and futures markets (where, for example,
13
Either by itself or through other persons on its behalf and whether that marketing takes place in Hong Kong or from a place outside Hong Kong but targeting Hong Kong.
-25-
clients want to trade the US or European markets and so need to enter
transactions through a US or European broker-dealer) and the asset
management industry (where, for example, an investor wants to invest in a
portfolio of UK equities and the experience and expertise for that strategy sits in
London). In part, Singapore addresses this issue through ‘paragraph 9
exemption’. However many financial institutions looking to establish a presence
in Hong Kong, but not a full service presence (with the investment cost
associated with that) at the outset, find Hong Kong virtually impossible. This is
one of Hong Kong's 'push' factors for new entrants to Asia looking at Hong Kong.
58. In this respect the SFC may provide additional guidance as to the permissibility of
the offshore booking model and clarification as to its position under Section 115
of the SFO. In particular the SFC should seek to update its Frequently Asked
Questions on what is ‘actively markets’ under Section 115 of the SFO. More
particularly, it may be that Section 115 needs to be amended (but not repealed,
as it does serve a useful purpose from an investor protection standpoint).
-26-
V. OTHER CONSIDERATIONS
59. Since the global financial crisis Hong Kong has actively implemented and
proposed changes to its regulatory environment to align its standards with
international benchmarks while maintaining a robust level of investor protection.
In promoting Hong Kong as the leading booking hub it is critical to consider the
interrelated regulatory regimes to ensure the enhancements complement each
other, otherwise Hong Kong's attractiveness as the prime booking centre may be
adversely affected. The relevant regimes are discussed below.
A. Resolution Regime
60. In January 2014, the Financial Services and the Treasury Bureau, the HKMA, the
SFC and the Insurance Authority jointly published the consultation paper on "An
Effective Resolution Regime for Financial Institutions in Hong Kong". The
proposals set out in the consultation paper seek to put in place for Hong Kong a
resolution regime encompassing all the key attributes required by the FSB to be
implemented in its member jurisdictions, including Hong Kong. In January 2015,
a second consultation paper "An Effective Resolution Regime for Financial
Institutions in Hong Kong" was issued, which also contains the conclusions from
the first consultation paper. This second consultation paper provides more in-
depth proposals on Hong Kong's resolution and recovery regime.
61. In this respect, while it is important to put in place an appropriate resolution
regime for financial institutions in Hong Kong, such resolution regime should
ensure a balance between the recoverability and resolvability of institutions, the
practical implications to institutions and comparability at an international level.
The consultation still requires a third stage consultation, with a view to
introducing a bill into the Legislative Council most likely in 2016. While the
January 2014 and January 2015 consultation papers set out the main framework
and proposals, and provide other proposals on, for example, what form the bail-
in powers will take, how counterparty rights (including those of early or
automatic termination) will be affected, how the interplay between existing
corporate insolvency proceedings and the resolution regime will work, what the
methodology will be for calculating compensation for creditors adversely
affected by resolution (and what rights there will be to appeal this), and how the
new law will interact with existing law in Hong Kong, we are still lacking detailed
concrete conclusions.
-27-
62. The first consultation paper introduced the concept of resolving at the level of a
locally incorporated holding company (HC) to improve resolvability. Whilst the
conclusions noted that a 'blanket' requirement for financial institutions to
establish a locally incorporated HC structure in Hong Kong should not be created,
the second consultation paper raised questions on the conditions at which
resolution should be undertaken with mixed activity groups namely locally
incorporated financial services holding company (FSHC) and locally incorporated
mixed activity holding company (MAHC). The authorities also proposed that it
should be possible to use resolution powers under the regime on affiliated
operational entities (AOEs), which are entities, regulated or not, providing critical
services to the failing financial institution.
63. It is important to keep in mind that the development of the resolution regime,
especially how the scope and the resolution authority powers are calibrated,
should not be in a way that will make Hong Kong unattractive as a booking
centre and at the same time achieve consistency with international standards for
Hong Kong to maintain its competitiveness internationally.
B. Holding Company and Tax Considerations
64. Becoming a preferred booking centre could also be achieved by attracting
financial institutions to set up their required holding company in Hong Kong. The
typical functions of a holding company include, but are not limited to, external
fund raising and provision of guarantees in respect of its subsidiaries, for which
incidental treasury and related functions will be required locally, leading to
additional job creation as a result.
65. Looking at the advantages or disadvantages for financial institutions to set up a
holding company or booking entity in Hong Kong, among other factors, tax
structure and deductions would be one of the main considerations.
66. Some considerations in the context of tax factors include:
(i) Interest expense of a Hong Kong booking entity: An entity which carries on
a business in Hong Kong and which is not considered to be a financial
institution for the purposes of the Inland Revenue Ordinance would be
subject to strict interest deduction rules. If the Hong Kong booking entity
is not a financial institution in Hong Kong (e.g. a SFC licensed corporation
which is not regulated by the HKMA), interest expenses of such Hong Kong
-28-
booking entity are generally not deductible if the interest is paid to
individuals, overseas group companies and overseas clients which are not
financial institutions, etc. This will significantly affect the tax costs of the
Hong Kong booking entity undertaking certain financial transactions in
Hong Kong, and also limit the choice of funding of the Hong Kong booking
entity if it is to avoid the additional tax burden.
(ii) Source of income of the Hong Kong booking entity: Hong Kong adopts a
territorial basis of taxation. In other words, only Hong Kong sourced profits
are subject to tax. This is a favourable factor for setting up a booking
centre in Hong Kong, as non-Hong Kong sourced profits would be exempt
from tax in Hong Kong. Nevertheless, the source of income, especially the
source of interest income of a non-financial institution (e.g. a SFC licensed
Hong Kong booking entity), is always a contentious issue. Removing the
uncertainties on source of income can help increase the attractiveness of
Hong Kong as a booking centre.
(iii) HK Double Tax Agreement (DTA) network: A DTA is a bilateral treaty
between two jurisdictions which provides relief against double taxation of
income. Furthermore, a DTA may provide a reduced rate of withholding
tax on certain types of income (e.g. interest and capital gain) derived by a
booking entity from its global clients. While the Hong Kong DTA network
has expanded in recent years, the number of jurisdictions with which Hong
Kong has concluded a DTA remains less than those of the other major
financial centres (e.g. UK, US, Singapore and Japan). Therefore, the
attractiveness of Hong Kong as a booking location can be enhanced if Hong
Kong can further expand its DTA network.
(iv) Incentives for the establishment of Hong Kong booking entities: There is
scope for tax reform in Hong Kong to introduce incentive programs to
encourage the establishment of booking entities in Hong Kong, such as
introducing an offshore banking unit regime which provides a concessional
tax rate to encourage genuine offshore banking activity with overseas
clients in Hong Kong.
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C. OTC Derivatives
67. Under the new Type 11 dealing in and advising on OTC derivatives licensing
regime in Hong Kong, there is no intra-group exemption, nor for that matter no
dealing as principal exemption (other than for price taker).
68. As a result, a purely internal risk management entity would be caught by the
Type 11 licensing regime by simply having intra-group derivative transactions (e.g.
to manage risk), notwithstanding that such entity may not face any external
client at all. Whilst there are various exemptions available under the regime,
these do not lend themselves easily to the fact pattern. Consequently, internal
risk management entities will likely have to apply for a Type 11 licence, and will
be subject to the relevant regulatory capital requirements. The cost of this is so
high that there is a very real risk that internal risk management entities will be
closed and the booking model and risk management model completely changed.
69. In contrast, in similar circumstances in Singapore, the proposed regulatory
regime includes a specific own account and intra-group exemption. A similar risk
management entity would not need to become licensed, and would therefore
not be subject to the regulatory capital requirements.
D. Market Infrastructure
70. Market infrastructure involving information system and operating procedures for
effecting securities transactions (in particular relating to cross-border
transactions) is also an important factor in setting up a booking centre. Effective
and efficient market infrastructure could allow buyers, sellers and intermediaries
effecting transactions (in particular on a cross-border basis) in a reliable and
economical manner. To enhance market infrastructure in Hong Kong for booking
centre operations this may involve the need to promote collaboration between
the HKMA, SFC, HKEx and financial institutions to develop action plans.
-30-
Appendix A. Current Economic Perspective: Hong Kong as a Booking Centre
A1. Indicators of Hong Kong's comparative standing are mixed. Hong Kong is well-
ranked as an internal lending hub, but with modest market shares of lending and
deposits (Table A); in common with other offshore centres, Hong Kong is less well-
ranked in terms of assets and liabilities from non-bank counterparties (Tables B and
D); and of substantive offshore centres, foreign currency assets and liabilities is a
high proportion of the total (Table C). Hong Kong is creditably-ranked as a centre
for offshore loans and deposits (Table E).
A. Share of total
banking assets and
liabilities reported to
BIS: External positions
of banks in all
currencies vis-à-vis all
sectors, end-September
2014
Source: BIS Locational
Banking Data (Table 2A)
Assets Liabilities
1. United Kingdom 16.9% 2. United States 11.2% 3. Japan 11.0% 4. France 8.4% 5. Germany 8.3% 6. Cayman Islands 4.9% 7. Netherlands 4.3% 8. Hong Kong 4.2% 9. Switzerland 3.3% 10. Singapore 2.6% 11. Luxembourg 2.5% 12. Belgium 2.4% 13. Italy 1.8% 14. Spain 1.6% 15. Canada 1.6% 16. All others 15.2%
1. United States 16.7% 2. United Kingdom 16.5% 3. France 8.7% 4. Germany 7.2% 5. Cayman Islands 5.5% 6. Japan 5.1% 7. Netherlands 4.1% 8. Hong Kong 3.5% 9. Switzerland 3.2% 10. Singapore 2.9% 11. Australia 2.7% 12. Italy 2.1% 13. Belgium 2.1% 14. Luxembourg 1.8% 15. Finland 1.7% 16. All others 16.1%
B. Proportion of
external positions of
banks in all currencies
vis-à-vis the non-bank
sector to all sectors,
selected domiciles, end-
September 2014
Source: BIS Locational
Banking Data (Table 2B)
Assets Liabilities
1. Japan 68.8% 2. Greece 65.7% 3. Bermuda 62.1% 4. Curacao 61.1% 5. Cyprus 56.2% 6. Bahrain 55.1% 7. Austria 54.5% 8. Korea 52.3% 9. Macau 49.5% 10. Spain 49.2% 11. Taiwan 48.9% 12. United Kingdom 47.2% 13. Canada 43.5% 14. Median 41.3% 15. Portugal 41.3% 20. Singapore 39.1% 21. Netherlands 38.8% 22. Germany 38.4% 23. France 38.3% 25. Guernsey 35.6% 26. United States 35.5% 29. Switzerland 33.4% 30. Luxembourg 30.7% 31. Hong Kong 29.6% 37. Cayman Islands 25.8%
1. India 82.2% 2. Isle of Man 67.2% 3. Bermuda 67.1% 4. Switzerland 59.7% 5. Cyprus 58.0% 6. Jersey 54.1% 7. Bahamas 52.2% 8. Curacao 52.2% 9. Panama 51.7% 10. Belgium 47.1% 11. Macau 47.0% 12. Bahrain 44.5% 13. Cayman Islands 42.1% 14. Hong Kong 38.5% 15. United Kingdom 38.3% 20. Median 31.6% 21. Singapore 31.2% 22. United States 31.0% 25. Luxembourg 30.3% 27. Spain 24.1% 28. Greece 23.9% 29. Malaysia 23.0% 32. France 21.2% 37. Germany 17.5% 40. Korea 12.2%
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C. Proportion of
external positions of
banks in foreign
currencies to all
currencies vis-à-vis all
sectors , end-
September 2014
Source: BIS Locational
Banking Data, (Table
2C)
Assets Liabilities
1. Bahrain 100.0% 2. Curacao 100.0% 3. Panama 100.0% 4. Singapore 100.0% 5. Cayman Islands 100.0% 6. Bahamas 99.9% 7. Bermuda 99.8% 8. Indonesia 99.6% 9. Korea 99.4% 10. Macau 99.1% 11. Taiwan 97.1% 12. India 96.5% 13. Brazil 95.6% 14. Hong Kong 93.8% 15. United Kingdom 90.7%
1. Bahrain 100.0% 2. Curacao 100.0% 3. Panama 100.0% 4. Singapore 100.0% 5. Cayman Islands 100.0% 6. Bahamas 100.0% 7. Brazil 98.6% 8. Bermuda 97.6% 9. Macau 97.0% 10. Korea 94.9% 11. Taiwan 92.4% 12. Turkey 88.1% 13. Hong Kong 87.4% 14. Chile 86.3% 15. United Kingdom 84.6%
D. Proportion of
external positions of
banks in foreign
currencies vis-à-vis the
non-bank sector,
selected domiciles, end-
September 2014
Source: BIS Locational
Banking Data (Table 2D)
Assets Liabilities
1. Bermuda 61.9% 2. Curacao 61.1% 3. Bahrain 55.1% 4. Japan 53.5% 5. Korea 51.7% 6. Macau 48.9% 7. Taiwan 47.5% 8. United Kingdom 42.1% 9. Panama 39.4% 10. Singapore 39.1% 11. India 37.2% 12. Mexico 35.9% 13. Canada 35.1% 14. Guernsey 30.6% 15. Cyprus 29.7% 16. Hong Kong 26.1% 17. All countries 25.8% 18. Cayman Islands 25.8% 40. United States 4.0%
1. Bermuda 64.7% 2. Curacao 52.2% 3. Bahamas 52.1% 4. Panama 51.7% 5. Switzerland 51.1% 6. Macao 46.0% 7. Bahrain 44.5% 8. Cayman Islands 42.1% 9. India 33.4% 10. United Kingdom 32.9% 11. Canada 32.4% 12. Cyprus 32.1% 13. Singapore 31.2% 14. Hong Kong 31.2% 15. Japan 29.7% 16. Jersey 29.1% 21. All countries 18.8% 25. Luxembourg 12.7% 45. United States 0.9%
E. Share of total
external loans and
deposits of banks in all
currencies vis-à-vis all
sectors end-September
2014
Source: BIS Locational
Banking Data (Table 7A)
Loans Deposits
1. United Kingdom 20.1% 2. United States 15.9% 3. Germany 8.0% 4. France 7.5% 5. Cayman Islands 6.3% 6. Japan 5.6% 7. Hong Kong 4.3% 8. Netherlands 3.6% 9. Singapore 3.2% 10. Luxembourg 2.7% 11. Switzerland 2.4% 12. Canada 2.0%
1. United Kingdom 19.8% 2. United States 19.6% 3. France 6.8% 4. Cayman Islands 6.3% 5. Japan 6.1% 6. Germany 5.0% 7. Hong Kong 3.9% 8. Singapore 3.5% 9. Netherlands 3.3% 10. Switzerland 2.9% 11. Luxembourg 2.1% 12. Spain 1.9%
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F. Share of total
external loans and
deposits of banks in
all currencies vis-à-vis
the non-bank sector
end-September 2014
Source: BIS Locational
Banking Data (Table
7B)
Loans Deposits
1. United Kingdom 22.8% 2. United States 15.9% 3. Japan 7.8% 4. Germany 7.5% 5. France 6.9% 6. Netherlands 4.7% 7. Cayman Islands 4.1% 8. Singapore 4.1% 9. Hong Kong 3.2% 10. Switzerland 2.9%
1. United Kingdom 21.6% 2. United States 16.6% 3. Cayman Islands 7.5% 4. France 6.4% 5. Japan 5.8% 6. Switzerland 4.8% 7. Netherlands 4.7% 8. Germany 4.3% 9. Hong Kong 4.3% 10. Singapore 3.1%
G. Share of total
international
positions by
nationality of
ownership of
reporting banks,
selected domiciles,
end-September 2014
Source: BIS Locational
Banking Data (Table
8A)
Assets Liabilities
1. Japan 13.3% 2. United States 12.0% 3. United Kingdom 11.2% 4. France 10.6% 5. Germany 10.4% 6. Switzerland 7.7% 7. Netherland s 5.3% 8. All Asia & Pacific 3.2% 9. Sweden 3.2% 10. Canada 3.1% 31. Singapore 1.1% 32. Hong Kong 0.2% 33. Luxembourg 0.2% 46. Cayman Islands 0.0%
1. United States 14.2% 2. United Kingdom 11.6% 3. France 10.6% 4. Germany 9.6% 5. Switzerland 8.2% 6. Japan 7.8% 7. Netherlands 5.1% 8. Sweden 4.0% 9. All Asia & Pacific 3.2% 10. Canada 3.0% 17. Singapore 1.1% 32. Hong Kong 0.2% 35. Luxembourg 0.1% 43. Cayman Islands 0.0%
A2. In volumes of trading in OTC derivatives, exchange-traded derivatives and foreign
exchange measured by aggregate transaction amounts, Hong Kong is well-ranked
within the leading ten centres but far behind the three leading centres in
transaction volumes, these being highly concentrated trading locations (Section H).
Hong Kong booked single currency interest rate swaps are transacted
overwhelming with professional counterparties, but mostly executed overseas.
Turnover is modest as a proportion of the total other than in HK dollar instruments,
and in those denominated in Asian currencies that are in some measures restricted
markets (Section I). No activity is observed in 25 denominations of the 41 reported
to the BIS.
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H. OTC single
currency interest rate
derivatives turnover
by country, April
2013, ‘net-gross’
basis, Daily averages,
in millions of US
dollars
Instruments comprise
swaps, forward rate
agreements & options
Source: BIS Triennial
Central Bank Survey,
December 2013
Total Share with reporting
dealers abroad
Share with other banks
1. United Kingdom 1,347,749 2. United States 628,153 3. France 202,210 4. Germany 101,347 5. Japan 67,136 6. Australia 66,184 7. Denmark 59,354 8. Singapore 37,143 9. Canada 33,975 10. Switzerland 32,618 11. Netherlands 28,693 12. Hong Kong 27,897
25.4% 25.0% 46.5% 18.2% 38.4% 54.4% 30.3% 62.7% 27.1% 79.1% 24.8% 66.0%
54.4%
44.5%
41.4%
79.9%
47.3%
19.8%
60.7%
27.4%
55.3%
17.6%
70.0%
26.8%
I. OTC single currency
interest rate
derivatives turnover
by country and
currency in April
2013, ‘net-gross’ basis
Daily averages,
US$ millions, 25
denominations not
shown, Hong Kong
having nil turnover
Source: BIS Triennial
Central Bank Survey,
December 2013
(Tables T 03 01-06)
Denomination HK turnover Total turnover HK share
AUD
CHF
CNY
EUR
GBP
HKD
IDR
INR
JPY
KRW
MYR
NZD
SGD
THB
TWD
USD
Total
7,342
9
2,038
923
78
1,773
1
1,999
2,401
4,116
843
556
568
1,508
138
3,482
27,897
102,405
17,025
15,503
1,336,075
206,643
2,752
126
7,875
84,335
16,448
2,592
7,377
4,650
3,704
912
776,268
2,758,583
7.2%
0.1%
13.1%
0.1%
0.0%
64.4%
0.4%
25.4%
2.8%
25.0%
32.5%
7.5%
12.2%
40.7%
15.2%
0.4%
1.0%
-34-
A3. Hong Kong foreign exchange activity is well-ranked but significantly less in volume
than the four leading centres where trading is concentrated (Section J).
J. Spot, outright
forwards, FX swaps,
currency swaps, FX
options
Daily averages, in
millions of US dollars
Source: BIS Triennial
Central Bank Survey,
Global foreign
exchange market
turnover in 2013,
(Table T 01 01),
February 2014
Total Share FX swaps Share
United Kingdom
United States
Singapore
Japan
Hong Kong
Switzerland
France
Australia
Netherlands
Other countries
Total
2,725,993
1,262,799
383,075
374,215
274,605
216,394
189,878
181,709
112,268
950,511
6,671,446
40.9%
18.9%
5.7%
5.6%
4.1%
3.2%
2.8%
2.7%
1.7%
14.2%
100.0%
1,126,586
340,991
172,787
169,558
174,130
131,535
134,921
115,243
43,254
521,938
2,930,943
38.4%
11.6%
5.9%
5.8%
5.9%
4.5%
4.6%
3.9%
1.5%
17.8%
100.0%
A4. Rankings of equity issuance and trading turnover are volatile, although recent data
show that Hong Kong is consistently well-ranked.
K. Stock market capitalisation
(US$ bn., end-2014)
Source: World Federation of
Exchanges
1. NYSE 19,351 2. NASDAQ OMX 6,979 3. Japan Exchange - Tokyo 4,378 4. London SE Group 4,013 5. Shanghai SE 3,933 6. Euronext 3,319 7. Hong Kong Exchanges 3,233 8. TMX Group 2,094 9. Shenzhen SE 2,072 10. Deutsche Börse 1,739
-35-
L. Value of share trading (turnover)
2014 (US$ bn)
Source: World Federation of
Exchanges
1. NASDAQ OMX 31,044 2. NYSE 18,234 3. BATS Global Markets - US 13,163 4. Shanghai SE 11,053 5. Shenzhen SE 5,912 6. BATS Chi-x Europe 6,877 7. Japan Exchange - Tokyo 4,756 8. London SE Group 3,493 9. NYSE 3,452 10. Euronext 2,938 11. Hong Kong Exchanges 1,630
M. No. of completed IPOs (2013)
Source: World Federation of
Exchanges
1. NYSE 140 2. Nasdaq US 116 3. Hong Kong Exchanges 109 4. TMX 90 5. Korea Exchange 85 6. ASX 61 7. TSE 46 8. LSE 36
N. No of listed companies (end-
2014).
Source: World Federation of
Exchanges; London Stock Exchange
1. BSE India 5,542 2. TMX Group 3,761 3. Japan Exchange - Tokyo 3,470 4. BME Spanish Exchanges 3,452 5. NASDAQ OMX 2,782 6. London SE Group 2,752 7. NYSE 2,466 8. Australian SE 2,073 9. Korea Exchange 1,864 10. Hong Kong Exchanges 1,752 11. NSE India 1,708 12. Shenzhen SE 1,618 13. Euronext 1,055 14. Shanghai SE 995 15. Bursa Malaysia 905
O. Exchange-traded funds, value
In only seven jurisdictions are more
than 180 ETF’s listed, Hong Kong
ranking twelfth with 122. London
SE, NYSE and Deutsche Börse each
list over 1,000 funds.
1. NASDAQ OMX 7,262 2. NYSE 4,383 3. London SE Group 340 4. Japan Exchange - Tokyo 276 5. Deutsche Börse 172 6. Shanghai SE 163 7. Hong Kong Exchanges 151 8. Korea Exchange 140 9. Euronext 122 10. SIX Swiss Exchange 91
P. Wealth management, shown by
estimates of assets under
administration or management
(US$ trillions, end-2014)
Deloitte Wealth Management
Centre Ranking 2015
1. Switzerland 2.04 2. UK 1.65 3. US 1.43 4. Panama & Caribbean 0.93 5. Hong Kong 0.64 6. Singapore 0.47 7. Luxembourg 0.29 8. Bahrain & UAE 0.06 9. Other 1.67
-36-
Appendix B. Summary of Main Regulatory 'Push' Factors in US, UK and EU in
Light of Latest Regulatory Reforms
Legislation/Regulation Features Push Factor
US - Dodd-Frank Wall Street
Reform and Consumer
Protection Act ("Dodd
Frank") - Volcker Rule
provisions and Swaps Push
Out provisions
UK – UK Financial Services
(Banking Reform) Act 2013
(Vickers)
EU – Liikanen proposals
Essentially, the new requirements will impose
restrictions on the permissible activities which can be
undertaken and booked into a banking entity, with the
principal overarching objectives of protecting deposit
taking entities from riskier, investment banking
activity.
The US Volcker Rule provisions under Dodd Frank
prohibit proprietary trading by a US banking entity.
The US Swaps Push Out provisions under Dodd Frank
prohibit booking of certain swaps transactions into
banking entities, requiring a separately capitalized
subsidiary.
The UK Financial Services (Banking Reform) Act
requires ringfencing of UK retail banking activities in
separate legal entities.
The EU Liikanen proposals would require separately
capitalized entities for investment banking activities
within a bank structure.
The requirements impact current
global booking models by limiting
products which can be booked
into parent banking entities. This
will affect the cost benefit
analysis for banks when they
consider developing /
restructuring new or existing
business activities.
-37-
Legislation/Regulation Features Push Factor
US - Dodd Frank Resolution
and Recovery Planning
Rules
UK - Banking Act 2009
EU - Bank Recovery and
Resolution Directive
Regulations requiring the development of recovery
and resolution plans or ‘living wills’ setting out how a
large and complex global bank would be resolved in an
orderly way in a crisis.
Two main aspects of resolution
regimes impact bank structural
and booking considerations:
1. Global regulators have
expressed concern around the
'resolvability' of global banks due
to the continuing complexity of
their legal entity structures. A
likely course of action will be
simplification of legal entity
structures to align more closely
to global lines of business. This
may have some impacts on
regional business models for
global banks and the creation of
Asian 'hub' entities.
2. Ongoing global concern
about the practicality of the
'single point of entry' resolution
mechanism whereby the global
'home' regulator would take the
lead in any global bank
resolution. This approach raises
inherent concerns for regional
jurisdictions such as Hong Kong
which have substantial inbound
foreign bank activity which is not
conducted through a local legal
entity. A public consultation in
Hong Kong is currently underway
in respect of a proposal to
establish an effective resolution
regime for financial institutions.
However, financial institutions
may consider segmenting their
businesses in different
jurisdictions in consideration of
the preferences of local clients
(e.g. clients in Asia may prefer
their assets to be subject to a
local resolution regime).
-38-
Dodd Frank - Foreign-Bank
Rule
New prudential standards for foreign banks with total
consolidated assets in the US of over US$50 billion –
this requires consolidation of non-branch US
operations under a holding company subject to
comparable regulation and a US bank including
regulation of capital, liquidity, leverage, risk
management, resolution plan, concentration limits,
credit exposure, etc.
Trapping of capital and liquidity
within the US holding company,
and ongoing compliance costs for
US operations may encourage
foreign banks to shift some US
operations to other jurisdictions
and further cause some
institutions to review their global
funding models.
-39-
Legislation/Regulation Features Push Factor
US – Dodd Frank – Over-
the-counter (‘OTC’)
regulations – Commodity
Futures Trading
Commission
EU – European Market
Infrastructure Regulation
(EMIR) / Markets in
Financial Instruments
Directive II (MiFID II) /
Markets in Financial
Instruments Regulations
(MIFIR) / Capital
requirements regulation
(CRR) and directive (CRD IV)
/ Market Abuse Directive
(MAD II) / Market Abuse
Regulation (MAR)
In essence the new requirements will affect the
operations of OTC derivative business/transactions in
the US/EU (to varying degrees) covering areas such as
capital requirements, risk management record
keeping, reporting requirements, operations, etc.
From the perspective of the
financial institutions, the
existence of an OTC derivative
regulatory framework does not
necessarily discourage the
development of new or existing
business activities. Similar to the
discussion relating to special
resolution regime above, the OTC
derivative regulatory framework
is also a global initiative. Hong
Kong is also establishing an OTC
derivative regulatory framework
covering areas such as licensing,
clearing, reporting, etc.
However, financial institutions
may consider segmenting their
OTC businesses in different
jurisdictions in consideration of
the preferences of local clients
(e.g. clients in Asia may prefer
their assets to be subject to a
local OTC reporting regime).
UK – Financial Conduct
Authority report on
outsourcing asset
management business
Identified resilience risk and oversight risk with respect
to the outsourcing activities of asset managers and
proposed adoption of more detailed contingency plans
and oversight arrangements.
The increase in compliance
efforts and costs may discourage
the handling of booking and
client relationships within the UK.
EU - Proposed Financial
Transaction Tax
Tax on financial transactions, including derivatives and
financial instruments.
This may discourage transactions
to be undertaken inside the EU.
UK (with similar regimes in
France and Germany as
well as similar or proposed
regimes in other EU
countries) – Bank levy
Tax on the global consolidated balance sheets of UK
banks / banking groups, as well as on the balance
sheets of foreign banks / banking groups with a UK
presence.
This may act as a disincentive for
banks to try to grow their balance
sheets in the UK / other EU
countries with similar regimes.
This is particularly applicable in
the UK where the rate applied to
global balance sheets held in the
UK has increased multiple times
since the introduction of the
Bank levy in 2011.
-40-
Legislation/Regulation Features Push Factor
EU – Alternative
Investment Fund Managers
Directive (AIFMD) –
restrictions on bonuses
EU – CRD IV – Bonus cap
Additional requirements imposed on remuneration
policy of alternative investment fund managers
including for example: (i) bonus to be paid out on
deferred basis, (ii) retention period requiring the
individual to hold shares/units used as part of bonus
payment, and (iii) deferred bonus granted to be
subject to performance conditions.
Bankers' bonuses are to be capped at 100% of fixed
compensation, which can be increased to 200% with a
66% shareholder vote.
Restrictions on payment of
bonuses and increased
shareholder involvement in
remuneration may cause banks
concern that they are unable to
put in place a competitive
remuneration policy to attract
and retain the best staff. This
may encourage banks to move
part of their operations outside
the EU (including relocation of
senior management).
HK-2000-OFF-15
About the Financial Services Development
Council, Hong Kong
Established in January 2013, the Financial Services
Development Council (FSDC), Hong Kong is a high-level and
cross-sector platform to engage the industry and formulate
proposals to promote the further development of Hong Kong’s
financial services industry and map out the strategic direction
for development. The FSDC will advise the Hong Kong SAR
Government on areas related to diversifying the financial
services industry, enhancing Hong Kong’s position and functions
as an international financial centre of our country and in the
region, and further consolidate our competitiveness through
leveraging the Mainland to become more global.
Contact us
Room 931 & 932, 9/F, West Wing, Central Government Office,
11 Ice House Street, Central, Hong Kong
(852) 2493 1313
www.fsdc.org.hk
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