banking today magazine

J o u r n a l o f T h e H o n g K o n g I n s t i t u t e o f B a n k e r s

Nov • Dec 2012 • Issue No.67

Keeping the Spotlight on Ethics

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Nov•Dec 2012

2 Cover Story


. .

Hong Kong has long had a

strong record for banking

integrity. With perceptions

changing across the globe,

however, the industry has

decided to take charge

of the ethics question

and build on an already

solid foundation. In this

special report, we speak

with both regulators and

practitioners at how Hong

Kong is leading the way.

In July 2011, the Hong Kong Monetary Authority released a new supervisory guidance, known by its module number CG-6. Banking Today spoke with HKMA’s offi ce to see why an emphasis on ethics was needed at the time, and how the situation has

developed in the past year.

Banking Today: High ethical standards are obviously critical for Hong Kong’s continued strong reputation world-wide. Were there any other reasons behind continuing to comment on ethical behaviour among staff?

HKMA: The importance of the ethical behaviour of banks’ staff and offi cers has long been recognised by the HKMA. The fi rst supervisory guidance on banks’ Codes of Conduct (which covered expected standards of behaviour amongst members of bank staff) was issued by the former Commissioner of Banking in 1986, and this was subsequently replaced by the Supervisory Policy Manual (SPM) module CG-3 “Code of Conduct” which was issued by the HKMA in June 2002. Among other things, CG-3 requires that an authorised institution (AI) should develop and maintain a Code of Conduct which contains a set of ethical values to which its staff members are expected to adhere in conducting business, core to which are attributes like honesty, integrity, diligence, fairness, responsible citizenship and accountability. AIs are also required to have an effective system for enforcing their Code of Conduct. The SPM module RR-1 “Reputation Risk Management” issued by the HKMA in December 2008 also highlights the importance of maintaining high standards of business conduct and integrity as part of an AI’s reputational risk management strategies.

This guidance is underpinned by statute. Paragraph 12 of the Seventh Schedule of the Banking Ordinance requires as an on-going authorisation criterion that the HKMA must be satisfi ed that the institution’s business is carried on with integrity, prudence and the appropriate degree of professional competence and in a manner not detrimental, or likely to be detrimental, to the interests of depositors or potential depositors. In addition, in

Nov•Dec 2012 3


setting out the Monetary Authority’s functions, section 7 of the Banking Ordinance includes functions such as (i) to take reasonable steps to ensure that AIs operate in a responsible, honest and business-like manner; (ii) to promote and encourage proper standards of conduct and sound and prudent business practices among AIs; and (iii) to suppress, and aid in suppressing, illegal, dishonourable and improper practices in relation to the business conducted by AIs.

It is however fair to say that, ethical behaviour has attracted more attention of late in the wake of the global fi nancial crisis as has the need to ensure appropriate levels of staff expertise and experience as the business of banking (and the associated risk management requirements) have become more complex. It was against this backdrop that the HKMA issued in July 2011 the SPM module on “Competence and Ethical Behaviour”. Although the greater part of the Module is devoted to competence, the HKMA wanted to ensure continuing focus on ethics and hence section 5 of the

module specifi cally covers “ethical behaviour” and reiterates the importance of, and necessity for, ethical behaviour by all levels of staff within an AI, as well as certain steps that AIs are required to take in this regard.

BT: In the text of the CG-6 guidelines, treasury market activities were given as an example of rapid development. Have any other areas recently seen such a rapid changes?

HKMA: Renminbi (RMB) business activities among AIs have defi nitely been another area of rapid growth and continue to have signifi cant future development potential. This is evidenced by the fact that RMB trade settlement conducted through Hong Kong amounted to RMB 1,900 billion in 2011, fi ve times the value of 2010, whilst RMB deposits in Hong Kong amounted to RMB 552 billion as at end-August 2012, more than four times the amount two years ago. With its increasing trade and investment links with

4 Cover Story

The international view: Susan Yuen, CEO Hong Kong, ANZ

In 2011, ANZ refreshed and revised their values

framework as part of their strategy throughout the

Asia-Pacifi c region. Acquisitions and expansion had

led to a big family of professionals from different

banking backgrounds and cultures. Unifying the

company culture also afforded a chance to focus

again on the issue of ethics.

Although the bank put signifi cant time in defi ning

their corporate values, Ms Yuen says that is only

the beginning. “Internalising the values requires

sharing with [staff] what it actually means ‒ the only

real way of sharing with them is through telling them

stories.” ANZ has adopted such stories throughout

their communications, from large town-hall meetings

to smaller sessions and written communications. Ms

Yuen sees it making a real difference in the culture.

She says that in defi ning a culture, ‟there has to

be momentum. We can‘t just talk about it and then

forget about it – we have to keep it constant in the

minds of our people”.

Nov•Dec 2012 5

risks of the product. The HKMA conducts periodic on-site examinations of AIs’ RMB business in order to assess the adequacy of their systems of control and their compliance function in respect of RMB business.

BT: The guidelines (CG-6) seem to emphasise the increased importance of continued professional development in these years of increasing complexity in the fi nancial industry. Is there a similar increased importance for ethics? In what ways?

HKMA: Ethics and ethical behaviour have always been fundamentally important in the business of banking, because banking is so heavily reliant upon trust and confi dence. Whilst ethical behaviour is covered in other SPM modules, it was felt that in CG-6 there was an opportunity to reiterate the importance of ethical standards and personal accountability which stand alongside competency standards in providing

The international view: Susan Yuen, CEO Hong Kong, ANZ

For the entire industry, Ms Yuen sees opportunity in

platforms like the Hong Kong Institute of Bankers.

For staff and participants to effectively internalise the

conclusions and ideas of any values set, Ms Yuen

sees active participation as critical. Sessions that

bring bankers together to share their experience,

including in the context of an organised debate, would

bring a clear connection to their real-work experiences

and challenges.

Discussing ethics openly, however, can present

challenges. Firstly, to suggest such a discussion is

necessary might be to imply ethics in Hong Kong is

in question, something no one contends. However,

the chance for banks to set the discussion is valuable

indeed. To keep the discussion active in the industry,

Ms Yuen sees a role for the banks themselves. The

stakes will remain high. ‟The outcome at the end of

the day is about whether your organisation has people

that embrace it. There’s no point in having all these

fancy values and rules if people don’t internalize it.”

mainland China, Hong Kong currently also holds the world’s largest pool of RMB liquidity outside of the mainland, providing the foundation for Hong Kong to build on its status as an offshore centre for RMB trade settlement, fi nancing and asset management services. For instance, we have seen vibrant RMB dimsum bond issuance and expansion into other RMB fi nancing and investment activities (including those under the RMB Qualifi ed Foreign Institutional Investors Scheme).

Whilst all of this represents a signifi cant business opportunity for AIs, AIs are expected to ensure that they have in place appropriate operating systems and provide adequate guidance and training to staff members to cater for any new RMB business. As risks and features of RMB products vary, AIs are expected to ensure that their product due diligence, suitability assessment and disclosure to customers in respect of each RMB product have properly taken into account the specifi c nature and

6 Cover Story

the foundation for the trust and confi dence that banking services need to thrive. In the upward swing of a business cycle, there may be a temptation for fi nancial institutions to devote resources almost overwhelmingly to expanding business and generating profi t but this must not be at the expense of upholding high ethical standards and high standards of competence. Recent events surrounding the global fi nancial crisis have signifi cantly raised awareness of ethical issues in the banking industry.

To restore public confi dence there is a need for regulators and fi nancial institutions alike to focus on the culture, and the controls in place to cultivate and maintain ethical behaviour, within institutions as part of a sound corporate governance structure.

BT: The guidelines point out the need for codes of conduct as ethical benchmarks. Are there any others our reader should be aware of?

HKMA: As set out in paragraph 5.5 of CG-6, the staff members of an AI should observe the Code of Conduct issued by the AI itself and should also abide by any applicable standards published from time to time by relevant regulatory authorities, and where applicable (and where not inconsistent with the AI’s Code of Conduct or any applicable regulation, rule or regulatory standard) any codes of conduct or standards issued by professional bodies of which they are members or associates.

AIs and their staff members should therefore identify and comply with the codes or standards (whether at individual or institutional level) issued by regulatory authorities or professional bodies that are applicable to them or relevant to the businesses or activities in which they are engaged, for example,

• “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission” issued by the Securities and Futures Commission;

• “The Code of Conduct for Insurers” and “The Code of Practice for the Administration of Insurance Agents” issued by The Hong Kong Federation of Insurers;

• “Code of Conduct for MPF Intermediaries” and “Guidelines on Conduct Requirements for Registered Intermediaries” issued by the Mandatory Provident Fund Schemes Authority; and

• the codes of practice and guidelines on proper handling of personal data issued by the Offi ce of the Privacy Commissioner for Personal Data.

Moreover, AIs should also ensure that circulars issued from time to time by the HKMA or other regulatory authorities on conduct-related issues are communicated to staff members engaged in the activities concerned in a timely manner.

☐ Banking Today

From Hong Kong’s banking community: Mimi Kam, General Manager and Head of Human Resources & Corporate Communications Division of Bank of East Asia.

BEA’s long history has meant an emphasis

on ethics stretching far back, says Ms Kam,

something that can be fairly said for most banks

in Hong Kong. ‟Banks are very well supervised

by the HKMA, and banks here are all very well

behaved.” Each banks’ codes of conduct have

been effective since before the regulation,

meaning compliance has not proven too diffi cult

a task. She advised that changes to regulatory

guidelines have infl uenced how the Code of

Conduct is structured and applied.

A stringent operating culture in Hong Kong has

tacked neatly with the recent global shift towards

greater oversight. According to Ms Kam, ‟the

culture is pretty much in place,” and banks

share a common understanding on the industry

best practice. ‟There is a lot of sharing already

among the bank groups.”

Still, she admits, there could be a larger

discussion throughout the region, with more

participants and more active structures.

Platforms to bring together banks apart from the

smaller, informal discussions among HR would

be of great benefi t, and help Hong Kong to

defi ne banking values globally.

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12 China World

The continuing euro zone debt crisis has seen an increasing number of European fi nancial institutions being forced to divest their foreign

operations to relieve their capital and liquidity pressure. ING, for one, has begun selling of its Asian insurance and asset management businesses. The Dutch company extended its invitation to Chinese fi nancial institutions to bid for those assets. ING’s move is an indication of the increasing importance and infl uence of Chinese banks in the fi nancial sphere. This is also a signal of the second wave of outbound investments for Chinese fi nancial institutions which escaped the fi nancial crisis

relatively unscathed and with abundant cash to spare. The circumstance certainly favours the Chinese banks in implementing their overseas expansion strategy. Still, Chinese banks do not fi nd their expansion through acquisition unfettered.

Today, seeing a Chinese bank on a foreign shore is no longer a peculiar sight. According to PwC’s 2011 China Banking Industry Report, as of end of 2011, China’s ten listed banks have set up 108 subsidiaries and branches abroad, 60% of which are located within the Asia Pacifi c region, 31% in the United States and Europe, while 9% are scattered in other territories.

A CrucialMoment for Chinese Banks Abroad

Nov•Dec 2012 13

The global expansion of these Chinese banks has so far been achieved through organic growth. While mergers and acquisitions can drastically speed up their advance into targeted foreign financial markets, this route is limited and could be subjected to restrictions imposed by the local financial market supervising authorities, in terms of investment approvals and holding percentages. This more often than not makes finding opportunities in a normal market condition difficult.

In the past, Chinese banks have looked upon their more established international peers as ideal direct investment targets. There was a strong desire to learn and replicate these institutions’ advanced investment banking business and acquire their experience in private wealth management. The interest was exemplified by China Development Bank taking a minority interest in Barclays for US$2.8 billion.

However, based on strategic consulting experience with large Chinese banks, it’s clear that while they are interested in the technologies and expertises of their western counterparts, more and more Chinese banks, following the footsteps of their corporate clients, are shifting their attention to developing regions such as Southeast Asia, Middle East, Latin America and some parts of Africa, where higher value propositions are offered. Southeast Asia, where Chinese companies are taking leading roles in the local economies, is in particular a boon to Chinese banks.

The shift in strategic focus as described above is consistent with observations from PwC’s 15th Annual Global CEO Survey released early this year. The survey results indicated that over 85% of respondents were optimistic about the futures of East Asian or South East Asian economies, and believed this would lead to a flush of opportunities in the banking sector. Over 78% of the respondents have strong confidence in the Latin American financial sectors. With the European debt crisis looming large in their minds, a majority of the respondents are understandably very concerned about the prospects for Western Europe. Also over 60% of the respondents indicated that they are more focused on the growth potential of developing economies.

In the past when Chinese financial institutions attempted to invest in developed countries, they often faced strong competition from their western peers. A bidding war would routinely ensue. The challenges facing these Chinese banks then were oftentimes their lack of experience in global deal making, paying too high a premium in high profile transactions and lost opportunities due long approval time.

Now the tide has turned. Overshadowed by the gloomy economic outlook, western financial institutions are forced to turn defensive, recalibrating their operations and divesting non-core businesses. This undoubtedly will decrease the level of competition for Chinese banks when they look to make acquisitions in developed countries. The transaction timeline has also been relaxed somewhat to allow more time for decision making, more detailed due diligence and more advantageous terms to be negotiated. The current condition provides a good and rare opportunity for Chinese financial institutions to make their mark in the developed economies.

Of course, there are still significant uncertainties surrounding the health of the international financial market. Despite abundant opportunities, there are still significant potential pitfalls. Experience tells that lack of transparency in financial institutions and uncertainties surrounding the financial market are the biggest issues when it comes to asset valuation in a transaction. Furthermore, the host country in which the target financial institution operates may have additional restrictions on granting approvals to Chinese investors. Limitations may be imposed on managerial and voting rights post transaction. A sound policy for investors would be to focus more on assessing the risk exposure of the target. They should also actively communicate with the respective countries’ supervising authorities, and adequately establish self-protection mechanisms in the transaction agreement to protect against valuation discrepancies and investment dilutions. In an acquisition, a thorough due diligence and corresponding price adjustment mechanisms can effectively mitigate potential risks.

Past track records have shown that domestic financial institutions often focus more on pre-transaction and transaction-specific risks. However many post-transaction elements are also crucial to the success

Nov•Dec 2012

14 China World

of a deal, such as post-transaction organisation restructuring, strategy alignment, corporate cultural integration, cooperation between the two management teams and satisfying additional capital requirements of the acquired business.

Additionally, the importance of foreign financial worker unions should not be disregarded. The unions often proactively confront company owners to secure benefits for their members. If not handled properly, disputes may severely interrupt normal business operations. The management of Chinese financial institutions should consider obtaining acceptance from the foreign financial institution worker unions and incorporate them into post-transaction plans which may earn their support on management decisions.

Merger and acquisition is a high risk, high reward activity. As Chinese financial institutions seek to become global players, they will inevitably face risks, stemming from uncertainties surrounding global economies and the localisation process. We realise that a recovery may not be imminent and rebuilding market confidence requires time. However, opportunity and success favour the brave. In the face of unprecedented opportunities, Chinese financial institutions should act with conviction in the current favourable circumstance.

☐ Nelson LouBeijing Advisory LeaderPwC China☐ Rico HuAssociate DirectorPwC China Transaction Services

Taiwan’s Banksin China Crossthe One Year Mark The Economic Cooperation Framework

Agreement (ECFA) was executed on 29 June, 2010 during the Fourth Chen-Chiang Summit

in Taichung, the fourth such meeting between the Straits Exchange Foundation (SEF) of the Kuomintang and the Association for Relations Across the Taiwan Straits (ARATS) of the Communist Party of China. Since then, there have been two major changes to the banking industries in Taiwan and mainland China. The fi rst is the opening of branches of Taiwanese banks in mainland China and vice versa. The second is the creation of the currency clearing system between the Renminbi and the New Taiwan Dollar.

The combination of these fi rst two changes will make it more convenient and less costly for businesses across the Taiwan Strait to transact business between Taiwan and mainland China. In addition, the changes in the near future to the banking regulation in Taiwan will further facilitate the fi rst two changes and impact both economies.

Branches of Taiwanese banks in mainland China

One of the important aspects of ECFA is that it allows the banks from Taiwan to open up branches in mainland China and vice versa. Since the execution of ECFA, eleven Taiwanese banks have been authorised by the Financial Supervisory Commission and allowed to open branches and representative offi ces in mainland China. With the opening of E. Sun Bank’s Dongguan Branch on 21 September 2012, currently, ten Taiwanese banks have branches and seven Taiwanese banks have representatives’ offi ces in mainland China.

Global Eye18


According to the law in mainland China, for a branch of a Taiwanese bank it takes at least one year of profitable operation before it is allowed to transact business in renminbi and offer services to local residents. Before a branch has obtained authorisation from the Chinese Government to transact business in renminbi, the branch can only transact business in US Dollars, Euros, Hong Kong Dollars, Japanese Yen, British Pounds, and Australian Dollars. Furthermore, these branches can only provide services to foreign nationals. In July 2012, three of the Taiwanese banks were authorised to transact business in renminbi. Three more Taiwanese banks are expected to be given the authorisation to transact business in RMB in the coming months.

To date, Taiwanese banks’ primary clients have been Taiwan nationals who work or run businesses in mainland China. Even after a Taiwanese bank has been granted authorization to serve local customers, its ability to do so is still limited. For example, these branches of Taiwanese banks can only open accounts for the locals who have more than RMB 1,000,000 in cash. In addition, at this time, these banks are also limited by the fact that there is still no currency clearing system in place between the RMB and the NTD. However, on 6 August 2012, a Memorandum of Understanding to create a currency clearing system between the two currencies was executed.

Branches of mainland China banks in Taiwan

Currently there are four Chinese banks with representative offices in Taiwan. Recently, two of the Chinese banks have been allowed and opened their first branch offices in Taiwan. The two banks are Bank of China and Bank of Communications. Unlike their Taiwanese counterparts, these two banks can immediately transact business in NTD and service local Taiwanese population; however, their abilities to do so are also limited. For a local Taiwanese person to open an account with one of these two banks, the person will need to have at least $3,000,000 NTD in cash. Neither bank has applied to install ATMs in Taiwan at this time. One of the primary reasons why these branches have been setup is to facilitate the anticipated currency clearing system between RMB and NTD.

Currency clearing system between RMB and NTD

During the most recent Chen-Chiang Summit in August 2012, a Memorandum of Understanding (MOU) for creating a currency clearing system between RMB and NTD was executed. According to this MOU, at the initial stage of the implementation, the competent authorities in each government shall elect one of their domestic banks that has a branch across the strait as the clearing bank for their own respective currency. This means the Taiwan’s Central Bank must select one and only one Taiwanese bank as the clearing bank for NTD in mainland China, and the People’s Bank of China must select one and only one mainland Chinese bank as the clearing bank for RMB in Taiwan.

As stated earlier in this article, there are ten Taiwanese banks with branches in mainland China and all these banks satisfy the basic requirements of being the initial clearing bank. Eight of the ten Taiwanese banks timely submitted their application to be the initial clearing bank with the Central Bank of Republic of China. While all eight banks have remarkable track records, because of the MOU, only one can be selected as the initial clearing bank. On 18 September 2012, Bank of Taiwan was selected by the Central Bank of Republic of China as the initial clearing bank for NTD in mainland China.

A spokesperson for Bank of Taiwan expressed that the primary reason it was selected is because it has more extensive experience in dealing with NTD transactions. Bank of Taiwan is a 100% owned subsidiary of Taiwan Financial Holdings, and Taiwan Financial Holdings’ sole shareholder is the Ministry of Finance; according to the Bank of Taiwan spokesperson, any profits generated from the currency clearing business will benefit the public.

On the other hand, there are only two Chinese banks with branches in Taiwan. While the People’s Bank of China has not made its official selection yet, it is expected that Bank of China will be the bank selected. People’s Bank of China is expected to make its official decision shortly.

20 Global Eye

shareholders can open branches in mainland China; this change means the private Taiwanese banks will also be able to open branches in mainland China. The Financial Supervisory Commission is also planning to remove the requirement that states that a Taiwanese bank can only invest up to 15% of its net worth in mainland China, which will allow Taiwanese banks to invest more capital in their operations in mainland China.

ConclusionExecution of ECFA and the MOU are only the first steps to open the door for faster, cheaper, and more convenient transactions between Taiwan and mainland China. The banking industries in Taiwan and mainland China have gone through a lot of changes since the execution of ECFA and the MOU; and more changes are also on the way. It is predicted that these changes will make the Taiwanese banks more competitive; furthermore, it is also predicted that these changes will generate large amount of savings in RMB. At this date, the actual results are yet to seen.

☐ Shuai-Sheng HuangPartnerFormosa Transnational Attorneys at Law

Once the currency clearing system between RMB and NTD has been created, it will be more convenient, faster, and cheaper for a person to transact business across the Taiwan Strait. Fai-Nan Peng, Governor of the Central Bank of the Republic of China, and Jin Qi, Assistant Governor of The People’s Bank of China, both expressed that Taiwan will be able to take advantage of Hong Kong’s experience. This means that the start of RMB transactions in Taiwan will be on a fast-track basis today when compared with the start of RMB transactions in Hong Kong five years ago.

Expected Future Changes to Taiwan Domestic Banking Law

The creation of currency clearing system between the RMB and the NTD is only the first step of transactions in Taiwan. In order to fully accommodate and utilise the system, various banking laws in Taiwan will be amended. The following are some of the changes that may take place during the next few months:

The Financial Supervisory Commission has stated that it intends to allow banks in Taiwan to be able to fully conduct RMB transactions by November. Dependent on when the RMB clearing bank in Taiwan is selected by People’s Bank of China, it is expected by November this year, people in Taiwan will be able to open RMB bank account with maximum daily withdraw limit of RMB 20,000 and maximum daily transfer limit of RMB 80,000, transact mutual funds in RMB, and companies may issue company bonds in RMB. Furthermore, by the end of the year, the Financial Supervisory Commission also states it intends to allow people in Taiwan will be able to purchase insurance denominated in RMB, make purchases or withdraw money in mainland China with a Taiwanese debit card, and transfer money to mainland China with a much lower transaction cost.

In the near future, the Financial Supervisory Commission also intends to loosen the Organisation for Economic Co-operation and Development (OCED) requirement for Taiwanese banks to enter mainland China. Currently, because of the OCED requirement, only Taiwanese banks with government as one of the

Nov•Dec 2012 23Financial Products Nov•Dec 2012

The use of over-the-counter (OTC) derivatives has mushroomed several folds over the last 15 years and global regulators have become concerned

with the pace of growth and the leverage of some of these OTC-traded instruments that contributed in some part to the credit crisis. Hong Kong SAR has not been immune to the credit crisis which triggered the Lehman Minibonds incident affecting many local distribution banks. The OTC derivatives markets clearly suffered during the Credit Crisis from a lack of transparency of prices, transactions and positions, which in turn hindered regulators from effi ciently supervising derivatives

markets in terms of managing counterparty credit risk and market abuse.

On 25 September 2009 at the G20 Summit in Pittsburgh, USA, the G20 Leaders' said the following in a offi cial statement: “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements”.

OTC Derivatives Reform:What Does This Mean for Hong Kong Banks?

24 Financial ProductsThe Dodd-Frank Wall Street Reform and Consumer Protection Act was introduced in the US in 2009 to increase oversight of derivatives market. The primary purpose of the Act is to reduce systemic risk in the financial system by regulating the over-the-counter (OTC) derivatives market. To a certain extent, the final rules and the reach of the Act will have a ripple effect from the West to us here in the East.

Under the Act, one central counterparty (CCP) will step in and buy the OTC agreement from the seller and then sell it to the buyer. In doing so, the CCP will take on the responsibility for guaranteeing the contract. Because the CCP is required to hold large amounts of capital and will be closely monitored, this can reduce the risk that one counterparty default will trigger a chain of defaults in derivatives markets.

Reduced flexibilityBanks use OTC derivatives to hedge their financial risk exposure, reduce earnings volatility and enhance financial performance. Historically, these bank-to-bank contractual agreements have been highly customised, allowing banks to tailor them to their needs.

The Act will reduce that flexibility. Seeing systemic risk in this multi-trillion dollar market, the Act mandates that OTC derivatives be traded through an exchange (where one exists) and centrally cleared. Their risks will also need to be secured by initial margin postings and variation margin postings based on mark-to-market valuations. This could mean a potential increase in transaction costs and concerns about overall market liquidity.

For most banks, the Act and the resulting regulations will require significant adjustments to their processes, procedures and systems.

Local sceneHong Kong, as a member of the Financial Stability Board and Basel Committee, is required to comply with international standards. The Hong Kong Securities and Future Commission (SFC) and the Hong Kong Monetary Authority (HKMA) are working together to build the regime and consult the market on the detailed regulatory requirements. The SFC and the HKMA have issued a second joint consultation paper (Consultation Paper 2) on their proposals to regulate the over-the-counter (OTC) derivatives market in July 2012.

Hong Kong Stock Exchange will develop a local CCP for OTC derivatives (initially covering interest rate swaps and

non-deliverable forwards). According to the Consultation Paper 2, only certain types of interest rate swaps and non-deliverable forwards should be subjected to new regulation at initial stage but this should be subsequently extended, in phases, to cover other interest rate and foreign exchange derivatives, as well as other asset classes such as credit and equity derivatives. Authorised structured products that are offered to the public are not likely to be included yet.

Retail bankingDue to current low interest rate environment tied to the pegging of the HKD to USD and the competitive banking environment, there has been a switch in customer preference towards HIBOR-based mortgages (ie HIBOR plus a spread), rather than PRIME-based mortgages (ie PRIME less a spread). The popularity of HIBOR-based mortgages effectively increases interest rate sensitivity of banks’ assets. Retail banks usually pass the management of interest rate risk to their asset-liability management department which may hedge their exposure using interest rate swaps, depending on their funding structures.

Authorised Institutions (AIs) that are counterparty to a clearing eligible transaction will be required to clear such transaction through a designated CCP. As proposed in the Consultation Paper 2, fines will be imposed for breach of the mandatory obligations. Thus, it is advisable for the AIs to review the Consultation Paper 2 carefully, assess the impacts (from trade execution, capture, reporting, collateral management to risk management) and take the necessary compliance steps. Banks should also look at the impacts from a commercial angle to look at the benefits from the increased yield spreads from reducing counterparty credit risks.

Potential impacts on accountingAs the regulatory capital requirements would follow in part from financial reporting numbers, the potential impacts on accounting in particular to retained earnings for Tier I capital calculation under Basel III would be important to consider. The impacts on a bank will vary depending on the nature of its market-facing derivatives activity, the types and volume of derivatives transactions in which it engages and the purpose for which these transactions are used. Some of the potential accounting impacts are considered below:

(i) OffsettingThe balance sheet offsetting requirements for financial assets and financial liabilities account are of particular importance to banks and other financial institutions


because any changes in offsetting may impact leverage ratios and regulatory capital requirements, particularly for those with large financial instrument and derivative portfolios.

Currently, transactions settled through clearing systems are in most cases deemed to achieve simultaneous settlement. While many settlement systems are expected to meet the new criteria, potentially some may not.

Entities need to examine the operational procedures applied by the CCP and settlement systems they deal with to determine if they meet the new criteria.

(ii) Valuation and hedge accountingIn IFRS 13, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). In discounting cash flows, an entity uses one or more discount rates equal to the prevailing rates of return for financial instruments having substantially the same terms and characteristics, including the credit quality of the instrument.

Historically, the fair values of derivatives have been calculated using LIBOR-based swap curve as the discount factor, since it reflected the cost of funding for banks.

However, the use of LIBOR as the standard discount rate ignores the fact derivative transactions are collateralised, which is furthermore a requirement for clearing through CCP. For collateralised trades, a more relevant discount rate is an overnight index swap (OIS) rate rather than LIBOR.

CCP also requires standardisation of OTC contracts for clearing purposes. However, the standardisation of OTC contacts may lead to hedge ineffectiveness due to potential mismatch of some critical terms between hedged item and hedging instrument.

(iii) Equity/liability classificationIf equity derivatives are to be cleared through CCP, it will result in derivatives accounting. For example, warrants or written call options that allow the holder to subscribe for or purchase a fixed number of non-puttable ordinary shares in the issuing entity in exchange for a fixed amount of cash or another financial asset, or the fixed stated principal of a bond are equity instruments [IAS 32.22, AG13].

When the CCP steps in as a counterparty for OTC equity derivatives, the instruments will be classified as derivatives liability, instead of equity, for the issuing entity. However, OTC equity derivatives are likely to be excluded as eligible products to be cleared through CCP at the initial stage.

G20 FSBFinancial

Stability Board

Holland

Singapore

Spain

Hong Kong

South Korea

France

China

Argentina

Saudi Arabia

South Africa

Australia

UK

Mexico

Turkey

USA

Indonesia

Canada

India

Brazil

Italy

Russia

Japan

EU Germany

Switzerland

26 Financial ProductsPotential impacts oncapital adequacy

OTC derivatives cleared through CCP are likely to attract lower capital charges due to lower counterparty credit risk which can be attributed to the following factors:

• Multilateral netting • Higher levels of collateral and no re-use• Single point of control for regulators in stress event• Increase transparency (and through trade repositories) • Lower operational risk through standardisation

(contract and process)

Economically, having less CCPs is more efficient. But this is unlikely in practice as many OTC derivatives are cross-border deals. Multiple CCPs can reduce netting benefit and increase costs incurred on initial margin, membership and operations. The overall impact on liquidity is unclear. Some studies suggest large amounts of additional collateral required, similar to capital increase. Others believe it will be mainly a re-allocation of existing collateral. As a result, the impact of multilateral netting is unclear.

How to minimise the impacts?Due to the potential high cost associated with the increased regulatory burden, a common theme across financial institutions to deal with the impacts is to use a technique called legal entity optimisation. For example, a financial institution may transfer all instruments subject to central clearing to one single legal entity set up in a country with the lowest margin requirements. Prima facie, this technique can deliver a competitive advantage, not only by reducing internal and external costs related to margining, reporting, documentation and risk management, but also by allowing a more holistic view of the organisation, increasing capital and liquidity efficiency.

As proposed in the Consultation Paper 2, there is no location requirement for a CCP. Both local and overseas CCPs may become designated CCPs for the purposes of the mandatory clearing obligation. However, as a pre-requisite to such designation, they will first need to be either a recognised clearing house or an authorised automated trading services provider. Regulators will assess the suitability of a CCP to be designated. Given most other Asia Pacific jurisdictions outside of Hong Kong SAR are still in the deliberation process, banks would need to watch closely on the upcoming developments and rationalise where and when the CCP would be most efficiently designated considering all the capital, operational and IT impacts.

RMB business developmentThe scale of offshore RMB OTC derivatives is relatively small now. However, a large part of RMB business is done by local banks, rather than global banks. Local banks have expanded its offshore RMB businesses with focus on product innovation such as RMB insurance, treasury and trade settlement products and service. Banks in mainland China will continue to tap the local market for Dim Sum bond offerings until the offshore interbank rates start to converge to onshore levels. So it is just a matter of time before the scale of offshore RMB OTC derivatives grows to a size that becomes systemically important to the Hong Kong SAR financial market. Regulators may reconsider in the future if only local CCPs should be permitted to clear products that are regarded as being of systemic importance. Currently, there is only one Chinese bank ranked with the world’s 29 globally systemically important financial institutions. However, locally there is not yet a formal designation of which banks are considered systemically important for Hong Kong SAR which would be an added consideration for using local CCPs when such an announcement is made.

ConclusionThese regulatory changes fundamentally alter the structure and operations of the OTC derivatives markets, significantly impacting business models, profitability, operations and technology of banks’ derivatives businesses. By proactively responding to the new business environment and effectively structuring their OTC derivatives business, Hong Kong SAR banks can take advantage of opportunities, protect franchise value and avoid the potential downside impacts of these changes.

Compliance must be a high priority: a failure to meet its requirements could result in severe penalties, as well as missed market opportunities. Global financial institutions, which are expected to be the majority of both swap dealers and participants, are already busy trying to comply with the new rules and Hong Kong SAR banks cannot afford to be behind.

☐ Yin Toa LeePartner☐ Siew Chan HoSenior Manager, Ernst & YoungFinancial Accounting Advisory ServicesFinancial Services, Asia Pacific

30

Balancing Act:Hong Kong and Shanghai Vie for IFC Primacy

According to the 12th Five-Year Plan (FYP), Shanghai will be developed into an International Financial Centre (IFC) by

2020, as part of the plan to internationalise the Chinese Renminbi (RMB, yuan). It will lead the world in trading, pricing and settlement of RMB assets. Some critics described this as “alarming news for Hong Kong” in the sense that China will not have room for more than one IFC and that is Shanghai. However, other observers argue that the worry might simply unwarranted anxiety for Hong Kong.

Is there competition between Hong Kong and Shanghai as China’s IFC?

Clearly, both Hong Kong and Shanghai are active as Chinese IFCs. Shanghai is developing from a national presence into an IFC, which is Hong Kong’s long-held fi eld. At the same time, Hong Kong is extending into the Chinese mainland.

Closer Economic Partnership Arrangement (CEPA), cross-border logistics planning, and Qianhai’s fi nancial innovation policies are key steps of integrating with South China. On top of Beijing’s policy supports, they are both competing for similar mainland and international markets, capital and talents. Some commentators see this as moving into each other’s territory. From a different angle, though, the two cities might be exploring each other for future “integration” in accelerating RMB internationalisation and upgrading the overall national strength.

Shanghai’s development into an IFC is part of Beijing’s twelfth Five-Year Plan (FYP) with substantial policy and fi nancial supports. Hong Kong’s transformation from a little fi shing village into a key IFC is a result of free market development based on an economic policy of positive non-interventionism.

Financial Industry


Balancing Act:Hong Kong and Shanghai Vie for IFC Primacy

For national benefits, both Shanghai and Hong Kong should be top IFCs in order to accelerate the adoption and liquidity of the RMB worldwide. For the moment, neither city is a direct challenge the global IFC leadership of New York and London. Combined they might exert greater influence, and to that end, the two sides are working on different parts of the bigger picture.

Since the signing of the Memorandum of Understanding Concerning Advancing Hong Kong-Shanghai Financial Co-operation (MOU) in 2010, the two places have been working closely to promote financial reform. Joint projects include the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, the listing of Exchange-Traded Funds (ETFs) tracking Hong Kong stocks on the Shanghai Stock Exchange, and the issue of H shares and RMB bonds by Shanghai enterprises in Hong Kong. Last year, officials from Hong Kong and the mainland jointly staged a roadshow in South East Asia to promote RMB financial services in both Shanghai and Hong Kong.

Will Shanghai’s ambitions blunt Hong Kong’s involvement in the RMB businesses?

To be the leading onshore global RMB Centre by 2015 as per the 12th FYP, Shanghai will function as the top RMB Pricing Centre, RMB Assets Trading Centre and Settlement Centre. Shanghai’s non-forex turnover targets in the plan have been set as 1,000 trillion yuan (US$158.4 trillion) with assets under management (AUM) of 30 trillion yuan (US$4.75 trillion). Such huge market capacity could make the Shanghai Interbank Offered Rate (Shibor) and the RMB central parity rate important references in pricing the RMB assets and yuan lending rate worldwide.

However, Shanghai’s development will not blunt Hong Kong’s involvement in the RMB businesses. Shanghai Stock Exchange (SSE) is still prevented from allowing overseas companies to issue RMB-denominated stocks. The plan for SSE’s international board was announced in 2010 for introduction in early 2011, but postponed indefinitely. The launch of the international board might require the seamless alignment with international standards of legal and accounting practices, involving privacy, and disclosure, which the mainland systems might not fully accommodate now.

In addition, the development in Hong Kong, Qianhai and South China might be affected if the National Development and Reform Commission (NDRC) allows overseas companies to sell RMB-denominated stocks in Shanghai. This could dampen Hong Kong’s initiative as an offshore RMB business hub. Hong Kong is promoting financial innovations at Qianhai and economic integration with the South China. RMB internationalisation requires offshore collaboration. The expertise and connections of Hong Kong (or indeed London) could better source and offer the capital on the best terms available in the global marketplace. Overseas marketing might be even more challenging than local affairs. Based on the developments outlined above, it is clear that maintaining Hong Kong as the premier offshore RMB hub remains a priority.

How will Shanghai’s IFC plans impact Hong Kong’s overall IFC standing?

Shanghai’s IFC plans should benefit Hong Kong’s overall IFC standing over the long run. Shanghai’s IFC plans signal the country’s growing receptivity to innovative financing, capital operations, insurance, derivatives, debt financing and securitisation.

32 Financial Industry

Incremental reforms are ongoing in Shanghai, while the more innovative initiatives are being tested at Qianhai with Hong Kong’s professional advice and active participation. This gives Hong Kong the first-mover advantage in consolidating its IFC status.

SSE has a higher market capitalisation because it is more convenient for state-owned enterprises (SOEs) to stage initial public offerings (IPOs). Local demand for stock, debts, capital and commodities is huge. This picture might alter when more mainland enterprises begin to list in Hong Kong later on. The Hong Kong Stock Exchange (HKEx) is striving to attract listings from the mainland and from overseas, including Mongolia, Kazakhstan, Japan, Italy, Switzerland,

Canada, and France. HKEx’s securities market led the world in funds raised through initial public

offerings (IPOs) for the third consecutive year in 2011. When Beijing allows non-

institutional investors from the mainland to trade overseas stocks, it is Hong Kong

that stands to benefit the most. Being China’s top offshore RMB centre, Hong Kong would

enjoy even bigger trading volume of the Chinese currency and RMB assets than the US or London

if RMB develops into a top global currency later on. Those mainland investors who use the Hong Kong registration to back flow their money to the mainland as international capital could enjoy more protection and convenience. The HKEx, therefore, represents another major advantage to Hong Kong’s status as the primary IFC in Asia.

Will Shanghai, not Hong Kong, become China’s London?

If the RMB becomes the top global currency, then Shanghai would emerge as China’s New York and Hong Kong as China’s London. With a tradable currency, Shanghai might increase RMB trading and shape international interest rates. However, floating the RMB risks destabilising the Chinese as well as the world economy in the short-run. Beijing increased the two-way floating band of RMB against the U.S. dollar in the inter-bank spot foreign exchange market from 0.5 percent to 1 percent on 16 April, 2012. This helps better reflect supply and demand in both the domestic and international markets.

In the absence of a floated RMB, Shanghai will remain a yuan-denominated market. In the longer-range future, market forces would make a vote. If more

Nov•Dec 2012Jan•Feb 2012 33Nov•Dec 2012

investors choose to work in Shanghai and the market turns to favor it as China’s lead IFC, Shanghai might end up boasting Hong Kong’s existing advantages in addition to its own. These include the free flows of information, the free market operation, few controls on interest rates and loans, and a low and simple tax structure. However, some worry these liberalisations could conflict with Beijing’s priority of maintaining national stability. Meanwhile, such liberalisations would gain international acceptance only after steady testing by global investors – there would be no overnight shift. Hong Kong’s free status should be able to satisfy China’s need for internationalisation at the present stage.

In real terms, Hong Kong’s advantage remains clear. Although Shanghai’s GDP (US$297 billion) has exceeded Hong Kong’s (US$243 billion) in 2011, Hong Kong remains a key IFC. With a far bigger GDP, New York is working tightly with London and Hong Kong as the top three IFCs in the Global Financial Centres Index (GFCI) in 2011. There is no significant difference between London and New York in the ratings. All the three IFCs are supporting each other for mutual benefit. Including Singapore, these four IFCs took around 70% of global equity trading, according to GFCI. The other top 10 members are Tokyo, Paris, Frankfurt am Main, Shanghai, Sydney, and Amsterdam according to the Xinhua-Dow Jones International Financial Centres Development Index.

In the end, even if Shanghai emerges stronger in almost every competency, Hong Kong still has value as a desirable location for international investors. New York’s dominance, for example, does not prevent London from leading the world in forex trading. As China’s top offshore RMB forex trading Centre, Hong Kong is in a very good position for continued growth. While Shanghai lures the world onshore with the most lucrative RMB market, Hong Kong serves the rest of the world as an offshore market. Such a “Bringing In” and “Going Out” not only balances with Beijing’s goals for modernising the country, it closely mirrors the highly successful, and basically equal, interrelationship between New York and London.

To a certain degree, this balanced relationship is necessary. Shanghai, Qianhai, Hong Kong, London and other offshore RMB centres could jointly develop RMB into a fully internationalised currency.

ConclusionCompetition for becoming China’s lead IFC is not a zero sum game. Hong Kong is poised to be China’s global IFC while Shanghai is consolidating its onshore IFC lead. International investors find value in Hong Kong’s established worldwide connections and free market operation. They will likely continue to prefer to manage their mainland capital from this offshore centre.

☐ Jack Yeung King-wahLecturerDivision of CommerceCommunity College of City


Payment Trendsin Greater China Part 2 Bankers are increasingly coming under

threat from the ecosystem of consumer payments. New market entrants are

taking the customer-facing part of the business and leaving banks to provide the messy back-end. Are banks becoming commoditised providers of utilities?

In the second part of our series on payment trends, we explore how mobile payments (m-pay) and electronic payments (e-pay) have become a key focus for investment and innovation, despite placing exponential strain on the current systems and processes we use to transact.

M-pay and e-pay backgroundThe United Nations Development Council has identifi ed six potential scenarios where the introduction of m-pay and e-pay can benefi t society, as summarised below:1. Increased money supply and fi nancial

inclusion2. Reduced cost of money transfer3. Domestic and international market expansion4. Improved regulatory oversight for payments 5. Market collaboration to provide infrastructure 6. Locally owned payments infrastructure

Drawing on these scenarios, there are a number of areas where we can see direct benefi ts being realised for China and Hong Kong. For these markets, we have seen a rapid increase in demand for m-pay and e-pay solutions due to the widespread adoption rate of such technology by consumers, with growth rates close to 150 percent in 2011. Projections show that the market is expected to exceed RMB 200 billion in China by the end of 2012, as these consumers continue

Payments

38 Payments

to push the boundaries of mobile and online tool use for collaboration, commerce and payments. In addition to this trend, we also see m-pay and e-pay providing a number of benefits in less developed market segments such as rural and migrant workers. These technologies are providing valuable opportunities to serve the “under-banked” with greater access to financial products.

The value that m-pay and e-pay are bringing to the market around increased money supply, financial inclusion, market expansion and the development of payments infrastructure is unquestionable. However, it is fair to conclude that there is still a way to go to reduce the cost of money transfer, improve oversight (eg traceability as well as monitoring of transactions) and promote collaboration between respective members of the payments ecosystem.

China is an adopter of m-pay and e-pay

The development of payments infrastructure has been highlighted as one of the top three priorities for investment (alongside Cloud and Shared Services) as outlined in China’s 12th Five-Year Plan. As a result, we have seen the release and rapid adoption of Third Party Payment Provider licenses with 197 companies (and 294 licenses) now operating in the market. Of these, we can see a concentration of

interest in m-pay licenses (32) and e-pay licenses

(72), which make

up one third of all Third Party Payment Provider licenses issued. This will be a challenging space for new market entrants, with key players such as Alipay and Tenpay now owning a combined market share of more than 70%. As an example of scale, Alipay now has more than 700 million registered accounts and processes a daily average of 4 million transactions (as of June 2012).

To date, however, 83 percent of all transactions in China are still cash based. This provides a huge opportunity to drive further development and benefits for society in line with the key scenarios mentioned above. Furthermore, it is estimated that more than half of China’s mobile subscribers (total number of users is currently estimated to be 1,023.7 million) are based rurally. Consequently, there is currently a significant focus on pilot schemes, which promote financial inclusion and collaboration to develop payment solutions and improved oversight for the market. An example would be from September 2012 when the People’s Bank of China (PBOC) launched a pilot scheme with the Agricultural Bank of China, Postal Savings Bank, China Union Pay, China Mobile and China Telecom.

What is the impact for Hong Kong?

Recent announcements by the Hong Kong Monetary Authority (HKMA) outline the significant investment they are looking to make in the m-pay and e-pay space. From the regulators perspective, the rapid advancement in technology and large scale acceptance of such capabilities by the consumer has been recognised. As a result, they have identified a number of initiatives to support the development of retail payment


infrastructure and instruments in the local market. In a press release dated 4 September 2012, they stated that initiatives include a study on “the development of electronic payments instruments including an e-cheque system and the formulation of an interoperable Near Field Communication (NFC) mobile payments infrastructure”. In addition to this, they will look to enhance same-day cross-bank credit transfer mechanisms (RTGS), implement an e-billing system and further develop the legislative framework for these products.

It is noted, however, that while these initiatives have been developed with the consumer in mind, their success is highly dependent on the adoption of and buy in for these platforms from the associated banks, retailers, technology houses, telecommunications companies and payment schemes. Given the number of stakeholders involved and the broad spectrum of work to be done, we envisage that the HKMA (and other regulators) will play a significant role in aligning common interests and promoting collaboration for the development of this market.

For now, in a similar fashion to the China market, we are seeing a proliferation of new market entrants that are focused on providing Point-of-Sale based solutions with value added capability at the point of transactions initiation. While this helps drive development in market expansion and potential financial inclusion, we are yet to address the key tenants of reducing the cost for money transfer and improving efficiency.

Are banks losing out?For banks, the crux is clearly defining their products in this space to understand the potential for revenue compared to cost of implementation and future maintenance. While theoretically simple, addressing

this becomes increasingly difficult given the legacy operating models with which banks are approaching the market. Third Party Payment companies providing m-pay and e-pay products provide stiff competition to banks as they witness further erosion of their payments value chain. Ultimately, these products provide a front-end charge at initiation, which at some point interfaces with a bank for processing, a settlement and clearing system, then another bank. As such, m-pay and e-pay companies are able to go to market with products that capitalise on the banking industry’s sunk costs of regulatory oversight and infrastructure without factoring in such pain points to their own operating models.

What’s next?The key developmental challenge is defining how we initiate, process and settle the enormous volume of transactions that are demanded as part of market expansion, while ensuring associated transactional costs do not spiral upwards. Currently, this clear trend towards front-end innovation and the approach to initiating transactions will continue to put pressure on banks and impact their role within the payments ecosystem. To address this, banks will need to re-define their approach to payments at the point of initiation with greater focus on value-added services and customer experience whilst driving greater efficiencies around processing and settlement in order to stop the continued squeeze on their top line.

In response to this, we are seeing a push from regulators to support the upgrade of back-end settlement systems with notable efforts from the Monetary Authority Singapore around the G3 project, the Reserve Bank of Australia with Immediate Payments, the HKMA upgrades to RTPS and PBOC’s work on China National Advanced Payment System (CNAPS) messaging and protocols, to name just a few. This does, however, pose a further threat to banks as without a standardised regional approach and protocols, operating models continue to fracture and costs escalate with ever increasing levels of complexity.

While our scenarios for the benefits of m-pay and e-pay solutions remain intact, there is still work to do in developing the platforms that deliver them.

☐ Harry HughesSenior ManagerManagement Consulting

42 Talk Around Town

It is a truism that long working hours are part of the work culture in Hong Kong. On websites doling out advice on life in the city, workers are

invariably warned that extended working hours and an exceptionally hard-work ethos are a permanent fi xture in Hong Kong.

Yet, somewhat unexpectedly, in the background for the past few years, the city has been waking up to the importance of work-life balance (WLB) — or at least is starting to talk about it. Measures designed to help workers create a better harmony between work and personal life, such as the fi ve-day working week and fl exible working hours, have been gradually incorporated in a WLB agenda.

On such a WLB expedition, the Hong Kong companies that have taken the initiative to make changes have

been from different sectors. But perhaps it is the banking industry that has claimed the most prominent place in the WLB forefront. In the early 2000s, a handful of banks brought in the novelty concept of paternity leave to the workplace. Then in the latter half of 2006, banks including HSBC, Standard Chartered, DBS and the Bank of China were among the private companies that took the lead to switch to a fi ve-day working week from 5.5-day week. This has been followed by more WLB measures in recent years, such as fl exible working hours and birthday leave.

“Apparently there is greater awareness of the concept of WLB in the banking industry today,” says Amanda Yik, senior project manager of Community Business, a non-profi t group that educates local companies on corporate social responsibility. “A growing number of banks are now taking the initiative to change the corporate work culture.”

HK’s BanksMake Strides in Work-Life Balance

Nov•Dec 2012Mar•Apr 2012 43Nov•Dec 2012

The shift in attitudes of banks might be rather surprising, for banking and WLB have traditionally been anathema to each other. But if any enterprise is to make the first move to promote WLB, it would be large organisations with a large pool of skilled staff, and banking is a sector comprising many of such corporations.

“It’s not as if you have to pump in a lot of money to promote WLB, but SMEs (small and medium-sized enterprises) in Hong Kong, which form the majority of local enterprises, tend to feel they don’t have enough resources to promote WLB,” says Yik. “On the other hand, most banks here are usually global businesses that like to blaze new trails.”

In the 21st century, work-life balance is no doubt one of the buzz phrases. It is bandied about among human resources, business sectors and governments. In the West, the notion became the focus of growing public and policy interest around the start of the century.

These changes occurred partly in the context of socio-demographic development, in particular the expansion of the female labor force, which is a trend noticeable in Hong Kong since the 1980’s. Another context is related to the unhealthy trend of overworking in some countries. In the UK, a government survey found that one in six employees worked over 60 hours a week in 2002 compared to one in eight in 2000. In Australia, the average working hours rose from 38.6 hours a week in 1885 to 44 hours in 2002. As people are devoting more hours to work, the pendulum that has swung too far away from leisure has to be adjusted accordingly to safeguard employees’ well being and reduce attrition.

In Hong Kong, the average working hours have for years been hovering around 48 hours per week, which is more than 20 percent higher than the 40 hours suggested by the International Labor Organisation (ILO), and which does not include the time people spend off work checking work emails and answering work-related phone calls.

“Hong Kong is a global financial center and the banking industry is very competitive. Those who work in banks… are likely to be high achievers and career-minded. [The industry] is also highly regulated and has been facing some significant crisis and layoffs recently. That causes stress and the feeling that one

needs to be willing to go the extra mile,” Yik says. “The impact of [employees overworking] on banks can be serious – productivity drops and people are more prone to making mistakes, which could have disproportionate consequences for banks.”

But a weightier business concern that drives the WLB agenda of banks is the intensifying competition for manpower over the decade, says Sharon Cheng, DBS’s head of human resources. “Since around 2000, it has been quite difficult for banks to find the right people. The competition for talent is getting stronger, and it’s all the more important for banks to do something to retain staff,” Cheng says.

The challenge, Cheng believes, is partly demographic in nature. “The intense market competition has led us to recruit many less experienced people including a significant number from the ‘post-80s’ generation (people born in the 1980s). This new generation of people grew up in a relatively more affluent society than the older generation. They enjoy better international exposure and value personal freedom more. So they tend to place a higher priority on work-life balance.”

A case in point is Paul Cheng, a 23-year-old bank executive with DBS. Work-life balance for him means having the time to meet up with friends after work several times a week and to pursue personal interest (keyboard playing in his case), which sets him apart from his older colleagues who seem more ready to work longer hours. “Work-life balance is not the top priority but it’s an important bonus. If I am to change jobs, I would ask the employer in the job interview what work-life balance measures are in store for me,” he says.

The Gen-Y’s different take on work is also backed by statistics. A Community Business survey carried out in 2010 probed the differences in attitude toward work-life balance between the post-80s generation and non-post-80s. It showed that 61.5 percent of post-80s respondents would consider leaving their current job for better work-life balance, compared with 30.3 percent for the other group.

The year 2006 provided the industry a catalyst to change. In January 2006, then Chief Executive Donald Tsang Yam-kuen announced the five-day week initiative for government departments with a view to improving work-life balance and boosting consumer

44

employees to request different working hours or to begin working from home.

Things seem to be changing for the better. According to government statistics released earlier this year, for employees in the industry category including finance, the median hours of work per week was 45, which has not changed much over the last few years and remains above the 40 hours recommended by the International Labor Organization. Community Business’ research showed that Hong Kong employees’ work satisfaction score improved from 5.7 out of 10 in 2006 to 6.2 last year. The latest Regus Work-Life Balance Index, sponsored by an office-space provider, recorded a 6% rise in the WLB level for Hong Kong workers from 2010 to 2012, against a global rise of 24%.

“We can’t say the improvement has been significant in the banking or other sectors. There’s still a lot of fear around losing competitiveness if they promote WLB,” Yik says. “We can’t expect things to progress overnight but... that’s not a reason to assert that it’s not going to work.”

Nita Law of Standard Chartered concurs. “After all, Hong Kong has a deep rooted hardworking culture. It will take time to change. There is still room for improvement and there is still hope.”

☐ Shirley Lau

spending. When the idea was put into practice at government departments in July, the banking sector quickly followed suit with a five-day clearing week launched in September. Many banks also then switched to a five-day working week for staff, much to the applause of bank workers such as Winnie Chan, then an employee with the Bank of China.

“I found myself having a lot more time to be with family and do things I wanted to do. It might be just a half-day’s difference but the change was significant. When you work half-day, you go to work and go home and the day is gone just like that. Practically it’s almost a full-day’s work. If you want to talk about promoting work-life balance, five-day week is the very basic,” Chan says.

On this basis, some banks have put together more initiatives to push WLB further up the corporate agenda. Standard Chartered, for example, launched in 2007 the “Project 1900” to encourage workers to leave the work by 7pm. “We don’t believe in presenteeism. This is not good for workers' health or family,” says Nita Law, regional head of human resources at Standard Chartered. In addition, Hang Seng implemented paternity leave in 2008, and DBS has recently come up with a one-day birthday leave for all staff. Nonetheless, WLB is not just about the number of working hours but also flexibility. Standard Chartered and DBS therefore introduced flexible work arrangements over the last two years to allow

Talk Around Town

4747Nov•Dec 2012 47

Industry’s Stellar Event: HKIB Annual Banking Conference

The HKIB Annual Banking Conference, held for the 4th consecutive year, was held on 13 September 2012 at the Hong Kong Convention and Exhibition Centre, attracting a full house of over 500 Hong Kong participants from 110 banks and financial institutions and close to 70 mainland delegates from 14 provinces. The event has enjoyed success since it made its debut. As the organiser, HKIB is thankful of the continued support from the industry.

A Forward-looking Theme: “The Year of Transformation —Heading into a New Era”The 2012 conference was given the dynamic theme: “The Year of Transformation — Heading into a New Era”. The theme presented awaiting opportunities in a time of rapid changes in the financial landscape. According to Dr Patrick Fung, Chairman of the HKIB Executive Committee, and Chairman and Chief Executive of Wing Hang Bank, it aimed at providing attendees with insights to convert challenges to business opportunities. HKIB was honoured to have Mr John Tsang, Financial Secretary of Hong Kong SAR, as a keynote speaker, who asserted Hong Kong’s banking industry enjoyed promising prospects as the city headed towards the position as the offshore RMB centre of the mainland. Therefore, Hong Kong banks should capitalise on such a golden moment to take business to the next level. Ms Wu Xiaoling, the other keynote speaker, is Vice Chairwoman of the Financial and Economic Affairs Committee of the 11th National People’s Congress of the People’s Republic of China. Ms Wu is a recipient of “Sun Yefang Economics Prize” and was ranked among the most influential women in economic leadership by the media worldwide. She emphasised that RMB was ready to become an international settlement currency as well as an international reserve currency due to the impressive performance of the Chinese economy and the growing significance of the mainland in international trade. She told the participants that Hong Kong banks were in an advantageous position to offer funding solutions to mainland companies expanding to overseas markets. Further, Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority, pointed out that the government and regulators were committed to improving the business environment for the further development of private banking in Hong Kong, which was identified as a key growth driver of the financial sector.

A panel discussion was also held in the morning session of the event. Panelists including Mr David Fung, General Manager of Wing Hang Bank; Mr Adrian Li, Deputy Chief Executive of the Bank of East Asia; and Mr Jason Yeung, Deputy Chief Executive of the Bank of China (Hong Kong), shared their views on RMB business and its growth potential. The session was moderated by Mr George Leung, Advisor of Asia-Pacific (Strategy and Economics) at HSBC.

Afternoon Breakout Streams Empowered with Forefront InformationAfter the networking luncheon, the participants selected to attend one of the 3 breakout streams, which respectively focused on corporate and commercial banking; personal banking and private banking; along with risk management and compliance, all hosted by experts in their field.

Annual Flagship Banking Event with High Positive Comments from Participants In addition, the conference attracted financial professionals from Singapore, Malaysia, Korea and Vietnam. A total of 30 speakers and panelists with strong credentials offered their valuable knowledge and opinions. Remarkably, over 99% of the participants rated it as a “good” or “excellent” event. Its success is great encouragement to HKIB. The conference is exemplary of HKIB’s role as a platform where bankers connect and get informed.

Mr John Tsang chun-wah, Financial Secretary, The Government of the Hong Kong Special Administrative Region delivered speech at the conference.

48

Ms Wu Xiaoling, Vice Chairwoman of the Financial and Economic Affairs Committee of the 11th National People’s Congress of the People’s Republic of China, Executive Vice-chairperson of the Finance and Banking Society of China, Chairwoman of the Financial Accounting Society of China and Former Deputy Governor of the People’s Bank of China.

Panel Discussion: (from left) Mr George Leung, Advisor, Asia-Pacific (Strategy and Economics), HSBC (moderator); Dr David Fung, General Manager, Wing Hang Bank; Mr Adrian Li, Deputy Chief Executive, The Bank of East Asia and Mr Jason Yeung, Deputy Chief Executive, Bank of China (Hong Kong).

Attracting a full house of over 500 Hong Kong participants from 110 banks and financial institutions and more than 60 mainland delegates from 14 provinces.

49Nov•Dec 2012

The signing ceremony of the Memorandum of Understanding (MoU) between the Qatar Finance and Business Academy (QFBA) and the HKIB took place in Hong Kong on 14 September 2012.

The MoU was signed by Dr Abdulaziz Al-Horr, Chief Executive Officer (CEO) of QFBA, and Ms Carrie Leung, CEO of HKIB. The MoU aimed to strengthen knowledge integration and expertise exchange between QFBA and HKIB. The MoU was also a testament of QFBA and HKIB’s joint effort to provide high quality financial services education, and to develop a rich talent pool to support the rapid growth of banking and finance industry in Qatar and the region.

Dr Patrick Fung, Chairman of the HKIB’s Executive Committee, said in his Speech that “The MoU has been

HKIB has the greatest pleasure in conferring Mr Teng Lin Seng, Chairman of the Monetary Authority of Macao (AMCM), with the HKIB Fellowship. The Conferment Ceremony was held at the Auditorium of the Monetary Authority of Macao on 26 October 2012.

The HKIB Fellowship was conferred upon Mr Teng “in recognition of his remarkable contribution and dedication to Macau’s banking industry and his determination to enhance the professionalism within the industry has laid a solid foundation for the long-term sustainable development of Macau.” said Mr David Wong, Vice President of HKIB and Chairman of Dah Sing Bank, Ltd. at the Conferment remarks.

necessitated by the increasing cross-border activity in the financial sector, against the backdrop of growing regional economic integration. The MoU is the first step for future coordination and communication between HKIB and QFBA and will be the basis for robust advancement in banking training and cross-regional talent exchange platforms.”

Mr Teng felt that the reason behind the honour bestowed upon him by HKIB is most appreciative. The conferment is also in recognition of his contribution to enhancing the cooperation between the banking communities of Hong Kong and Macao – a mission which he is more than happy to undertake.

Mr Teng praised the mission of HKIB who has been around for nearly 50 years. The quality of service and knowledge of the banking practitioners in Hong Kong has enabled Hong Kong to become one of the major international financial centres. It is hoped that the ongoing cooperation between HKIB and Macau Institute of Financial Services (IFS) will help promoting professional ethics and standard of competence of the financial industry in Macao.

MoU with QFBA to Strengthen Knowledge Integration and Expertise Exchange

HKIB Confers AMCM Chairman Teng Lin Seng with Fellowship

Ms Carrie Leung, CEO of HKIB and Dr Abdulaziz Al-Horr, CEO of QFBA, signed the MoU on behalf of the two organisations.

50

Certified Financial Management Planner (CFMP™) Graduation Ceremony 2012 took place on the very same occasion as the Fellowship Conferment Ceremony. The 2012 graduation class was the 2nd batch of the CFMP™ Public Class in Macao for students successfully completed the course and awarded the Diploma. In his Opening speech, Dr António Félix Pontes, Chairman of the Executive Board of the Macau Institute of Financial Services (IFS) praised “The CFMP qualification is highly respected and recognised in the field of financial planning.” He reminded graduates that “the services are also tailor-made to safeguard the interests of each investor.” Therefore he “had emphasised a good financial planner to have thorough knowledge in various areas, such as investment, tax planning insurance and so on” in various occasions.

Ms Carrie Leung, CEO of HKIB remarked that “One of the leading advantages of CFMP is its wide industry recognition. In Macau, it is formally accepted by the Monetary Authority of Macao (AMCM).” In addition to organising public classes with IFS, the HKIB have also cooperated with other major banks in Macau to organise in-house CFMP™ programme. So far, more than two hundred banking or financial practitioners have successfully attained the CFMP™ qualification; furthermore, over 200 students are currently taking the CFMP™ course studies. “It is expected that the numbers of CFMP™ holders in Macau will be over 500 in 2013.” Ms Carrie Leung indicated in her speech.

Certified Financial Management Planner (CFMP™) Graduation Ceremony 2012

Mr Teng Lin Seng (right), Chairman of the Monetary Authority of Macao receives the HKIB Fellowship scroll from Mr David Wong, Vice President of HKIB.

Mr Teng Lin Seng (6th from left), Chairman of the Monetary Authority of Macao pose with representatives of HKIB Council & Executive Committee, CEO of HKIB, and Chairman & Members of the Executive Board of the IFS.

51Nov•Dec 2012

The Institute organised its 4th “Regulators Dialogue” session on 15 October 2012. The session, with Mr Sunny Yung, Division Head, Banking Supervision, the Hong Kong Monetary Authority (HKMA) as the speaker, allowed Members to gain a comprehensive understanding of HKMA’s countercyclical supervisory measures to strengthen risk management of banks in mortgage lending.

Mr Yung provided an authoritative interpretation of related issues, which was well-received by over 100 participants through briefing, discussions and question-answer interactions. The participants were mainly legal and compliance officers and managers, as well as banking executives responsible for administering internal compliance guidelines.

“Regulators Dialogue” is one of the Institute’s most popular programmes. It justifies its popularity with its interactive platform connecting representatives from banks and regulators to clarify and analyse changing local and international regulatory requirements. “Regulators Dialogue” can facilitate the efficient implementation of regulatory requirements at the banks’ level.

“Regulators Dialogue” offers Synchronised Requirements on Regulations for Members

The seminar was well received by our members with overwhelming response.

Mr Sunny Yung of HKMA.

Graduates of CFMP Class post with Dr António Félix Pontes, Chairman of the Executive Board of the IFS; Mr David Kwok, Honorary Secretary of HKIB and Mr Tong Hon Shing, Honorary Treasurer of HKIB.

52

Opportunities for Learning are Endless…

More Professional Training Coming in November – December 2012

Course Remarks Programmes Dates Duration Fees HKIB CEF (Hours) (Members) CPT

☐ Professional Training Programmes

Corporate Credit Decision Making Workshop – A Cash Flow BasedLending Approach

7 – 28 Nov (Wed) 10 hours $1,800 √ --

Red Flags for Corporate Failure & Lender′s Protective measures – Case Study Workshop

14 – 28 Nov (Wed) 9 hours $1,800 √ --

Trade Finance for Credit and Marketing Officers

14 Nov – 5 Dec (Wed) 10 hours $1,600 √ --

The Foreign Exchange Regime for PRC Cross-Border Financing

19 Nov – 3 Dec (Mon) 7.5 hours $1,200 √ --

The Latest FATCA Guidance – What Hong Kong & China Banks Are Doing?

21 Nov (Wed) 2.5 hours $400 √ --

Overview of Licensing Requirements of Regulated Activities under the Securities and Futures Ordinance (SFO)

22 Nov (Thu) 3 hours $1,200 √ --

Account Opening Documentation Requirements from Legal and Regulatory Perspectives

23 Nov (Fri) 3 hours $1,000 √ --

Bankruptcy Laws and Its Significancein Bank Financing

24 Nov (Sat) 3.5 hours $1,200 √ --

Investment Psychology: The Irrational Mind of the Market

27 Nov (Tue) 3 hours $600 √ --

Bank Funding Strategies: Securitization and CDO with China Case Studies

3 & 10 Dec (Mon) 6 hours $1,200 √ --

Capturing Business Opportunities in Foreign Exchange and Money Markets

4 & 11 Dec (Tue) 5 hours $800 √ --

FI Counterparty Risk Analysis 7 Dec (Fri) 3 hours $900 √ --

* HKIB reserves the final right to cancel, modify and/or postpone the course.

Enquiry Hotline: 2153 7877/ 2153 7865 Fax: 2544 9946 Email: [email protected] Website: www.hkib.org

The Institute’s Professional Examination Qualification Programs will be modified in 2013. Please note the forthcoming announcements regarding the new examination structure and transition arrangements.

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