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Written by: Chen Xunlin
2021-03-02 14:30
Last update date: 2021-03-02 14:30
The redevelopment of Hong Kong's financial industry cannot be separated from the stability of the financial market. To maintain financial stability, we must master financial sovereignty.
However, in the past year, Hong Kong, which clearly enjoys independent decision-making power, manipulation power and control power in financial affairs, has experienced two threats to financial stability, including State Street Global, a subsidiary of State Street Bank. The investment once followed the executive order of former US President Trump to prohibit the Hong Kong Tracker Fund from investing in companies alleged to be related to the Chinese military.
State Street withdrew its decision shortly afterwards, and the incident has come to an end. However, the market chaos and disputes caused by it still need to be resolved and clarified: when Hong Kong's investment product managers are affected by foreign politics and fail to fulfill their responsibilities, the regulators How to protect the interests of investors?
More importantly, if the SAR government fails to actively defend financial sovereignty, how can it talk about maintaining financial stability?
How can regulators safeguard the interests of investors and actively defend financial sovereignty?
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The United States previously banned local investors from investing in a number of companies alleged to be related to the Chinese military. The Tracker Fund, which is managed by the US company State Street Global but established and registered in Hong Kong, was also affected, because State Street immediately announced the Tracker Fund It will comply with the executive order of the President of the United States and will not make new investments in sanctioned entities, including CNOOC, China Mobile, and China Unicom listed in Hong Kong.
However, this move undoubtedly caused the Tracker Fund to deviate from the Hang Seng Index. As a result, it caused criticism. The political circles and even the stockholders called for the SAR government to intervene and replace the administrator.
After two days of turmoil, State Street quickly changed its share and immediately issued a statement stating that it would resume investing in "sanctioned stocks" in the Hang Seng Index.
Tracker Fund is an exchange-traded fund. In response to this matter, Monetary Authority President Yu Weiwen told the media at the end of January that State Street Global’s handling of the Tracker Fund did not cause substantial damage to investors, but caused market chaos. The Hong Kong Monetary Authority and the Tracker Fund Supervisory Committee have consulted State Street Global to understand and follow up the incident.
However, the Monetary Authority has so far not issued warnings or penalties.
As for the Securities Regulatory Commission, which mainly investigates market manipulation, product misrepresentation, investor protection, etc., although State Street Global did not comply with the regulatory requirements when managing the Tracker Fund in 2016, it condemned and fined 4 million yuan, but In this Tracker Inc. incident, there is no role at all.
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Tracker Inc.: Inaction by regulators
The Trustee and Custodian of the Tracker Fund is State Street Bank, the fund manager is State Street Global Investment Management Asia, and the Exchange Fund Company is the holder.
Regarding the supervision of financial products and the operation of financial institutions, the Securities Regulatory Commission formulates codes and guidelines in accordance with the powers conferred by the Securities and Futures Ordinance.
Among them, the Code of Conduct for Fund Managers lists the restrictions and requirements for fund managers in risk disclosure, conflict of interest handling, etc.; and in the "Code on Unit Trusts and Mutual Funds" (hereinafter referred to as the "Code" ), the Securities Regulatory Commission details the approval procedures and regulations of fund products. The trustee/custodian may be: a banking institution that is incorporated outside Hong Kong and is continuously subject to prudential regulation and supervision, or is approved An entity that acts as the trustee/custodian of the plan and is subject to the prudential regulation and supervision of overseas regulatory agencies accepted by the SFC.
The "Code" also lists the corresponding responsibilities of the trustee/custodian: such as executing the investment instructions of the management company, except for instructions that conflict with the sales documents, constituent documents or the provisions of this "Code"; reasonable care must also be taken Measures to ensure that the plan complies with the investment and borrowing restrictions listed in the document, as well as compliance with the plan’s approval conditions.
The Code also requires that when certain changes to the plan need to be made, such as the introduction of new fees, changes to investment objectives and policies, they must be approved in advance by the SFC; if certain changes do not require the SFC’s approval, the management company should also first notify the holders Provide reasonable advance notice.
However, the SFC stated: "These codes and guidelines are not subsidiary legislation, and violations of the relevant rules will not lead to any judicial or other legal proceedings."
In the Tracker Inc. incident, Tracker Funds gave up investment in some of the constituent stocks of the Hang Seng Index, that is, failed to "provide investment returns that closely follow the performance of the Hang Seng Index," which violated the investment objective. State Street also failed to obtain prior approval from the Securities Regulatory Commission.
Tracker Funds does not want to invest in "sanctions stocks" because State Street is worried about political risks, but the inaction of Hong Kong regulators is tantamount to voluntarily giving up "financial sovereignty", which undoubtedly puts Hong Kong's financial stability at risk.
Tracker Fund is an ETF that tracks the constituent stocks of the Hang Seng Index. Last year, the Hang Seng Index rose sharply, and the Tracker Fund also rose.
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HSBC suspends dividend payment: highlights hidden financial security risks
In addition to the recent Tracker Fund incident, the suspension of dividends by HSBC Holdings last year has already revealed the signs of Hong Kong’s weak financial sovereignty.
HSBC has suspended the distribution of dividends without precedent as it cooperated with the regulatory orders of the Bank of England.
Overseas regulators require local banks to suspend dividend payments and share repurchases, which also raises doubts about Hong Kong's financial sovereignty.
Investing in HSBC to collect interest is the "belief" of many Hong Kong stockholders. HSBC's management also promised that the annual dividend will remain unchanged. However, at the beginning of last year HSBC received a written letter from the Bank of England through the Prudential Regulation Authority (PRA) The notice requires HSBC to cancel the distribution of the fourth quarter of 2019 dividend (US$0.21 per share, or approximately HK$1.64 per share), involving approximately 33.7 billion yuan, and other British banks have also received similar requests.
PRA is responsible for regulating and supervising UK banks, housing loan institutions, credit unions, insurance companies and large investment companies. It also supervises international banks and insurance groups headquartered in the UK.
HSBC is currently listed in many jurisdictions, including the London Stock Exchange and the Hong Kong Stock Exchange. HSBC in Hong Kong is in the market standard regardless of its common equity Tier 1 capital ratio or total capital ratio. However, HSBC is in order to cope with the situation during the epidemic. For capital needs, the company's funds should be retained at the request of PRA, so the dividend was chosen to be suspended.
How can HSBC re-study "Return to Asia" without relocating and returning to Hong Kong?
Revelation from HSBC to Hong Kong
Immediately after the news came out, a large number of investors were dissatisfied, and the price of Forex Holdings collapsed the next day.
In response to the incident, the HKMA stated that the Hong Kong banking system has ample capital levels, with an average capital adequacy ratio exceeding 20%, which is far above the minimum regulatory requirements. It has the ability to continue to provide stable credit to support the Hong Kong economy. Therefore, the HKMA does not believe that it is necessary to require Hong Kong banks to suspend Dividends or share repurchase.
However, the HKMA’s statement did not cause HSBC to withdraw its decision; the SFC issued a statement in May last year in response to related enquiries and complaints, reiterating that the main role of the SFC is to deal with Hong Kong in accordance with the Securities and Futures Ordinance and related subsidiary laws. The stock exchange-listed companies are regulated, but HSBC's banking business and PRA matters are not within the scope of the SFC's supervision, so there is no justification to take regulatory action on the cancellation of dividends and the suspension of dividends.
Independent stock commentator David Webb also pointed out that HSBC followed the requirements of the British financial regulator to cancel the dividend, and it did not violate the law. It is recommended that shareholders not waste money on legal proceedings.
HSBC has always been the company most trusted by Hong Kong people. Due to its stable dividend payment, many retirees are also willing to invest in exchange for regular dividend income. However, HSBC’s practice of not paying dividends after de-netting has not only damaged its reputation, but also Few funds and investors have even lost interest rates and prices.
Regardless of whether it is HSBC’s cancellation of dividends or State Street’s "slingshot", it has not only attracted much criticism, but has also harmed the interests of investors. However, the local regulators appear powerless.
HSBC suspended its dividend payment last year, which caused dissatisfaction among a large number of investors.
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Some mainland commentators believe that overseas regulators require banks to suspend dividends and share repurchases for the sake of local finances and interests, while HSBC Hong Kong suspends dividends based on this, and did not notify or report to the Hong Kong Association of Banks and the Hong Kong Monetary Authority. Interpretation violates the territoriality principle of financial supervision and may cause financial security risks—putting local interests first, ignoring the territorial distribution rights of the place of business and listing, and the power of financial supervision.
Overseas regulators require banks to suspend dividend payments and share repurchases, which has also raised doubts about Hong Kong's "financial sovereignty". How can Hong Kong develop into a truly independent and financially sovereign place in the long run?
The commentary further pointed out that this move is also a challenge to China’s financial supervision power, and it is proposed that financial supervision should adopt the principle of geographical distribution (the principle of territoriality)—that is, no matter where the financial institution is registered, it is operated or listed on the basis of the financial institution. The subject is the standard and must abide by relevant local regulations, rather than obey the orders of overseas regulatory agencies, so as to strengthen supervision and at the same time carry out the entity responsibility of financial sovereignty.
The incident is about how the Hong Kong government and financial regulators perform to safeguard Hong Kong's financial security and protect the rights and interests of investors, and how to develop Hong Kong into a truly independent and financially sovereign place in the long run.
In fact, under the premise of "one country, two systems", Hong Kong already enjoys independent decision-making power, manipulation power, and control power in financial affairs, and can independently handle monetary policy and financial supervision.
The international political and economic landscape has undergone tremendous changes. When Hong Kong needs to transform into "China's international financial center" in order to promote the renewed prosperity of the financial industry, the SAR government must follow the principle of "one country, two systems" and legislate to require fund managers and banks registered in Hong Kong Other financial institutions have promised to abide by Hong Kong laws and regulations, and are only governed by local laws, not by laws and administrative orders of other places.
The SAR government must proceed from Hong Kong’s interests and safeguard Hong Kong’s financial sovereignty. After all, it is the most important thing for Hong Kong to be free from external political or economic games.
The above is excerpted from the 254th "Hong Kong 01" Weekly Report (March 1, 2021) "Political Wrestling Threatening Financial Stability, Hong Kong Must Defend Financial Sovereignty". If you want to read the full text, please
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