WORLD TRADE
ORGANIZATIONS/FIN/W/25
3 December 2002
(02-6667)
Committee on Trade in Financial Services Original:  English
COMMUNICATION FROM HONG KONG, CHINA
Market Trends and Regulatory Issues Relating to Electronic Banking and On-line Trading in the
Securities and Futures Market of Hong Kong, China
The attached paper has been received from the delegation of Hong Kong, China with the
request that it be circulated to the Members of the Committee on Trade in Financial Services.
Hong Kong, China would like to share with the Committee on Trade in Financial Services its
experience on the regulatory issues relating to electronic banking (e-banking) and on-line trading in
the securities and futures markets in Hong Kong, China.  We hope to contribute to the discussions of
recent developments in the sector in respect of on-line financial services.
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I. INTRODUCTION
1. In Hong Kong, China the banking industry and the securities and futures market are regulated
by the Hong Kong, China  Monetary Authority (HKMA)1 and the Securities and Futures Commission
(SFC),2 respectively. The general regulatory framewor k is laid down in ordinances and subsidiary
regulations. The two regulatory bodies also issue a number of codes and guidelines setting out
regulatory/licensing requirements in greater detail3.
2. Hong Kong, China has a favourable environment for the development of e-banking. There is
the supply of financial services from a wide range of sophisticated local and foreign banks, the
demand to use these services from a technologically  aware population and the infrastructure to enable
online business to be conducted. Specifically, the penetration rates for the various forms of electronic
delivery channel in Hong Kong, China are already among the highest in the world.  For example:
• around 60% of households have personal com puters and about 80% of them have connected
to the Internet;
• around 40% of households have subscribed to broadband Internet access; and
• around 87% of the population use mobile phones.
                                                     
1 http://www.info.gov.hk/hkma/
2 http://www.hksfc.org.hk/
3 All the applicable codes and guidelines are available at the web-sites of the respective regulating bodies.S/FIN/W/25
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3. The legal framework in Hong Kong, China is al so supportive of electronic transactions. Hong
Kong, China has put in place the Electronic Transactions Ordinance (ETO)4 in 2000. Digital
signatures generated by digital certificates issued by a recognised certification authority (CA) will be
regarded as satisfying signature requirements under the law. Electronic records shall not be denied
admissibility as evidence in any legal proceeding on the sole ground that it is an electronic record.The ETO also provides for the recognition of overseas CAs so as to facilitate the development of
cross-certification and cross-border e-trading activities.
II. OVERVIEW OF MARKET TREND
4. E-banking has become increasingly popular in Hong Kong, China. In particular, 33 banks
(including all major banks and the majority of retail banks in Hong Kong, China) have already
introduced e-banking services, through different electronic channels such as the Internet, mobile
phones, personal digital assistants and electronic kiosks. These banks (11 foreign banks and 22 localbanks) represent around 80% of the total customer deposits of Hong Kong, China. According to a
survey published in May 2002, 30% of the Internet users of Hong Kong, China are users of Internet
banking facilities;  and 83% of daily or weekly Internet banking users  are either extremely satisfied
or satisfied with the services.
5. In recent years, it is evident that more banks further extend their e-banking services from
consumers to corporate customers (including small-and-medium enterprises, large corporations and
institutional customers). These include online services for cash management, payment processing,
trade finance and treasury management. In addition, several global/regional business-to-business
market portals for financial products have extended their operations to Hong Kong, China. For
example, an electronic platform for online trading of Asian debt securities (including Hong Kong,China debt securities) has established its head office in Hong Kong, China.
6. As for securities and futures businesses alone, over 120 of the total 850 brokers are approved
by the SFC to provide on-line trading services.  The SFC takes the approach that the fundamental
principles of regulation are not premised on the use of a particular medium of communication or
delivery.  Regulated activities should be uniformly regulated irrespective of whether such activitiesare conducted via paper-based media or electronic media.  The SFC’s licensing requirements are
generally applicable to all businesses that provide dealing services in Hong Kong, China, irrespective
of the communication or the delivery media used in the conduct of such businesses.
III. REGULATORY FRAMEWORK OF THE BANKING INDUSTRY
7. The HKMA's primary supervisory objective in this regard is to create a safe and sound
environment for e-banking development in Hong Kong, China without standing in the way of
progress. In this connection, the HKMA has implemented a comprehensive risk managementsupervisory framework for e-banking, which is in line with the best international regulatory practices,
especially those recommended by the Basel Committee on Banking Supervision. The HKMA’s key
supervisory focuses are risk management (particularly information security) as well as consumer
protection in relation to e-banking. The framework applies consistently to local and foreign banks and
it comprises the following major components:
• the development of policies and guidance for the banking industry;
• promoting customer protection, education and awareness;
• continuous monitoring and examinations; and
• international co-operation.
                                                     
4 Full text of the Ordinance can be downloaded from
http://www.info.gov.hk/itbb/english/it/index_n.htmS/FIN/W/25
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A. POLICIES AND GUIDANCE
8. The HKMA has been issuing a series of policies and guidance on e-banking, which serve as
the foundation of the regulatory framework of e-banking. These include:
• Guide to Authorization5 (September 2002) – This Guide contains an updated version of the
HKMA’s guideline on authorization of virtual banks. The main principle is that foreign or
local virtual banks can be established in Hong Kong, China as long as they can satisfy thesame prudential criteria that apply to conventional banks.  Apart from technology risks,
virtual banks are required to attach equal importance to the management of conventional
banking risks such as credit, liquidity and interest rate risks.  Virtual banks are also required
to strike an appropriate balance between the desire to build market share and the need to earn
a reasonable return on assets and equity.
• The statutory Guideline on Regulation of Advertising Material Issued Over the Internet
6 (May
2002) – Under the Banking Ordinance, overseas institutions intending to solicit deposits from
members of the public in Hong Kong, China are not required to be authorized, provided that
the deposits are placed overseas. However, section 92 of the Banking Ordinance requires that
advertising material in respect of deposits to be placed outside Hong Kong, China has to
comply with the disclosure requirements in the Fifth Schedule of the Banking Ordinance7.
Section 92 also covers advertising material issued through new technological means,including the Internet.  Like regulators in other major financial centres, it is also the HKMA’s
policy to regulate only Internet advertising material which is targeted at members of the
public in Hong Kong, China. This guideline specifies the factors that the HKMA will take
into account in determining whether Internet ad vertising material for deposits is targeted at
members of the public in Hong Kong, China.
• The Guidance Note on Management of Security Risks in E-banking Services
8 (July 2000)  – It
sets out the key principles and recommends sound practices on security policies and
management as well as system and network security of e-banking services. The general
principle is that banks are expected to implement security arrangements that are “fit for
purpose”, i.e., commensurate with the risks associ ated with the services. This guidance note is
not intended to prescribe what technologies or controls banks must employ.
B. CUSTOMER PROTECTION , EDUCATION AND AWARENESS
9. As for other banking services, banks are required to observe the Code of Banking Practice in
providing e-banking services to their personal customers. The Code9 is jointly issued by the Hong
Kong, China Association of Banks and the DTC Association (the Hong Kong, China Association of
Restricted Licensed Banks and Deposit-taking Compan ies).  In particular, the Code sets out a general
                                                     
5 http://www.info.gov.hk/hkma/eng/public/gta2002/Chapter%209.pdf .
6 http://www.info.gov.hk/hkma/eng/bank/spma/attach/TM-E-2.pdf .
7 Advertising material complying with the Fifth Schedule shall include, among other information, a
prominent warning to the effect that the deposit-taker is not an authorized institution and is therefore not subject
to the supervision of the HKMA. The objective is to ensure that material facts are available to enable
prospective depositors to make their own judgement on whether to place a deposit with the institutions
concerned.
8 http://www.info.gov.hk/hkma/eng/guide/circu_date/200007061_index.htm .
9 The Code aims to ensure adequate transparency in the provision of e-banking services so as to
enhance the customers’ understanding of what they can reasonably expect of the services, as well as theirprecautionary actions in enabling adequa te information security of the services. The Code expects banks to set
out clearly in their terms and conditions the respective rights and obligations between the institutions and
customers. Such terms and conditions should be fair and balanced to both the banks and the customers.S/FIN/W/25
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principle that, unless a customer acts fraudulently or with gross negligence, such as failing to properly
safeguard his device(s) or secret code(s) for accessing the e-banking service, he should not be
responsible for any direct loss suffered by him as a result of unauthorized transactions conducted
through his account.
C. CONTINUOUS MONITORING AND EXAMINATIONS
10. To help ensure that banks’ e-banking services have properly addressed the issues of risk
management and consumer protection, the HKMA’s guideline expects banks to discuss their plans on
introducing e-banking services with the HKMA in advance, although there is no need for them to seek
formal approval from the HKMA to offer the services. In particular, the HKMA’s guideline expects
banks’ senior management to commission periodic independent assessments of the information
security aspects and contingency plans of their e-banking services. Such independent assessments are
expected to be carried out by trusted independent experts (could be inside or outside the bank) beforelaunch of the services, and thereafter, generally at least once a year.
11. In addition, the HKMA launched in 2002 an on-site examination programme focusing on
banks’ e-banking activities, technology risk management and business continuity planning. The
programme is developed with reference to similar programmes of other bank supervisors in advanced
economies and the guidance on e-banking risk management issued by the Basel Committee onBanking Supervision. To facilitate prioritisation of its supervisory focus, the HKMA has established a
technology risk profile system. It is also im plementing an automated technology control self-
assessment system to collect and analyse banks’ self-assessment of their e-banking and technology
related controls.
D. I
NTERNATIONAL CO -OPERATION
12. The HKMA is a participant of the Electronic Banking Group of the Basel Committee on
Banking Supervision. The Group has studied different supervisory issues of e-banking, such as cross-
border issues and risk management principles for e-banking services. The HKMA is also active in
sharing its experience in supervision of e-banking with other bank supervisors in the Asia Pacific
region.
IV. REGULATORY FRAMEWORK OF THE SECURITIES AND FUTURES MARKETS
13. The following guidelines are relevant:
• Guidance Note on Internet Regulation (June 1999)  – It clarifies the SFC’s regulatory
approach that the application of regulatory rules and principles should not be premised on theuse of a particular medium. It also draws to the attention of registered persons and financial
services providers specific areas which may trigger regulatory concern; and addresses issueswhich are frequently raised with the SFC with  respect to securities dealing, commodity
futures trading and leveraged foreign exchange trading activities conducted over the Internet.
• Guidelines for Registered Persons Using the Internet to Collect Applications for Securities in
an Initial Public Offering (July 2000)  – They aim to provide guidance to those registered
persons who use the Internet to collect applications for securities from their clients or the
public for securities in an initial public offering. The guidance focuses on the areas on
electronic prospectus, application procedures, web content, web design, web operation andsystem integrity.
• Guidelines for the Regulation of Automated Trading Services (ATS) (March 2002)  - They set
out the principles, procedures, and standards in relation to the proposed regulation of ATSS/FIN/W/25
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providers.  The guidelines expound seven standards: financial resources and risk management,
operational integrity, fitness, record keeping, transparency, surveillance and reporting.
These guidelines can be found in the Regulatory Handbook section of the SFC website at
http://www.hksfc.org.hk.
V. REGULATORY CHALLENGES
14. With the increasing number and value of transactions being processed through electronic
channels and growing incidents of Internet related fraud cases around the world, there is a need for
financial regulators to continue to attach sufficient importance to the supervision of e-finance, and to
regularly update its regulatory framework in view  of the latest developments. This will bring
considerable challenges to financial regulators such  as in relation to the resource implications, the
technical expertise, and public education in e-finance security.
15. For Hong Kong, China, both the HKMA and SFC  have issued guidelines on the operational
principles but have not prescribed computer/technical standards for service the suppliers. As for the
enforcement of regulatory control over service suppliers located overseas, both HKMA and the SFC
have introduced international cooperation arrangemen ts, either by means of a framework laid down
by the Basel Committee on Banking Supervision or through Memoranda of Understanding signed
with overseas regulatory bodies.   The SFC’s appro ach to international enforcement is consistent with
international practice and our cooperative arrangements are consistent with the recommendations of
the International Organization of Securities Co mmissions (IOSCO).  The SFC has entered into
34 cooperative arrangements with other regulatory bodies, a list of which can be found under theCross Border Cooperation section of the SFC web-site .  The SFC has also applied to join the IOSCO
Multilateral MOU.
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