Operator argues the regime that governs the group has been “sufficiently robust and effective” in ensuring that it does not engage in practices that might be considered anti-competitive
EDDIE.LEE@SCMP.COM
UPDATED : Sunday, 17 April, 2016, 8:43pm
Questions are being asked about why the competition law does not apply to the stock exchange operator. Photo: AP
Just when many emerging and mature financial markets across the world are opening up to greater competition, Hong Kong’s monolithic stock trading platform does not appear to be facing any challenge to its de facto monopoly.
It does not help when the city’s competition regime, on which so many market players have pinned their hopes, specifically exempts Hong Kong Exchanges and Clearing Limited (HKEx) and some of its related entities from the law’s reach, according to a lawmaker and a shareholder activist.
HKEx and some of its related companies, together with 575 statutory bodies, are not covered by the landmark Competition Ordinance, which came into effect in December and which was established to check anti-competitive behaviour.
The statutory bodies are covered by general laws but not specific rules in the ordinance such as on price fixing, bid rigging, limiting supply to jack up prices and profits, market sharing and the exchange of commercially sensitive information.
Accountancy sector lawmaker Kenneth Leung has raised the issue in the Legislative Council, querying whether economic activities engaged by public bodies should be brought within the scope of the competition law.
When it comes specifically to HKEx, he questioned whether the exclusion of the sole operator of the city’s stock and futures markets from the application of the competition rules defeats the purpose of the new law.
Many markets have more than one independent exchange offering trading in shares, commodities and derivatives.
There are two major bourses – Singapore Exchange and ICE Futures Singapore – in the Lion City, Hong Kong’s regional rival. Even on the mainland, the Shanghai Stock Exchange and its Shenzhen counterpart operate separately.
But HKEx’s three-decade “monopoly” on trading platforms after the unification of four stock exchanges in 1986 – despite a brief attempt by the now-defunct Hong Kong Mercantile Exchange to seek a share of the commodity futures market – remains largely unchallenged.
HKEx argues the regime that governs the group had been “sufficiently robust and effective” in ensuring that it did not engage in practices that might be deemed anti-competitive.
But Leung, who has advocated since 2000 taking away HKEx’s regulatory function, said he thought the body should not be exempt from the ordinance.
Legislative councillor Kenneth Leung argues that the stock exchange should not be exempted. Photo: Jonathan Wong
“There is no policy reason why HKEx should enjoy exemption from the Competition Ordinance,” Leung said.
“It may not be to the advantage of Hong Kong as an international financial centre to have two stock exchanges, but why can’t we have more competition in the clearing and share registration systems and other trading platforms for derivative instruments?”
HKEx could not itself be a listed company, while acting as a regulator and a public body at the same time, because there was a clear conflict between the roles, Leung argued.
Investment banker turned corporate activist David Webb echoed Leung’s view: “Nobody should be [exempt from the law], not by default.”
He said HKEx continued to enjoy high profit margins, thanks to a lack of competition.
For the year ending in December last year, the group’s total revenue and other income reached HK$13.4 billion, up 36 per cent from 2014, resulting in a record profit of HK$7.96 billion, up 54 per cent.
“HKEx should be removed from the exemption list ... The Hong Kong government needs to revise the principles of its competition policy,” Webb said.
The activist cautioned that a sole trading platform would likely hinder the city’s market development, adding that an increase in the number of stock or futures exchanges would not put a heavy burden on regulators.
“The principles of regulation are the same,” Webb said.
Asked whether competition should only be facilitated in the derivatives market while leaving the more mature equity market alone, he said the entire sector should be opened fully.
While there was no suggestion HKEx was engaging in anti-competitive conduct, both Leung and Webb said it was crucial that the group should come under strict scrutiny.
In reply to inquiries by the Post, a HKEx spokesman said the group was the only organisation currently authorised by the Securities and Futures Ordinance to operate a stock market, but it was not the only organisation that could offer stock trading.
“The Stock Exchange and other HKEx-recognised entities are closely regulated and supervised by the Securities and Futures Commission ... No fees can be imposed or revised without having regard to the level of competition that the fee relates,” the spokesman said.
The group did not state whether it could in any way benefit from the exemptions or whether it welcomed more competition, but it noted that local authorities attached importance to its contribution to the financial stability and security of Hong Kong.
“It is also important to note that the stock exchange faces competition in some areas from overseas markets,” HKEx said.
In a market where public bodies and private firms compete alongside one another, there are always concerns over whether a level playing field can be maintained.
In Britain and the European Union, if a public body is acting as an undertaking, the types of agreement and conduct that are prohibited by competition law are the same for that public body as for any other undertaking.
According to principles developed in EU case law, an activity that is fundamentally “commercial” but also pursues some public service objectives will still be an economic activity, which can be subject to scrutiny.
It remains to be seen whether Hong Kong’s recently established competition rules, which prohibit conduct such as price fixing and predatory behaviour towards competitors, will develop in the same direction.
In reply to Leung’s questions in the Legislative Council about the scope of the law, commerce minister Greg So Kam-leung said the bodies, while being exempted from the application of the Competition Ordinance, still had an obligation to comply with the competition principles and should not be engaged in any anti-competitive activities “without reasonable grounds”.
“The government will demand the relevant bodies to rectify their behaviour in case it is found that such behaviour does not conform with the competition principles,” So said.
The government might also consider putting a statutory body under the regulation of the Competition Ordinance if necessary, the minister added.
The government has not specified which bodies’ functions are or will be under review. But academics and industry watchers have long argued that, apart from HKEx, the Trade Development Council, a trade promotion body competing with the exhibitions industry, should also be covered by the competition law and regulated in the same way as commercial concerns.
However, Terence Chong Tai-leung, an economist at Chinese University, argued that the trade body would lose its competitive edge and therefore be deprived of a major source of income if it were banned from the exhibition business.
The Hong Kong General Chamber of Commerce, whose members represent a wide spectrum of local, mainland and international firms, said the competition law’s scope should be expanded to cover public bodies.
“We think this is only natural and a matter of time,” chamber chief executive Shirley Yuen told the Post, citing the development of competition law in other countries as examples.
“In Australia, competition law coverage was initially limited and did not extend to the entire economy, including most statutory bodies until 1996,” she said.
“Blanket coverage would provide consistency and help address anomalies such as agreements entered into between companies and statutory bodies, and therefore subject to different treatment.”
Paul Haswell, a partner at international law firm Pinsent Masons, said the city’s competition law was similar to comparable rules in the European Union and its development should be in line with that in Europe.
Apart from statutory bodies, the government should also ensure that public sector tendering would not fall foul of the competition law, Haswell said.
http://m.scmp.com/news/hong-kong/politics/article/1936707/beyond-law-critics-ask-why-competition-ordinance-does-not
