Status Report on New Product and Market Development Initiatives (Status as of 16 October 2006)

Corporate

26 Oct 2006

Status Report on New Product and Market Development Initiatives
(Status as of 16 October 2006)

The following initiatives are subject to market support and regulatory approval so they may not be implemented. HKEx will announce further details of these initiatives as they progress.

Initiative		Status on 17 July 2006	Status on 16 October 2006
1.	Review of the derivative warrant market	A number of amendments to the Listing Rules will be considered at the next Listing Committee policy meeting, scheduled for this month. They deal with two of the points in the six-point plan: banning commission rebates and facilitating further issues. HKEx will work with the Securities and Futures Commission (SFC) and industry to tighten the current Liquidity Provider provisions in the Listing Rules and to provide documents in more accessible language, and it will continue its investor education efforts. The SFC is expected to publish revised marketing guidelines soon. HKEx has implemented its online Derivative Warrant Resources Centre with centralised and expanded information on all derivative warrants along the lines recommended by the SFC. Other SFC initiatives are scheduled to be considered at the next Listing Committee policy meeting.	Amendments to the Listing Rules to facilitate identical issues and ban commission rebates and other incentives were published on 29 September. On facilitating further issues, HKEx will work towards shortening the period between issuance and listing from the current four days. HKEx is working with the SFC and the industry to assess the current Liquidity Provider provisions in the Listing Rules and to provide documents in more accessible language. The SFC published revised derivative warrant marketing guidelines on 19 September. HKEx will continue to provide market education on derivative warrants.
2.	Amendments to the Listing Rules to require Main Board issuers to publish short announcements in newspapers instead of full announcements	HKEx published on 7 July its Exposure Conclusion on the Abolition of the Requirement for Main Board Issuers to Publish Paid Announcements in Newspapers and Related Matters, which noted overwhelming support from respondents. HKEx has decided that the total abolition of the requirement should be preceded by a six-month transitional period (Phase 1). During Phase 1, issuers must Publish in newspapers a notification of the announcements and post the full version on the HKEx website and the issuers’ own websites. Further announcement will be made regarding the commencement date for Phase 1, which is currently intended to be at least six months after the publication of the Conclusion, subject to operational readiness.	HKEx is preparing for implementation of this initiative. The preparations include systems upgrades, planning of familiarisation and briefings to the market, communication planning, registration procedures for the new electronic submission system, and reviewing internal practices and procedures to bring them in line with the new issuer information dissemination model.
3.	Consider accepting issuers from more overseas jurisdiction	Not included in this issue.	HKEx is considering accepting issuers from more overseas jurisdictions, in addition to the existing recognised jurisdictions: Bermuda, the Cayman Islands, the Mainland and Hong Kong. The issue has been considered by the Listing Policy Committee and they were supportive in principle of facilitating the listing of foreign companies from other jurisdictions. Some developments are likely over the next few months.
4.	Review of the Growth Enterprise Market (GEM)	At the close of the exposure period, which was extended one month to 31 May, HKEx had received 16 submissions. The submissions were posted on the HKEx website on 16 June. HKEx is studying respondents’ comments and will announce the way forward in due course.	HKEx is studying respondents’ comments. HKEx is mindful of the position of existing GEM-listed companies and will consider their interests carefully when formulating proposals. The proposals will be subject to a separate consultation.
5.	Phase 2 Reductions of Minimum Securities Trading Spreads	The HKEx Board has decided to implement the Phase 2 reduction of minimum securities trading spreads in two phases, with Phase 2A — covering securities trading between $2 and $20 — to be implemented this month after completion of a market rehearsal and subject to the approval of the necessary rule changes by the SFC. During the six months from its implementation, HKEx will monitor the results of Phase 2A and will proceed in the first quarter of 2007 with Phase 2B, which covers securities trading between $0.25 and $2, provided no systemic problems arise in Phase 2A.	The Phase 2A reduction of minimum securities trading spreads was implemented on 24 July. The operation of the market has been smooth since the implementation. HKEx is monitoring the results of the implementation for a six-month period. An interim report will be submitted to the HKEx Board in November and a final report in the first quarter in 2007.
6.	Expansion and improvement of CCASS Investor Participant (IP) account and Stock Segregated Account with Statement (SSA) services	The IP account service was expanded to Macau individual investors and incorporated companies in early June. HKEx is considering the further expansion of the service.	HKEx is seeking to improve the IP account and SSA services in CCASS. The HKEx Board has approved enhancements to the SSA by early 2007 in order to give investors whose brokers use the SSA electronic access to their account details and movements via the CCASS Internet System and CCASS Phone System. Investors also will be able to sign up through their brokers for SMS alerts on any debit movement in the SSA as a result of the enhancements. Further enhancements are planned for implementation in phases in 2007.
7.	Exploration of new financial products / services and review of existing products / services	Callable Bull/Bear Contracts (CBBC) The CBBC market infrastructure was introduced on the first Monday of June and trading of CBBC commenced in the securities market a week later. The initial batch of CBBC, comprising a total of seven contracts from four issuers, was listed on the Stock Exchange on 12 June.	CBBC issuance and turnover have continued to grow. HKEx is considering expanding the number of eligible underlying securities.
		Derivatives market business concepts HKEx is assessing market demand for new index futures products based on industry sectors such as finance-related H-share companies. It is also exploring option contracts with more expiry months.	The Derivatives Market Consultative Panel (DMCP) was consulted on the market demand for new index futures based on finance-related H-share companies. HKEx continues to monitor the development of this sector in the securities market. The DMCP reviewed the product concept of additional expiry months in selected stock option classes and HKEx is working on the details of the proposal and the market making arrangements. HKEx is considering the development of more Mainland-related products, particularly Mainland-related derivatives and possibly renminbi-denominated products. HKEx is planning to introduce stock options and stock futures contracts based on China Merchants Bank and Industrial and Commercial Bank of China.
8.	Review of market maker model for derivatives market	HKEx is finalising the review and will seek approval of the proposed model in the third quarter.	The SFC has approved the relevant rule changes. HKEx plans to introduce a new market maker model for its Hong Kong Futures Exchange products and revised trading fee discounts for market makers’ trading in stock index futures or options, with the changes scheduled to take effect in February 2007.
9.	Harmonisation of collateral policies for the three clearing houses	HKEx is reviewing the draft amendments to the rules and procedures of the respective clearing houses in relation to the admission of the new types of non-cash collateral.	HKEx is finalising the draft amendments to the rules and procedures of the respective clearing houses in relation to the admission of the new types of non-cash collateral for approval in the fourth quarter of this year.
10.	Network consolidation for major market systems on a new network (SDNet)	All CCASS/3 circuits were successfully migrated to SDNet on 10 June. The SDNet has been operating reliably and smoothly since the Phase 1 (October 2005) and Phase 2 (June 2006) rollouts. HKEx is now preparing for the rollout of the third and final phase of the SDNet project, the migration of the AMS/3 and MDF networks to SDNet.	HKEx is implementing the last phase (Phase 3) of the network consolidation. Migration of the MDF network and the AMS/3 network is scheduled to be completed in the fourth quarter of this year and the middle of 2007 respectively.
11.	AMS/3 Open Gateway (OG)/Multi-Workstation System (MWS) upgrade	Pilot installations involving new hardware and software were completed in June and mass rollout will be started at end of this month. HKEx has selected vendors for the hardware and software and the upgrading is proceeding as scheduled.	HKEx is upgrading AMS/3 OG and MWS hardware and system software due to technology obsolescence and to cater for additional OG processing capacity. The upgrade is being conducted in batches until the second quarter of 2007.
12.	HKATS / DCASS Network Gateway (NG) upgrade to Windows 2003	More than 90 per cent of NGs installed in Participants’ premises were successfully migrated to Windows 2003. The remaining work will be completed in August as planned.	The NG upgrade to Windows 2003 has been successfully completed.

Initiative		Status on 17 July 2006	Status on 16 October 2006

Note:

AMS/3, the Third Generation Automatic Order Matching and Execution System, is the trading system for the securities market. CCASS/3, the Latest Generation Central Clearing and Settlement System, and the Market Data Feed, or MDF, are the other major market systems supporting the securities market. HKATS, the Hong Kong Futures Automated Trading System, is the trading system for the derivatives market. DCASS, the Derivatives Clearing and Settlement System, and PRS, the Price Reporting System, are the other major market systems for the derivatives market.

This report is carried in HKEx's quarterly publication, Exchange, published on 26 October 2006.

Updated 26 Oct 2006