1. Paul M Y Chow, Chief Executive Hong Kong Exchanges and Clearing Limited CEO Forum 2007 City University of Hong Kong 18 March 2007 GLOBAL EXCHANGE MERGERS AND ACQUISITIONS (M&A)

2. 2 AGENDA 1.Development of exchange entities 2.In-country exchange consolidation & HKEx case 3.Cross-border exchange consolidation 4.Outlook for HKEx

3.  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 3

4. 4 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

5. 5 HKEx followed a long history of exchange mergers in Hong Kong 1891Association of Stockbrokers 1921Hong Kong Stockbrokers’ Association 1947Merger to form Hong Kong Stock Exchange 1969Far East Exchange 1970sKam Ngan Stock Exchange and Kowloon Stock Exchange 1977 Hong Kong Commodities Exchange, later became Hong Kong Futures Exchange (HKFE) 1986Merger to form Stock Exchange of Hong Kong (SEHK) 1999Decision to merge SEHK, HKFE and Hong Kong Securities Clearing 2000Merger 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

6. 6  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

7. 7 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

8. 3. Cross-border exchange consolidation 8 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

9. There is limited synergy from cross border M&A of exchanges 9 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

10. Other issues related to cross border M&A of exchanges 10 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

11.  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 11

12. 12  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

13. Thank You