Paul M Y Chow, Chief ExecutiveHong Kong Exchanges and Clearing Limited

CEO Forum 2007City University of Hong Kong

18 March 2007

GLOBAL EXCHANGE MERGERS AND ACQUISITIONS (M&A)

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AGENDA

1. Development of exchange entities

2. In-country exchange consolidation & HKEx case

3. Cross-border exchange consolidation

4. Outlook for HKEx

In the first industrialised countries, stock exchanges served local communities

Improved technology, intensified domestic competition, centralisation of financial activities led to concentration -

Except where regionalism and related protectionism were particularly strong

Over the past decade, there has been a clear trend to demutualise exchanges

As well as merging exchanges horizontally, vertical integration is another option

Cross-border cooperation has been another clear trend in the global exchange arena

It may take different forms: MOU, strategic alliance, investment and merger and acquisition

1. Development of exchange entities

Horizontal In-country

Consolidation

Demutualisation

Vertical In-country

Consolidation

Cross-Border Cooperation

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In-country exchange consolidation brings the following benefits:

2. In-country exchange consolidation

Critical mass

Consolidation of liquidity pool

Price formation (a single price for same share)

Economies of scale

Rationalisation and sharing of overheads

Higher global profile

Easier to maintain regulatory standards

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HKEx followed a long history of exchange mergers in Hong Kong

1891 Association of Stockbrokers

1921 Hong Kong Stockbrokers’ Association

1947 Merger to form Hong Kong Stock Exchange

1969 Far East Exchange

1970s Kam Ngan Stock Exchange and Kowloon Stock Exchange

1977 Hong Kong Commodities Exchange, later became Hong Kong Futures Exchange (HKFE)

1986 Merger to form Stock Exchange of Hong Kong (SEHK)

1999 Decision to merge SEHK, HKFE and Hong Kong Securities Clearing

2000 Merger to form HKEx and listing of HKEx

Brief HistoryYear

HKEx was one of the earlier listed exchanges – almost a pioneer!

2. In-country exchange consolidation - HKEx case

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Government leadership

Convincing rationale

• Synergies

• Inefficiencies of mutual form

• Desire to create a commercial and listable entity

Vertical integration with Hong Kong Securities Clearing valuable

Shares / cash alternatives to members of the pre-merger entities

Trading rights regime retained

Catalyst:

• Asian Financial Crisis (highlighted need for a central market operator)

Driving forces behind the HKEx merger in 2000

2. In-country exchange consolidation - HKEx case

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The merger has delivered tremendous benefits to HKEx and the market:

Commercial management replaced mutual-style

Market alignment

• Horizontally (cash market and derivatives market)

• Vertically (trading and clearing operations)

More coordinated market development

Consolidation of liquidity pool

Better risk management

Synergies

• Economies of scale

• Rationalisation

• Sharing of overheads

• Enhanced efficiency

2. In-country exchange consolidation – HKEx Case

3. Cross-border exchange consolidation

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Client Base Home market effect limits cross-listing

potential Advances in technology and presence

of international intermediaries allow global, round-the-clock securities trading

There is limited synergy from cross border M&A of exchanges

Operations Different local market needs, including

service and product offerings Different operating procedures and

trading mechanisms Different currencies Different financial reporting and

regulatory standards

There is limited synergy from cross border M&A of exchanges

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Information Technology Different setup of infrastructure,

location and local standards present challenges to full system integration

Economies of Scale Maintaining marketplace in each territory requires separate infrastructures

• Difficult to share overheads Possible diseconomies of scale from

additional need of coordination

Human Resources Different languages, culture, local laws

and regulations Requirement to maintain separate

infrastructures may limit scope for staff reduction

3. Cross-border exchange consolidation

Other issues related to cross border M&A of exchanges

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Political and Regulatory Issues

Exchanges are often crown jewels of their home territories

• Political resistance• Ring fence• Statutory regulation and

supervision

Costly Investment Investment value declines in a bear market

Investment choices should be left to shareholders

Management and Control Issues

Difficult questions arise• Primary / leading location of key

functions and headquarters?• Primary location of data centre?

3. Cross-border exchange consolidation

Cross-border merger currently not attractive due to no evident synergies • Lack of synergies with other Asian exchanges• Synergies with other world exchanges – even more remote• Risk of diseconomies due to distance, culture, market needs, politics, etc.

HKEx’s profitability, ROE, cost-income ratio are among the highest of global exchanges

Business synergies with Mainland, but• One Country, Two Systems• Different market models and infrastructure• Different regulatory frameworks• Mainland exchanges not demutualised• Mainland still largely closed• RMB not freely convertible

Vertically integrated businesses help secure HKEx’s position• One-stop-shop service • Overall systems investment and risk management effort • Cross-subsidisation of costs

4. Outlook for HKEx

Currently, lack of sound rationale for any cross-border M&A for HKEx

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HKEx is the vertically-integrated sole Hong Kong market operator

Mission: “To be a leading international marketplace for securities and derivative products focused on Hong Kong, Mainland China and the rest of Asia.”

HKEx’s strategies focus on

• Market quality

• Infrastructure improvement

• Service enhancement

• Regulatory integrity

Dividend payout ratio of 90%

Regular sharing of knowledge with other exchanges (MOU, MORC, etc)

Maintain cooperative relationships with Mainland entities (e.g. A+H Working Group)

HKEx focuses on its core competence

4. Outlook for HKEx

Thank You