Stock exchanges are the cornerstone of financial markets as they provide good platforms for channelling savings to investments. They play a key role in fostering economic development through offering enterprises an efficient means to raise sizable funds, while at the same time providing investors a range of investment options to enhance returns on their funds.

The efficient and effective operation of our stock market has an important bearing on the development of our position as an international financial centre. The proper running of a stock exchange is also conducive to maintaining financial stability.

Since public interest is involved, the Hong Kong Government attaches great importance to the Stock Exchange of Hong Kong and has been working closely with the exchange in the accomplishment of its past transformation and in enhancing overall market quality.

The year 1986 marked a milestone development in Hong Kong's stock market history when the then four exchanges were unified to become the Stock Exchange of Hong Kong Limited to improve market regulation and efficiency.

This was followed by a major revamp and strengthening of our regulatory regime in 1989 with the establishment of the Securities & Futures Commission in the wake of the 1987 market crash.

In 2000, another major step was taken to modernise the market structure by demutualising the exchanges and clearing houses, and consolidating them into a single market operator, the Hong Kong Exchanges & Clearing Limited.

As a result of these reforms in the last two decades, the exchange has grown in both size and quality to become a leading regional market for equity fund-raising.

By operating a highly efficient and transparent market and adopting listing requirements that are in line with international standards, the exchange has laid a firm foundation for Hong Kong's development as an international financial centre.

In Hong Kong, we have put in place a three-tiered structure for the regulation of the securities and futures industry. The first tier is the Government, which sets the direction and policy for development; the second tier is the SFC as the statutory regulator; and the third tier is the HKEx, which is the market operator and at the same time the frontline regulator.

The first and foremost role of the Government is to provide a favourable environment under which the financial markets can develop and prosper. From the macro perspective, the Government has developed an environment conducive to doing business and promoting public confidence in the financial markets.

Our rule of law, free market economy, independent judiciary, free flow of information and capital, and low and simple tax regime are the fundamental strengths of Hong Kong.

On financial services, our policy is to maintain and further upgrade the quality of our financial markets so as to protect investor interest and thus strengthen investor confidence. To this end, we have made tremendous efforts to establish a robust regulatory regime and foster strong corporate governance.

As one of the key milestones in enhancing our regulatory regime, our new Securities & Futures Ordinance came into effect in April, 2003. It strengthens our requirements for corporate disclosure and the investigative powers of SFC, putting us on a par with the best prevailing international standards.

We have also amended the Companies Ordinance to provide for statutory derivative actions by shareholders.

To promote listed corporations' compliance with ongoing obligations, we are now preparing legislative amendments to give statutory backing to major listing requirements.

This would clearly set out the legal responsibility for listed companies and concerned stakeholders to comply with major listing requirements and provide for the necessary statutory sanctions.

Of course, legislation alone could not ensure good market quality. We need to work on another crucial factor, which is good corporate governance.

The Government has taken the lead to work with the SFC and the HKEx to develop a "Corporate Governance Action Plan" to ensure that our corporate governance requirements are in line with the best international standards and practices.

Another area on which we have placed a lot of emphasis is the regulation of financial intermediaries and other related professions as they perform an important gate-keeping function in the financial services industry.

We have enacted new legislation to establish a Financial Reporting Council as a statutory independent body to carry out investigations into suspected irregularities concerning auditors of listed corporations, and to inquire into suspected non-compliance with financial reporting standards.

This would help to enhance the regulation of auditors and the quality of financial reporting of listed companies. The HKEx has provided important support to the implementation of this initiative.

In line with the Government's overall policy direction, the SFC has strengthened the regulation of sponsors and compliance advisers. Under the new regulatory regime for sponsors, which came to effect in January this year, only those corporate finance advisory firms that meet the stringent eligibility criteria, including those concerning experience, resources and internal control, may act as sponsors.

We are glad to see that our efforts in improving corporate governance and upgrading market quality are receiving recognition in the international community. As reported by the media, a research report published by the University of Chicago acknowledged Hong Kong as one of the places with strong corporate governance.

The International Monetary Fund also mentioned in its Article IV Staff Report for Hong Kong published in January this year that Hong Kong's corporate governance had been strengthened.

Our equity market has undergone significant transformation and achieved considerable growth over the past 20 years.

The total market capitalisation today, which amounts to about US$1.7 trillion, is nearly 50 times that in the mid-'80s. The daily turnover has also increased by 176 times. Twenty years ago, we were nobody in the international financial community. Today, our stock exchange has become one of the major equity fund raising centres in the world.

Last year, we were second only to London in terms of IPO equity funds raised. In terms of market capitalisation, our stock market is the seventh largest in the world and the second largest in Asia.

The achievements of Hong Kong's equity market have been impressive. All these did not come by luck, but as a result of concerted efforts made by the Government, the regulators, the relevant professions as well as market participants to gain confidence from not only local investors but also investors from around the world.

Certainly, there is no room for complacency and we must keep up with our efforts in enhancing our market quality and strengthening investor confidence in our market.

Promoting co-operation among exchanges is mutually beneficial to all those involved and we notice that different modes of co-operation are emerging. For instance, some stock exchanges in the West are actively engaged in deliberation about cross-ownership. Whether this form of cooperation would bring synergy remains to be seen. In my opinion, there is no one-size-fits-all model.

Secretary for Financial Services & the Treasury Frederick Ma gave this address at the 26th Asian & Oceanian Stock Exchanges Federation General Assembly.