19 May 2005 Goldman Sachs Chairman’s Forum Regulatory Concerns in Asia Andrew Sheng Chairman Securities and Futures Commission, Hong Kong 1
Contents of Lecture • IOSCO’s Regulatory Focus • SFC’s Regulatory Philosophy • Our Regulatory Focus • What we expect of Goldman Sachs 2
Recent Key Market Trends in Asia Deposit-taking Institutions – demographics changing customer pattern – growth of consumer banking, credit cards, demand for structured products Risk-pooling Institutions - still foreign dominated, but demand growing Contractual Savings Institutions - huge liquidity pools, but shortage of professional fund management skills Market Makers - key investment banking skills still dominated by large foreign players, with foreign fund managers as key clients Specialized Sectoral Financiers - policy-based banks shrinking in market size; venture capital and private equity becoming more important Financial Service Providers – exchanges demutualizing 3
China IPO market as big as Japan, 12% of the Global IPO Market in 2004 $142B $48B Europe/ 41 Rest of Asia- Middle East 6 Pacific 3 India 6 Australia Asia-Pacific 48 15 Japan Americas 53 China 17 Note: Chinese IPOs include Chinese domestic A-share issues. China includes Hong Kong. 4 Source: Dealogic
Key Asian Capital Market Trends Demographics – around 300 million Asians earn US$5,000 or more annually; by 2020, discretionary spenders will grow to 1.4 billion. Huge demand for asset management and consumer banking needs Wealth management - private banking spreading from those with US$1 million or more to middle income professionals Mutual Funds - Asian demand for fund products will grow – no longer just long-only funds; line between mutual funds and hedge funds blurred Market makers - huge role for leading investment banks in Asia Outsourcing - more jobs being outsourced to Asia * 5
Recent International Regulatory Trends Greatest change in global standards and regulation since 1930s – Convergence in IAS and US GAAP Oversight of auditors, analysts, CRAs Massive changes in corporate governance standards and disclosure Sarbanes-Oxley European Directives, Higgs etc International rules – Basle Capital II IOSCO standards Massive civil litigation if financial firms do not get it right * 6
Recent Global Stability Concerns Shell, Parmalat – Cross-border, involving over-statement of reserves and possible mis-selling Hedge Funds and Prime Brokers Are hedge funds too opaque? Is there a fraud risk? Are prime brokers exposed in terms of credit to hedge funds? Where is the next black hole? Structured notes and private banking Concentration of key derivative players Major regulators stepping up action + possible litigation * 7
SFC Regulatory Philosophy Engage the market – G-9, of which Goldmans part of, key help to drafting of new SFO Pick Important Problems, Fix Them & Tell Everyone Concentration on small brokers and quality of listed companies Managed problem brokers and Dual Filing basically fixed market structural issues Regulate according to international standards (IOSCO) – follow closely, but not lead Prevention better than cure Balance between regulatory benefits vs regulatory costs * 8
Recent SFC Regulatory Concerns Mis-selling – Towry Law – settlement of HK$255 million for investors IPO Sponsors ICEA – HK$30 million settlement Hedge Funds and Derivatives – are they a problem? First to allow retail hedge funds Charles Schmit US$30 million fraud Success of Derivative Warrants and exposure of Structured Products Mainland IPO allocation and non-tradable share issues * 9
Concluding Thoughts Asian capital markets are integrating, as Asian savings seek regional placement, but it will integrate according to global standards. Regulatory concerns of SEC and CESR quickly become Asian regulatory concerns – no let up in need for high compliance culture Asian regulators are also talking and cooperating with each other, increasingly according to IOSCO and MMOU standards, i.e. sharing information and taking joint action against cross-border misconduct Market leaders like Goldman Sachs have huge reputational advantage and opportunities. Risk is to allow compliance mistakes to damage reputation of leading firms SFC welcomes close dialogue with market leaders to uplift market skills capacity and strengthen strong compliance culture 10
Thank you very much 11
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