HK Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: Hong Kong

Status: October 2, 2001

Recommendation 1
Recommendation 2
Recommendation 3
Recommendation 4

Recommendation 5
Recommendation 6
Recommendation 7
Recommendation 8

Market selection

Recommendation 4

Each market must have clear rules assuring investor protection by safeguarding participants from the financial risks of failed settlement and ensuring that listed companies are required to follow sound policies on corporate governance, transfer of economic benefits and shareholder rights.

1. Does the depository or the market have securities lending and borrowing schemes in place, and are these open to all market participants and their settlement agents? Yes. For the depository scheme, HKSCC acts as the principal to borrow shares from the lenders for the sole purpose of settling long CNS trade positions of its Participants. There is also an active on-shore and off-shore stock borrowing and lending market on domestic securities.

2. Does the settlement system mark fail trades to market and collect margin from the failing counterparty to protect the innocent counterpart's interest? Yes. Under the Continuous Net Settlement (CNS) system, HKSCC acts as the settlement counterparty to broker participants and is exposed to market risk. In order to control such risk exposure, HKSCC marks to market all CNS trade positions disregarding whether it is a failed trade or not.

With HKSCC being the central counterparty ("CCP"), the innocent counterparty's interest is protected against failed transactions and will not suffer any loss.

3. Does the market operate a guarantee fund or have an equivalent procedure to protect against the cost of failed transactions; and which sectors of the market does it cover? Yes. HKSCC operates a guarantee fund, which is composed of contributions from broker participants, appropriation from HKSCC's reserves and insurance coverage. HKSCC guarantees settlement of broker-broker trades on a CCP basis and the Guarantee Fund covers HKSCC against losses arising from broker participants' default.

4. Are the stock transfer agents (share registrars) linked electronically to the depository? No. But SFC and HKEx are studying means to further improve the efficiency of securities settlement in Hong Kong including inter alia scripless market model and enhancement of straight-through-processing where closer links between the central depository and share registrars are also under consideration.

5. Is there a legal maximum time period to complete ownership transfers in the books of the issuer? If so, does market practice adhere to the deadline? Ownership transfers have to be completed within 10 business days, which are governed by the Stock Exchange Listing Rules.

6. Are investors entitled to all benefits arising on a security from the point of purchase; and how are any rules enforced? Yes, in normal cases. There are no Exchange rules or depository rules expressly providing for the entitlement.

7. Is proxy voting permissible in the market and can such proxies be lodged by post or other remote delivery method? Yes. Such proxies have to be signed and delivered to the issuer. Delivery method can be by hand or by post.

8. Are there binding rules in the market stating the minimum and maximum lapsed time between the announcement and completion of key events, including registration, the calling of shareholder meetings, the payment of dividends or interest, rights issues, tender offers and other voluntary corporate actions? Relevant rules are in place to regulate the period of notice and the response time for corporate announcements:

Book Close: The issuer shall notify the Exchange in writing and publish in the newspapers a notice of the closure of its transfer of book or register of members at least 14 days before such closure (Listing Rule Appendix 7)

Notice of General Meeting: Not less than 14 days notice must be given for a general meeting proposing to pass an ordinary resolution (Companies Ordinance s.114(2)). Not less than 21 days notice must be given where a special resolution will be put to a meeting (Companies Ordinance s.116(1)). Not less than 21 days notice must be given for an Annual General Meeting ("AGM") (Companies Ordinance s.114(3)(a))

Rights Issue: Offers of securities by way of rights are normally required to be conveyed by renounceable provisional letters of allotment or other negotiable instrument, which must state the time, being not less than 14 days, in which the offer may be accepted. In case where the issuer has a large number of overseas members a longer offer period may be desirable, provided that the Exchange must be consulted if the issuer proposes an offer period of over 21 days. (Listing Rule 7.20)

In the case of a right issue, an announcement of the results of the issue and of the basis of any acceptance of excess applications must be published in the newspapers as soon as possible, but in any event not later than the morning of the business day next after the allotment letters or other relevant documents of title are posted (Listing Rule 12.10)

Open offer: Offers of securities by way of an open offer must remain open for acceptance for a minimum period of 14 days. In cases where the issuer has a large number of overseas members a longer offer period may be desirable, provided that the Exchange must be consulted if the issuer proposes an offer period of over 21 days. (Listing Rule 7.25)

In the case of an offer of subscription, offer for sale or open offer, an announcement of the results of the offer, the basis of allotment of the securities and, where relevant, the basis of any acceptance of excess applications must be published in the newspapers as soon as possible, but in any event, not later than the morning of the business day next after the allotment letters or other relevant documents of title are posted (Listing Rule 12.08)

9. Are all voluntary corporate actions advised through a central mechanism assuring consistent information to all investors? Yes. Under the listing rules, the principal publication channels for news dissemination to registered shareholders are mainly through either newspapers or the GEM (Growth Enterprise Market) website. Distribution of printed hardcopies for annual, half-yearly and quarterly (for GEM only) reports, listing documents and circulars are also required. Nominee companies have a fiduciary responsibility to notify the beneficiary owners (of shares held on their behalf) of any corporate communications as Agent.

10. Is information on corporate actions available electronically, and is the minimum lapsed time for responding to such actions sufficient to enable all domestic and foreign investors to respond in a timely and considered fashion? Yes. Listed company's announcements are available on the website of HKEx.

Listed issuers are required to comply with relevant rules and regulations as mentioned above in notifying their shareholders of corporate actions. However, under certain foreign jurisdictions such as U.S. and Canada, overseas shareholders may not be qualified to participate in some corporate actions such as scrip dividend or rights issue.

1.	Does the depository or the market have securities lending and borrowing schemes in place, and are these open to all market participants and their settlement agents?	Yes. For the depository scheme, HKSCC acts as the principal to borrow shares from the lenders for the sole purpose of settling long CNS trade positions of its Participants. There is also an active on-shore and off-shore stock borrowing and lending market on domestic securities.
2.	Does the settlement system mark fail trades to market and collect margin from the failing counterparty to protect the innocent counterpart's interest?	Yes. Under the Continuous Net Settlement (CNS) system, HKSCC acts as the settlement counterparty to broker participants and is exposed to market risk. In order to control such risk exposure, HKSCC marks to market all CNS trade positions disregarding whether it is a failed trade or not. With HKSCC being the central counterparty ("CCP"), the innocent counterparty's interest is protected against failed transactions and will not suffer any loss.
3.	Does the market operate a guarantee fund or have an equivalent procedure to protect against the cost of failed transactions; and which sectors of the market does it cover?	Yes. HKSCC operates a guarantee fund, which is composed of contributions from broker participants, appropriation from HKSCC's reserves and insurance coverage. HKSCC guarantees settlement of broker-broker trades on a CCP basis and the Guarantee Fund covers HKSCC against losses arising from broker participants' default.
4.	Are the stock transfer agents (share registrars) linked electronically to the depository?	No. But SFC and HKEx are studying means to further improve the efficiency of securities settlement in Hong Kong including inter alia scripless market model and enhancement of straight-through-processing where closer links between the central depository and share registrars are also under consideration.
5.	Is there a legal maximum time period to complete ownership transfers in the books of the issuer? If so, does market practice adhere to the deadline?	Ownership transfers have to be completed within 10 business days, which are governed by the Stock Exchange Listing Rules.
6.	Are investors entitled to all benefits arising on a security from the point of purchase; and how are any rules enforced?	Yes, in normal cases. There are no Exchange rules or depository rules expressly providing for the entitlement.
7.	Is proxy voting permissible in the market and can such proxies be lodged by post or other remote delivery method?	Yes. Such proxies have to be signed and delivered to the issuer. Delivery method can be by hand or by post.
8.	Are there binding rules in the market stating the minimum and maximum lapsed time between the announcement and completion of key events, including registration, the calling of shareholder meetings, the payment of dividends or interest, rights issues, tender offers and other voluntary corporate actions?	Relevant rules are in place to regulate the period of notice and the response time for corporate announcements: Book Close: The issuer shall notify the Exchange in writing and publish in the newspapers a notice of the closure of its transfer of book or register of members at least 14 days before such closure (Listing Rule Appendix 7) Notice of General Meeting: Not less than 14 days notice must be given for a general meeting proposing to pass an ordinary resolution (Companies Ordinance s.114(2)). Not less than 21 days notice must be given where a special resolution will be put to a meeting (Companies Ordinance s.116(1)). Not less than 21 days notice must be given for an Annual General Meeting ("AGM") (Companies Ordinance s.114(3)(a)) Rights Issue: Offers of securities by way of rights are normally required to be conveyed by renounceable provisional letters of allotment or other negotiable instrument, which must state the time, being not less than 14 days, in which the offer may be accepted. In case where the issuer has a large number of overseas members a longer offer period may be desirable, provided that the Exchange must be consulted if the issuer proposes an offer period of over 21 days. (Listing Rule 7.20) In the case of a right issue, an announcement of the results of the issue and of the basis of any acceptance of excess applications must be published in the newspapers as soon as possible, but in any event not later than the morning of the business day next after the allotment letters or other relevant documents of title are posted (Listing Rule 12.10) Open offer: Offers of securities by way of an open offer must remain open for acceptance for a minimum period of 14 days. In cases where the issuer has a large number of overseas members a longer offer period may be desirable, provided that the Exchange must be consulted if the issuer proposes an offer period of over 21 days. (Listing Rule 7.25) In the case of an offer of subscription, offer for sale or open offer, an announcement of the results of the offer, the basis of allotment of the securities and, where relevant, the basis of any acceptance of excess applications must be published in the newspapers as soon as possible, but in any event, not later than the morning of the business day next after the allotment letters or other relevant documents of title are posted (Listing Rule 12.08)
9.	Are all voluntary corporate actions advised through a central mechanism assuring consistent information to all investors?	Yes. Under the listing rules, the principal publication channels for news dissemination to registered shareholders are mainly through either newspapers or the GEM (Growth Enterprise Market) website. Distribution of printed hardcopies for annual, half-yearly and quarterly (for GEM only) reports, listing documents and circulars are also required. Nominee companies have a fiduciary responsibility to notify the beneficiary owners (of shares held on their behalf) of any corporate communications as Agent.
10.	Is information on corporate actions available electronically, and is the minimum lapsed time for responding to such actions sufficient to enable all domestic and foreign investors to respond in a timely and considered fashion?	Yes. Listed company's announcements are available on the website of HKEx. Listed issuers are required to comply with relevant rules and regulations as mentioned above in notifying their shareholders of corporate actions. However, under certain foreign jurisdictions such as U.S. and Canada, overseas shareholders may not be qualified to participate in some corporate actions such as scrip dividend or rights issue.