Hong Kong's International Financial Centre: Retrospect and Prospect

More specifically in Asia, the demand to widen the scope for alternative forms of liquidity
management has been rising as large global traders have sought to increase their exposures in the
region. Trading via dark pools allows that to occur in ways that also facilitate the masking of
specific traders. On the one hand, trading through dark pools can be market-stabilizing by
discouraging herd behavior. On the other hand, it obviously undercuts regulatory moves to
enhance market transparency. Not least, it also threatens to undercut standard brokerage and
exchange pricing structures. The challenges posed by dark pools have unleashed much research
and intense discussion around the world. In Hong Kong, the SFC has come to be associated with
the more deregulatory position; it has already granted alternative trading system licenses to firms
like Credit Suisse, Citigroup, UBS, BNP Paribas, Goldman Sachs, Morgan Stanley, Merrill
Lynch, Nomura Cross, Deutsche Bank, and several agency brokers (ITG and Instinet, Liquidnet
Asia). The HKEx takes the more skeptical position.
Although over a dozen off-exchange crossing networks now operate in Hong Kong, the
HKEx has thus far limited the scope of their operations. The stated objections revolve around
resistance to market fragmentation and opacity. Doubters point to the idea that dark pools might
crack open the HKEx’s monopoly over secondary securities trading and clearing. By way of
riposte, HKEx officials point out that its current dominant position in Hong Kong reflects a long
and painful struggle to bring order and stability to crisis-prone markets. Again, the first phase of
market consolidation occurred in 1986 by way of the merger of pre-existing exchanges and the
second phase ended in 2000, when futures and clearing functions were added. Ever since then,
controversy has centered on potential conflicts associated with the HKEx having both a
regulatory and a commercial role and on the regulation of minimum trading spreads charged by
member-brokers. Alternative liquidity systems challenge the HKEx on both counts.
Bond issuance and trading
In recent years, public entities like the HKMA and the Hong Kong Mortgage Corporation
(HKMC) have issued HK dollar bonds in an attempt to accelerate local market development. The
Government itself in 2009 proposed a plan to begin a systematic bond issuance program, despite
the fact that it doesn’t need the funding and that interested corporations and individuals had full
access to US-dollar bond markets, effective substitute for HK dollar bonds under the linked
exchange rate system. The government contended that in the long run, currency mismatches in
aggregate funding schemes like the Mutual Provident Fund could become more problematic and
more expensive to manage in the absence of a flourishing HK dollar bond market. (Most retirees
save HK dollars and expect to be paid out in HK Dollars, but the funds that hold their savings
over time are widely diversified in currency and other terms. The HK dollar bond market is
necessary to provide a mechanism for hedging). Even with regular issues from the Government,
many observers noted that it would take some time to develop liquid secondary markets. Thus
far, banks have tended to be primary purchasers, and they have not been inclined actively to
trade local government bonds. Nevertheless, the Singapore case looms large in the minds of
policymakers. After its government initiated its own bond issuance program in 1998, demand
52