Hong Kong Markets Largely Unaffected by Securitization Turmoil

The Hong Kong securities markets have been relatively unaffected by the market turmoil in asset-backed securities, said Securities and Futures Commission Executive Director Keith Lui, since the markets have less exposure to sub-prime credit and structured credit products than the US markets. In remarks at the German Development Institute in Berlin, he also noted that, while Hong Kong has a very active derivative warrants market, the warrants are listed and traded on the stock exchange and have attracted significant retail interest. Moreover, products offered to the general public or retail investors require the prior authorization of the Securities and Futures Commission. More sophisticated financial instruments in Hong Kong are available only to professional investors and high net worth private banking clients.

That is not to say that the Commission is not learning from the sub prime crisis. Mr. Liu said that that the crisis has reaffirmed the importance of transparency and disclosure, and the need to ensuring that there are no regulatory gaps. The regulatory regime has to be robust and yet flexible enough to respond to changes in the financial landscape. There are also valuable lessons to be learned on the need for information sharing, coordination and cooperation among national and international regulators and central banks, and equipping these agencies with the appropriate tools and authority to restore confidence and maintain stability in the face of a looming crisis. In this regard, he praised the work of the Financial Stability Forum.

More broadly, the official noted that financial markets go through recurring cycles of liberalization to facilitate financial innovation, followed by increased liquidity and rising leverage induced by irrational optimism, and finally liquidation as asset prices collapse, which often leads to limitation that re-regulates market and intermediary activities. The cycle then repeats once markets rebound. In his view, the role of the regulator is to strike a judicious balance between market development and innovation on one hand, and the protection of investors and the maintenance of market stability on the other.