The Hong Kong Monetary Authority (HKMA)

The HKMA was established in April 1993 by merging the Office of the
Exchange Fund with the Office of the Commissioner of Banking. The
Exchange Fund (Amendment) Ordinance 1992 provided for the
establishment of the HKMA.

The HKMA's policy objectives are to maintain currency stability, within
the framework of the Linked Exchange Rate System, through sound
management of the Exchange Fund, monetary policy operations and other
means deemed necessary; to ensure the safety and stability of the banking
system through the regulation of banking business and the business of
taking deposits, and the supervision of authorised institutions; and to
promote the efficiency, integrity and development of the financial system,
particularly payment and settlement arrangements. The HKMA is divided
into five departments: Monetary Policy and Markets, Reserves
Management, Banking Policy, Banking Supervision, and External.

The HKMA is an integral part of the Hong Kong Special Administrative
Region (HKSAR) Government, but can employ staff on terms different
from those of the civil service to attract personnel of the appropriate
experience and expertise. Its staff and operating costs are charged directly
to the Exchange Fund instead of the general revenue.

The HKMA is accountable to the Financial Secretary, who is advised by
the Exchange Fund Advisory Committee on matters relating to the control
of the Exchange Fund. The committee's involvement in respect of
monetary and investment matters has become much stronger. It functions
like a management board, meets monthly and advises the Financial
Secretary on, among other things, the HKMA's annual budget.

Authority for the prudential supervision of banks, restricted licence banks
and deposit-taking companies is vested in the HKMA. Its authority is
derived from the Banking Ordinance, the provisions of which relate to the
supervision of authorised institutions. The main objectives of the
ordinance are to provide a measure of protection to depositors and to
promote the general stability and effective operation of the banking
system.

The HKMA's supervisory approach is based on a policy of 'continuous
supervision'. This involves monitoring authorised institutions using a wide
variety of techniques aimed at detecting any problems at an early stage.
Consolidated supervision is exercised by the HKMA on a global basis over
institutions which are incorporated in Hong Kong.

Prudential supervision in Hong Kong is carried out mainly through on-site
examinations, off-site reviews and prudential meetings. On-site
examinations provide the HKMA with the opportunity to assess at first
hand how an institution is managed and controlled. They are particularly
useful for assessing asset quality and the adequacy of internal controls.
Off-site reviews involve the analysis of regular statistical returns, and
accounting and other management information supplied by institutions,
with a view to assessing their performance and compliance with the
Banking Ordinance. They are followed by prudential interviews with the
senior management of the institutions, at which their business, prospects
and potential areas of concern are discussed. This approach enhances the
HKMA's ability to identify potential areas of concern, which can be
followed up by on-site examinations.

As an international financial centre, Hong Kong follows banking
supervisory policies that are in line with international standards, especially
those recommended by the Basle Committee on Banking Supervision. The
most recent major supervisory framework introduced by the Basle
Committee is its proposal on incorporating market risks into the capital
adequacy regime, which was finalised in early 1996. Market risk is
defined as the risk of loss in on- and off-balance sheet transactions arising
from movements in market prices. It covers transactions relating to
foreign exchange, interest rates, equities and commodities.

The HKMA implemented a market risk supervisory framework in Hong
Kong with effect from December 31, 1997, which is essentially an
extension to the capital adequacy regime, and is based on the Basle
Committee's recommendation but simplified where appropriate to take into
account the generally low level of market risk exposures of the local
authorised institutions. The latter has been confirmed by the various
market risk surveys conducted since 1993 as well as statistics collected
from a quarterly prudential return on market risk exposures with effect
from December 1996. To reduce the regulatory burden, the HKMA has
also set out exemption criteria so that institutions with minimal market risk
exposures are exempted from the new framework. An amendment to the
Banking Ordinance was approved in August 1997 to give statutory
backing to the new requirement. A guideline was subsequently issued to
explain in detail how the adequacy of capital to support market risk will be
assessed under the new requirement.

The HKMA has strengthened its supervisory efforts in the fast-growing
derivatives market. In 1995, it established a specialist team with expertise
on derivatives products and financial models to conduct treasury
visits/examinations on authorised institutions' derivatives/treasury activities.
Two guidelines have been issued by the HKMA - one on high-level risk
management for derivatives and one on the operational aspects of risk
management for derivatives and other traded instruments.

The HKMA is committed to improving the transparency in financial
disclosure by authorised institutions. As a result of these efforts, Hong
Kong banks are considered to have the highest standards of disclosure in
Asia. The 1997 financial disclosure package covers areas such as the
maturity profile of institutions' major assets and liabilities, a more detailed
and standardised disclosure of institutions' loan books, institutions'
progress in relation to addressing the 'Year 2000 problem' of their
computer systems and the capital adequacy ratio adjusted for market risk.

With the joint effort of the HKMA and the industry associations, a Code
of Banking Practice was formally issued by the industry associations in
July 1997. It is intended to improve the standard and transparency in the
provision of banking services, establish a fair and cordial relationship
between banks and customers, and enhance banking stability by fostering
customer confidence and loyalty in banks. The code is non-statutory but
the HKMA will monitor authorised institutions' compliance with it as part
of its regular supervision.

Pursuant to the Memorandum of Understanding signed between the
HKMA and the Securities and Futures Commission (SFC) in October
1995, the two authorities continued in 1997 to strengthen co-operation to
ensure that there will be no gaps in regulation and to minimise
unnecessary duplication of effort in their supervision. Regular meetings
were held between the two authorities to discuss policy matters and
supervisory issues relating to institutions in which they both have an
interest.

The HKMA has formed a study group which comprises representatives
from the banking industry and other relevant experts and professionals. It
will review the current state of electronic banking in HK, assess the
capabilities, potential and impact of such developments and advise on
specific aspects of electronic banking. The ultimate objective is to develop
a policy and regulatory framework which could provide a sound and
secure basis for the development of electronic banking in Hong Kong.

The HKMA became a member of the BIS in November 1996 in
recognition of the size of Hong Kong's financial markets and its
contribution to international monetary co-operation. As a member of the
BIS, the HKMA participates more fully in BIS activities and policy
discussions. The People's Bank of China is also a member, which clearly
shows that the international financial community is supportive of the 'One
Country, Two Systems' principle enshrined in the Joint Declaration and
the Basic Law.

The HKMA promotes co-operation among central banks in the region,
principally through the Executives' Meeting of East Asia and Pacific
Central Banks (EMEAP), whose activities cover supervisory liaison and
co-operation, development of financial markets and infrastructure, and
various areas of central bank operations. The HKMA has chaired a study
group on banking supervision since its establishment in August 1996
under the direction of the EMEAP. This comprises experts in banking
supervision from EMEAP members and meets on a half-yearly basis to
hold discussions in areas of mutual interest. It also conducts research and
analysis on banking supervisory issues with a view to improving the
understanding of such issues in the region.

The HKMA will participate in the 1998 BIS triennial global survey on
foreign exchange and derivative activity.

Hong Kong is a member of the Financial Action Task Force (FATF), an
international organisation of 26 governments and two international
organisations with a mandate to encourage international efforts in the fight
against money laundering. To help combat money laundering, a revised
Guideline on Prevention of Money Laundering was issued by the HKMA
under section 7(3) of the Banking Ordinance on October 17, 1997. It
replaced the previous guideline on this subject issued in July 1993. It has
taken into account the latest legislative changes on money laundering in
Hong Kong as well as the stocktaking review of the 40 recommendations
by the FATF. In particular, the customer identification requirements have
been significantly strengthened with new provisions incorporated in
relation to shell companies, trust and nominee accounts and other types of
intermediaries.

The Banking (Amendment) Ordinance 1997 was enacted by the
Legislative Council on January 8, 1997. Provisions relating to the
regulation of the issue of multi-purpose stored value cards (MPCs) and
the approval and regulation of money brokers commenced operation on
May 15, 1997. Concurrent with the commencement of these provisions,
the HKMA has published detailed guidelines to explain the authorisation
criteria and detailed supervisory requirements for stored value cards
(SVCs) and money brokers.

The legal framework for SVCs generally provides that the issue of general
purpose MPCs is confined to licensed banks (which are the only entities
having access to the payment system). A special purpose vehicle whose
principal business is to issue MPCs may be authorised as a deposit-taking
company under the Ordinance for the principal purpose of issuing, or
facilitating the issue of SVCs. Flexibility is available also for the Monetary
Authority to exempt an SVC not to be an MPC where the usage of the
card is very limited and the risk to the payment system and cardholders is
slight.

The legal framework prohibits any person to act as a money broker unless
approved by the Monetary Authority under the Banking Ordinance and
empowers the Monetary Authority to revoke the approval of a broker on
the basis of a set of prescribed criteria. The main approval criteria include
a company's fitness and properness of management; financial soundness;
adequate accounting systems and systems of control; and prudence and
competence in business conduct.

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