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SFC orders HKEX to improve Chinese wall between IPO business and regulatory units

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The Securities and Futures Commission has ordered Hong Kong Exchanges and Clearing, which operates the third-largest stock market in Asia by market capitalisation, to do more to prevent internal conflicts of interests over new listings.

The exchange, which was the largest IPO market worldwide seven times in the past 11 years, both approves new listings and earns money from listing fees paid by companies floating on the stock exchange.

Removing potential conflicts of interest is a crucial step towards strengthening investors' confidence, which will help HKEX compete with other exchanges such as the Nasdaq in the US as well as the Star Market in Shanghai.

"It's the right way forwards as it will upgrade the quality of new listings ... and strengthen Hong Kong's status as an international financial market in the longer term," said Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers.

The SFC, which regulates the exchange concluded that the HKEX had not done enough to build a so-called "Chinese wall", a virtual barrier to block the exchange of information, between its business executives and the listing department to avoid conflict of interests, according to a report released by the SFC on Thursday.

The review covers IPOs in 2018, the same year that the HKEX carried out its largest listing reform ever allowing dual-class shareholding companies and pre-revenue biotech firms to list.

"The listing department's Chinese wall protocol contains numerous ambiguities, does not fully address key aspects of the Chinese wall and may be difficult for department staff to interpret and follow," the SFC report said.

The commission found HKEX chief executive Charles Li Xiaojia and the then listing head David Graham joined some of the meetings in 2018, which the SFC said is inadvisable.

Graham retired at the end of last year while Li said he would leave when his contract expires in October next year.

The commission also told the HKEX to review its internal procedures "to ensure that HKEX business executives do not and are not seen to pressure the listing department to respond more swiftly to particular applicants."

The SFC gives detailed instruction on this point, citing the business promotional staff should avoid "repeatedly referring to the desirability of those applicants or by copying the chief executive to whom the head of listing reports on an email".

HKEX's listing approval process came under the spotlight in March after the Independent Commission Against Corruption charged former senior executive Eugene Yeoh Kim-loong for accepting HK$9.15 million in bribes between 2017 and 2019 to approve IPOs. Yeoh was former joint-head of the initial public offerings vetting team of the listing department during the period. The hearing is scheduled for later this year.

"We look forward to continuing to work closely with the SFC to refine and further raise the competitiveness of our listing regime," a spokesman of the HKEX said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.