Hong Kong maintains a three-tier system of deposit-taking institutions - licensed banks, restricted licence banks and deposit-taking companies - which are collectively called authorised institutions under the Banking Ordinance. The Hong Kong Monetary Authority (HKMA) is the licensing authority for all three types of authorised institutions.

        The authorisation criteria for locally incorporated applicants and overseas applicants to become a licensed bank are broadly the same. However, a local applicant incorporated in Hong Kong must, in the opinion of the HKMA, be closely associated and identified with Hong Kong. A local applicant must also have a paid-up capital of at least $150 million and a minimum trading period of 10 years as an authorised institution. The minimum requirements for assets (net of contra items) and public deposits are $4 billion and $3 billion, respectively. For banks incorporated outside Hong Kong applying to establish a branch in Hong Kong in the form of a licensed bank, the minimum requirement for total assets is US$16 billion. A licence may still be granted even if the asset test is not met, provided that the HKMA believes that this would help to promote the interests of Hong Kong as an international financial centre.

        Hong Kong imposes no major barriers on overseas banks operating domestically in Hong Kong, whether in Hong Kong dollars or other currencies. However, overseas banks licensed since 1978 are effectively restricted to one branch, a measure designed to avoid overcrowding in retail banking. This restriction was relaxed in September 1994, and foreign banks may open one regional office and a back office, in separate buildings, to conduct such activities as strategic planning, general liaison with correspondent banks and corporate entities, and processing and settlement of transactions already entered into by the branch office. This was done to help foreign banks reduce their operating costs by letting them move some operations to areas with lower rentals. The relaxation also applies to foreign restricted licence banks.

        Hong Kong had 172 licensed banks at the end of December 1998, of which 31 were locally incorporated. They maintained a total of 1 508 offices in Hong Kong and there were 141 representative offices of foreign banks. The total deposit liabilities of all the licensed banks to customers at the end of December 1998 were $2,908.5 billion.

        Only licensed banks may operate current or savings accounts. They may also accept deposits of any size and any maturity from the public. All licensed banks must belong to the Hong Kong Association of Banks (HKAB). The HKAB's Interest Rate Rules set maximum rates payable on Hong Kong dollar savings deposits and time deposits with original maturities of less than seven days, with the exception of deposits of $500,000 or above, for which banks may compete freely.

        Applicants for restricted bank licences must have a minimum issued and paid-up capital of $100 million. Restricted licence banks may take call, notice and time deposits of any maturity from the public, but in amounts of not less than $500,000. There are no restrictions on the interest rates they may offer. There were 60 restricted licence banks at the end of December 1998 with total deposit liabilities to customers of $36.2 billion at the end of December 1998.

        Restricted licence banks may use the word 'bank' describing their business in promotional literature and advertisements, but this must be qualified by a description such as 'restricted licence', 'merchant', 'investment' or 'wholesale'. To avoid confusion with licensed banks, descriptions such as 'retail' or 'commercial' are not allowed. Overseas banks seeking authorisation as restricted licence banks may operate in branch or subsidiary form. If in branch form, they may use their registered name even if it includes the word 'bank' or a derivative, but in this case it must be qualified prominently by the words 'restricted licence bank' in immediate conjunction.

        Deposit-taking companies are required to have a minimum paid-up capital of $25 million. They are restricted to taking deposits of not less than $100,000, with a term of maturity of at least three months. At the end of December, there were 101 deposit-taking companies, with total deposit liabilities to customers of $9.9 billion as at end-December.

        It is generally the HKMA's policy that a person who intends to hold 50 per cent or more of the share capital of an authorised institution incorporated in Hong Kong should be a well-established bank or other supervised financial institution in good standing in the financial community and with appropriate experience.

Only members of the SEHK and the Hong Kong Futures Exchange (HKFE) may trade on these two markets respectively. At year's end, the SEHK had 555 corporate and individual members while the HKFE had 135 members.

        Securities transactions on the SEHK are executed by the Automatic Order and Execution System (AMS). In addition to the first and second terminals, a third AMS terminal was introduced in January 1998 so as to further increase the order input and order matching efficiency. The AMS was also upgraded to cater for the increase in trading capacity.

        The HKFE launched three new products for trading in 1998 - HKFE Taiwan Index futures and options contracts, one-month HIBOR futures contracts and Hang Seng 100 Index futures and options contracts. The trading of these contracts are conducted through HKFE's Automated Electronic Trading System.

        The Hong Kong Securities Clearing Company (HKSCC) operates the Central Clearing and Settlement System (CCASS), which is one of the most important reforms to the risk management system introduced after the 1987 market crash. It is an automated book-entry system that handles the settlement of securities. To further enhance its services, the HKSCC extended the CCASS services to retail investors in May 1998. In addition, as a result of the linkage of the CCASS with the bank's settlement system also in May 1998, delivery against payment in respect of a securities transaction on a real-time basis was made possible.

        To strengthen market discipline, the HKSCC has strengthened enforcement of the T+2 settlement rule and implemented compulsory buy-in for trades remained unsettled on T+3 since the third quarter of 1998.