Stock Code: 388

ANNUAL REPORT 2017

ANNUAL REPORT

2017

Hong Kong Exchanges and Clearing Limited

12/F, One International Finance Centre
1 Harbour View Street, Central, Hong Kong

info@hkex.com.hk
t: +852 2522 1122 f: +852 2295 3106
hkexgroup.com hkex.com.hk
HKEX – As Hong Kong strides ahead after its first
20 years of reunification with Mainland
the pioneer China, we are more determined than ever

in connecting to contribute to its further development

as a leading international financial centre.
China with We are also extremely confident as we
other markets look to the future and the opportunities
we see on the horizon.

We are at the centre of a new era of

growth. By connecting markets and
connecting people, we made a major
breakthrough with mutual market access.

Connecting China with the World.

Reshaping the Global Market Landscape.
CONTENTS
(Financial figures in this Annual Report are expressed in HKD unless otherwise stated)

OVERVIEW
Overview
2 | Highlights of the Year
4 | Financial Highlights
5 | Chairman’s Statement

ORGANISATION
9 | Chief Executive’s Review

Organisation
14 | Board and Committees
16 | Board of Directors and Senior Management
29 | Management Committee

MD & A
Management Discussion and Analysis
30 | Business Review
54 | Financial Review
59 | 10-Year Financial Statistics

Governance

GOVERNANCE
60 | Corporate Governance Report
74 | Nomination Committee Report
77 | Audit Committee Report
80 | Risk Committee Report
83 | Remuneration Committee Report
90 | Environmental, Social and Governance Committee Report

FINANCIALS
92 | Directors’ Report

Financials
98 | Auditor’s Report
104 | Consolidated Income Statement
105 | Consolidated Statement of Comprehensive Income
OTHERS

106 | Consolidated Statement of Financial Position

107 | Consolidated Statement of Changes in Equity
108 | Consolidated Statement of Cash Flows
109 | Notes to the Consolidated Financial Statements

Others
GLOSSARY

189 | Shareholder Information

191 | Glossary

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 1

 HIGHLIGHTS OF THE YEAR

3 July
Launched
Bond Connect

15 March 7 June
Premier Li Keqiang Established Bond Connect
announced a bond Company Limited, a joint
market trading link venture with CFETS
would be set up
between Mainland
China and Hong Kong

Corporate News

8 -12 May 27 October

Hosted fifth LME Asia Week in Hong Kong Held event marking end of floor trading

8 June 6 November
Hosted fourth RMB FIC Conference Launched new HKEX Market website

7 September 29 November
LME announced Strategic Pathway Opened office in Singapore

2 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 HIGHLIGHTS OF THE YEAR

OVERVIEW
Regulation

ORGANISATION
16 June 15 September
Published New Board Concept Paper and Issued joint conclusions from listing
GEM consultation paper regulation consultation with SFC

20 January 22 September

MD & A
Issued joint statement on GEM IPOs with SFC Issued proposed rule changes relating to
capital raisings by listed issuers and
delisting framework

17 February 15 December
Announced revised approach for Issued consultation conclusions from
enforcement of Listing Rules and published New Board Concept Paper and
revised enforcement policy statement GEM consultation paper

GOVERNANCE
Products and Services
20 March
Introduced RMB Currency Options

FINANCIALS
21 March
OTC Clear launched client clearing

10 July 13 November
Introduced CNH and USD Gold Futures Introduced Iron Ore Futures
LME introduced LMEprecious products OTHERS

Market Operations
16 January 6 November
Implemented Volatility Control Extended derivatives market’s
Mechanism in derivatives market after-hours trading to 1 am

1 June 30 November
GLOSSARY

Implemented new position limits for Published information paper on

Stock Options investor identification model for
Northbound Trading through
24 July Stock Connect programmes
Launched second phase of Closing
Auction Session in securities market

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 3

 FINANCIAL HIGHLIGHTS

2017 2016
$m $m Change
Revenue and other income 13,180 11,116 19%
Operating expenses 3,566 3,455 3%
EBITDA 1
9,614 7,661 25%
Profit attributable to shareholders 7,404 5,769 28%
Basic earnings per share $6.03 $4.76 27%
Interim dividend per share $2.55 $2.21 15%
Final dividend per share $2.85 $2.04 40%
$5.40 $4.25 27%
Dividend payout ratio 90% 90% –

Key messages

Profit attributable to shareholders for 2017 was 28 per cent higher than prior year reflecting the
combined effect of revenue growth and continuing cost discipline. Key highlights for the year
include:

• Revenue and other income for 2017 was 19 per cent higher than 2016. This growth included:

– Higher trading and clearing fees driven by a 32 per cent increase in Cash Market turnover, partly
offset by lower HKFE volumes and LME revenue;

– An increase in Stock Exchange listing fees from growth in the number of newly listed securities;
and

– A significant increase in net investment income from both Corporate and Margin Funds.

• Operating expenses grew by 3 per cent against the prior year. While continuing to invest in key
strategic initiatives, the Group has maintained a disciplined approach to cost management.

• The EBITDA margin of 73 per cent was 4 per cent higher than 2016, driven by the significant
growth in revenue and other income as compared to the prior year.

2017 2016 Change

KEY MARKET STATISTICS
ADT of equity products traded on the Stock Exchange ($bn) 71.2 50.2 42%
ADT of DWs, CBBCs and warrants traded on the Stock Exchange ($bn) 17.0 16.7 2%
ADT traded on the Stock Exchange ($bn) 88.2 66.9 32%
ADV of derivatives contracts traded on the Futures Exchange 441,320 463,841 (5%)
ADV of stock options contracts traded on the Stock Exchange 428,499 297,903 44%
ADV of metals contracts traded on the LME (lots) 624,480 618,627 1%

1 For the purposes of this Annual Report, EBITDA is defined as earnings before interest expenses and other finance costs, taxation, depreciation and
amortisation. It excludes the Group’s share of results of the joint ventures.

4 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

CHAIRMAN’S STATEMENT

OVERVIEW
ORGANISATION
MD & A
A strong economic upswing across the world had set a favourable backdrop that helped boost investment
sentiment in capital markets. In Hong Kong, we witnessed a bullish securities market especially in the
fourth quarter of 2017 when the average daily turnover reached $107.3 billion. Building on the mutual

GOVERNANCE
market access strategy, HKEX has continued to benefit from increased capital inflows through Stock
Connect, and is making great strides towards its objective of becoming the global exchange of choice
across asset classes. We are pleased to see that a number of new records have been set on HKEX’s
trading platforms.

Our Performance
The securities market in Hong Kong recorded a strong performance in 2017 amid robust market
momentum. Trading in our derivatives market was also strong, in particular both RMB Currency Futures

FINANCIALS
and Stock Options recorded remarkable growth in trading volume. In London, metals trading volumes on
the LME stabilised in 2017 as activity remained constrained by commodities market conditions and
other factors.

Market highlights in 2017

• The number of new listings hit an all-time high of 174 companies.

• Securities market turnover was over $100 billion for 30 consecutive trading days from 6 November to
OTHERS

15 December, the longest such period since March 2015.

• The market capitalisation of the securities market reached a new record-high of $34 trillion on the last trading
day of 2017.
• Northbound and Southbound Trading through Stock Connect grew significantly from 2016, increasing by
194 per cent and 170 per cent respectively.
• Turnover of securitised derivatives (DWs and CBBCs) was the world’s highest for the 11th consecutive year.
• Turnover of RMB Currency Futures – USD/CNH Futures reached a new record-high of 732,569 contracts.
• Turnover of Stock Options also set a new record high, rising to 105,839,179 contracts.
GLOSSARY

Given the strong turnover in the Hong Kong securities market and significant growth in our investment
income, the Group’s total revenue and other income rose, reaching $13.2 billion for the year ended
31 December 2017, up 19 per cent from 2016, while the profit attributable to shareholders was
$7,404 million, up 28 per cent.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 5

 CHAIRMAN’S STATEMENT

Dividend
The Board recommends a final dividend of $2.85 per share, which together with the interim dividend of
$2.55 paid in September 2017, results in a full-year dividend of $5.40 per share.

Strategic Update
In 2017, we made notable achievements in driving forward our strategic plan to build HKEX into a leading
global multi-asset class exchange connecting China and the world. The launch of Bond Connect in July
marked another important milestone under our mutual market access programme by providing
international investors with direct, convenient access to the China Interbank Bond Market via Hong Kong.
After implementing Realtime Delivery versus Payment money settlement for the Northbound related
transactions in November, we continue to work with regulators and our Mainland counterparts to further
enhance the Connect programme, including enabling holiday trading and broadening the programme to
cover other asset classes such as ETFs.

On the product front, we focused on deepening our capabilities in the fixed income, currency and
commodities markets to provide more comprehensive tools for trading, asset allocation and risk
management. We rolled out the world’s first USD/CNH dual currency Gold Futures contract with physical
settlement in Hong Kong in July, alongside LME Gold and Silver Futures as part of LMEprecious in
London. We also launched HKEX’s first ferrous metal product, Iron Ore Futures, in November,
complementing its precious and base metals products. Following the introduction of our first RMB
Currency Options in March, we announced plans to offer additional long-dated contract months for
products in HKEX’s derivatives market in 2018. All these product initiatives, along with our Connect
programme, have laid a solid foundation for Hong Kong to become China’s global wealth management
centre and the offshore hub for RMB internationalisation.

Both our Stock Exchange and the LME made important progress in 2017 through active market
engagement and gaining industry support for plans to enhance their competitiveness and accelerate
growth, in response to the evolving market environment. In Hong Kong, drawing on the market feedback
to the New Board Concept Paper published in June, the Exchange issued the conclusions in December
setting out its proposed way forward to expand Hong Kong’s listing regime to facilitate listings of
companies from emerging and innovative sectors, subject to appropriate safeguards. The consultation
paper on related proposed Listing Rule amendments was subsequently published in February 2018.
In London, following a comprehensive period of engagement with the market, the LME announced its
Strategic Pathway in September, aiming to protect the physical market, ensure fairness, increase user
choice and maximise trading efficiency. As part of its delivery programme announced in October, the
LME has reduced the short and medium-dated carry fees. The LME further issued a market consultation
in November 2017 on the introduction of an OTC booking fee for financial participants and
enhanced trading regulations in support of market fairness. The consultation decision notice will be
published in due course.

Details of the Group’s performance and initiatives undertaken in 2017 are set out in the Chief Executive’s
Review and Business Review sections of this Annual Report.

Quality Market
Throughout 2017, we continued working closely with regulators and stakeholders to uphold the
efficiency and quality of our Hong Kong market. Following the implementation of the Volatility Control
Mechanism in the derivatives market in January, we introduced a revised stock option position limit
model in June, Phase 2 of the Closing Auction Session in the securities market in July and Phase 1 of the
after-hours derivatives trading (T+1 session) enhancements in November. The launch of client clearing by
OTC Clear in March enables financial institutions in the region that are not OTC Clear Members to enjoy
the capital efficiencies of central clearing. Further, the Orion Trading Platform – Securities Market was
launched in February 2018 to support new business and meet increased capacity requirements over the
next decade.

6 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 CHAIRMAN’S STATEMENT

The joint consultation conclusions published together with the SFC in September paved the way for

OVERVIEW
further strengthening of the Exchange’s decision-making and governance structure for listing regulation
in Hong Kong. During the year, the Exchange also launched a number of market consultations on listing
matters, including GEM reform, capital raisings, delisting and the Corporate Governance Code.
The conclusions on the GEM reform were published in December, whilst the conclusions on other areas
will be published after completion of a thorough analysis of market feedback.

Environmental, Social and Governance Performance

HKEX is committed to high standards of corporate governance as well as social and environmental

ORGANISATION
stewardship, as they help achieve sustainable success for the Group and our stakeholders. In 2017,
we engaged an independent external consultant to evaluate the performance of the boards of HKEX
and of its two subsidiaries in the UK. We are pleased that the evaluation recognised many strengths of
the HKEX Board and concluded that it operates effectively and performs well in its governance of
HKEX. The evaluation also concluded that the performance of the LME Board and the LME Clear Board
was in compliance with the applicable laws and governance codes and is largely well aligned with
international best practices. Underscoring our commitments as a responsible corporate citizen, we are
working to establish a charitable foundation to serve as the single channel and point of focus for all of the

MD & A
Group’s corporate giving. This will enable us to better fulfil our corporate social responsibilities and to
have a more positive and influential impact on our communities.

Details of our efforts in promoting sustainability in our marketplace, workplace, community and
environment are set out in our 2017 CSR Report which will be available on the HKEX Group website
together with this Annual Report.

Outlook

GOVERNANCE
While the market generally expects that the global
economic growth will extend into 2018, stock markets
across the world saw increased volatility in the first two
months of the year. Geopolitical risks, the fiscal and
monetary policies of the US and Europe, a possible rise in
trade protection sentiment and potential changes in
global capital flows caused by the US tax reform

FINANCIALS
continue to pose challenges to the global financial
markets. The world is also moving into a new era of new
economy businesses and technology innovations, and the
financial markets are facing a landscape filled with both
opportunities and challenges. In positioning the Group
to continue its success in this new environment, we will
focus on completing the listing regime reform, further
enhancing cross-border market connectivity, making our
OTHERS

derivatives market more competitive and strengthening

our risk management and market structure to capture
new growth opportunities.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 7

 CHAIRMAN’S STATEMENT

Acknowledgements
My term as the Chairman of HKEX will come to an end after conclusion of the 2018 AGM. It has been a
privilege to serve on the Board and have the opportunity to work alongside my fellow Board members
and the Group’s management over the past six years. I have been most pleased to see the achievement
of a number of important milestones and strategic initiatives, including the acquisition of the LME,
the implementation of the Connect programme, the launch of the listing regime reform and the renewal
of our technology platforms. HKEX has been transformed from a local exchange into an international
exchange of multi-asset classes. They provide a solid foundation and unprecedented opportunities for
long-term sustainable growth. We have a strong board in place to lead the Group forward, through good
times and bad.

On behalf of the Board, I would like to express our gratitude to Tim Freshwater, who will also retire after
the conclusion of the 2018 AGM, for his valuable contribution and advice during his second six-year term
on the Board.

Finally, I would like to thank our Shareholders and other stakeholders for their steadfast support to me
and to the Group. I am very proud of our employees, and am grateful for their invaluable contribution to
the Group’s sustainable success; they are the heroes of HKEX.

CHOW Chung Kong

Chairman

Hong Kong, 28 February 2018

8 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

CHIEF EXECUTIVE’S REVIEW

OVERVIEW
ORGANISATION
MD & A
2017 was a breakthrough year for the Company. Various new records in the securities and derivatives
markets were set, and many of our key initiatives set out in the Strategic Plan 2016-2018 were achieved.
We decided to implement the biggest listing regime reform in 25 years after extensive market

GOVERNANCE
engagement. Mutual market access continued to be a key theme of our business, and the successful
launch of Bond Connect has taken the competitiveness of our market to a whole new level beyond
equities. In addition, various new products across different asset classes were launched to broaden our
market and meet investor demand across the globe. Our efforts in pushing forward reforms and
constantly enhancing our market structures in Hong Kong and London have laid a strong foundation for
us to further entrench our value propositions as we enter the final year of our Strategic Plan 2016-2018.

Active and Vibrant Market Performance

FINANCIALS
Our primary market performed competitively in 2017. HKEX ranked third globally in IPOs with a record
high 174 1 companies listing and raising $128.5 billion in total. Our existing listed companies also raised
$452.9 billion, an increase of 54 per cent over 2016. Total funds raised reached $581.4 billion.

In the secondary market, market momentum reached its peak during the fourth quarter. The full-year
2017 ADT for the Cash Market reached $88.2 billion, a 32 per cent increase compared to 2016.
Thirty consecutive days for ADT above $100 billion were recorded between November and December 2017.
The market capitalisation of the securities market reached $33,999 billion on the last trading day of the
OTHERS

year, exceeding the previous record of $31,550 billion set on 26 May 2015.

Trading in the derivatives market was strong, largely driven by stock options and index options, with a
number of new records set in 2017. Total futures and options turnover reached 214,845,348 contracts,
an increase of 14 per cent from 2016. Total options turnover reached record highs of 137,785,021 contracts,
an increase of 32 per cent from 2016. Open interest at year-end was 11,155,770 contracts, up from
9,296,110 at the previous year-end.
GLOSSARY

1 Includes transfers of listing from GEM to the Main Board

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 9

 CHIEF EXECUTIVE’S REVIEW

Average Daily Turnover on Average Daily Number of Contracts Traded on

Cash Market Derivatives Market

659
107.3
601
93.2
473 495
77.8 421
74.3
66.9
340 352
287 305 304

Full Year Q1 Q2 Q3 Q4 Full Year Q1 Q2 Q3 Q4

2016 2017 2016 2017

$bn Options Contracts (’000) Futures Contracts (’000)

Business Development Review

Enhancing the Competitiveness of Our Core Businesses
In the primary market, a number of consultations were launched in 2017. The joint consultation with the
SFC on proposed enhancements to the Exchange’s decision-making and governance structure for listing
regulation and the New Board Concept Paper were concluded in September and December respectively.
In relation to the joint consultation, after carefully considering market feedback, the SFC and the
Exchange concluded and clarified the respective roles of the SFC and the Exchange under the enhanced
structure. The Exchange will remain the primary frontline regulator for listed issuers and the role of the
Listing Committee under the Listing Rules will remain largely unchanged. In relation to the New Board
Concept Paper, a major breakthrough was made when the market reached a clear consensus on
broadening HKEX’s listing regime to facilitate listings of companies from emerging and innovative
sectors. Drawing on the feedback received and subsequent regulatory discussions with the SFC, we have
proposed a way forward to expand the existing listing regime by introducing two new chapters to the
Main Board Listing Rules to allow the listing of (i) Biotech companies which do not meet any of the
financial eligibility requirements of the Main Board; and (ii) issuers from emerging and innovative sectors
that have weighted voting rights structures, subject to additional disclosure and safeguards. With these
reforms, we will put Hong Kong in a position to capture the next generation of opportunities and ensure
our market’s long-term prosperity while safeguarding our market’s integrity. Formal consultation on the
proposed Listing Rule amendments was launched in February 2018.

In the secondary market, we continued to implement major market microstructure upgrades for the
securities and derivatives markets in 2017 to enhance our overall competitiveness. These include the
introduction of Volatility Control Mechanism in the derivatives market and Phase 2 of the Closing Auction
Session to further facilitate trade execution at closing prices. In response to market feedback,
we introduced an enhanced stock option position limits regime in June 2017, effectively tripling the
maximum position limit for stock options and expanding the scope of activities for hedging exemptions.
Consultation on the proposed after-hours trading enhancements was concluded in August 2017,
following which the after-hours trading of index futures was extended from 11:45 pm to 1:00 am in
November 2017.

10 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 CHIEF EXECUTIVE’S REVIEW

Reaching New Milestones for Mutual Market

OVERVIEW
Access
Stock Connect
Shanghai-Hong Kong Stock Connect and Shenzhen-
Hong Kong Stock Connect continued to gain wider
market acceptance in 2017. Trading volumes in both
directions on Stock Connect rose significantly with total
Northbound turnover reached RMB2,266 billion,
an increase of 194 per cent and Southbound turnover

ORGANISATION
reached $2,259 billion, an increase of 170 per cent
from 2016. In particular, Southbound ADT almost
trebled to $9.8 billion, accounting for more than 5 per cent
of headline ADT. As of the end of 2017, net money
inflow into the Mainland and into Hong Kong reached
RMB348 billion and $726 billion respectively
since launch.

MD & A
The decision by MSCI in June 2017 to include China
A Shares in its Emerging Markets Index and All Country
World Index in 2018 was an acknowledgement of the
important role of Stock Connect in the opening up of
the Mainland stock markets. International investors
have also shown a growing enthusiasm for China A
Shares and the use of Stock Connect. We will continue
to work with regulators and Mainland counterparts on

GOVERNANCE
enrichment of the variety of traded products, including
ETF Connect and further enhancements to the operating
model such as holiday trading arrangements and an
investor identification regime for Northbound Trading.

Bond Connect
The successful launch of Bond Connect Northbound trading on 3 July 2017 marked another important

FINANCIALS
milestone for our mutual market access programme. Bond Connect is a significant breakthrough in the
opening of the Mainland bond market, allowing a broader group of international investors to access the
China Interbank Bond Market (CIBM) via Hong Kong. BCCL, a joint venture between CFETS and HKEX,
was set up to support Bond Connect-related trading services, investor education and other services.
Since launch, the overall foreign investor holdings in the CIBM domestic debt securities have reached
RMB1,147 billion, an increase of 36 per cent from 30 June 2017.

Expanding Our FIC Product Offerings

OTHERS

In 2017, we continued our efforts to provide a full range of RMB-related derivatives to help entrench
Hong Kong as a gateway for cross-border fund flows and a risk management centre in connection with
the internationalisation of the RMB. Our USD/CNH Currency Futures contract continued to see notable
growth in liquidity with total turnover of 732,569 contracts, representing a 36 per cent growth compared
to 2016. New RMB Currency Options were launched on 20 March 2017 to complement our existing
currency futures, enabling investors to execute more trading strategies. 5-Year China Ministry of Finance
Treasury Bond Futures were launched during April – December 2017 as a pilot scheme for foreign
investors to hedge against interest rate volatility of RMB assets. Subject to regulatory development,
GLOSSARY

HKEX will consider launching new RMB interest rate products that are complementary to Bond Connect
at an appropriate time.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 11

 CHIEF EXECUTIVE’S REVIEW

OTC Clear was awarded the “Best OTC Clearing and Risk Management System Implementation” by the
Asian Banker and “Clearing House of the Year” by Asia Risk in 2017 as the first international clearing
house to provide a clearing service for USD/CNH cross currency swaps. A total of US$38.7 billion notional
was cleared by OTC Clear in 2017, up eight-fold from 2016. Going forward, we will further expand
OTC Clear’s offering to cover clearing for wider types of RMB-based exchange rate products.

Laying the Groundwork for Our Commodities Business

Impacted by global macroeconomic conditions, the trading volumes of LME metal contracts remained
largely at the same level as 2016. ADV of contracts traded on the LME was 624,480 lots, 1 per cent
higher than 2016. Declines in volumes of key products including LME Aluminium and Copper were offset
by increase in LME Zinc, Nickel, Lead and Ferrous volumes, as well as the launch of LMEprecious
contracts. Year-end LME futures market open interest was 2.3 million lots, up 2 per cent year-on-year.

In September 2017, the LME published the “LME Strategic Pathway” to set out a vision for supporting the
physical market and stimulating volumes, following an extensive and comprehensive period of market
engagement. Immediate actions included the implementation of fee reductions on short and
medium-dated carries as well as the proposed introduction of a financial OTC booking fee.

Expansion in our product offerings continued to be one of the key areas of our commodity strategy in
2017. In July 2017, we launched the LMEprecious and HKEX’s first pair of deliverable CNH and USD Gold
Futures. In addition, Iron Ore Futures were introduced in November 2017 as our first ferrous metal
product in Hong Kong. These new contracts complemented our existing product offerings and provided
investors with new tools for trading, hedging and asset allocation.

As part of our commodity strategy, we continued our preparations for Qianhai Mercantile Exchange in
Shenzhen. The commodity trading platform will focus on providing physical trading and related enhanced
services, with a long term goal of serving China’s real economy and developing representative bulk
commodities price benchmarks for Mainland China.

Strengthening Platform and Infrastructure Capabilities

We continued to undertake various projects in Hong Kong and London with a view to upgrading and
transforming our key systems for the securities and derivatives markets. Major preparation work included
the launch of the new trading platform for the securities market, upgrades of the trading and clearing
platforms for the derivatives market, as well as the upgrades of the LMEselect electronic trading engine
and the LMEsmart matching platform. The planning process for the Next Generation Clearing Platform in
areas of data warehouse, risk engine and client portal was completed during the year for delivery over the
next two years.

Strategic Outlook – Final Chapter of Strategic Plan 2016-2018

2017 marked the end of the Hong Kong markets floor-trading, open since 1986, as we announced the
redevelopment of the Trading Hall and Exchange Exhibition Hall on 27 October 2017. The new
HKEX Connect Hall was recently reopened on 20 February, symbolising the beginning of a brand
new era for Hong Kong’s financial markets.

12 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 CHIEF EXECUTIVE’S REVIEW

Looking forward, 2018 is the critical conclusion year of our Strategic Plan 2016-2018. Building on the

OVERVIEW
solid groundwork and the significant progress already made, we strive to make our IPO market more
relevant, our equity market more connected, and our derivatives market more competitive. Key areas of
focus include implementing listing reform, extension of Stock Connect by including ETFs and other
assets, building of new product ecosystems and the launch of derivative products with Mainland
underlyings, as well as the launch of new trading systems in the securities and derivatives markets.
We are confident that these initiatives will further boost the competitiveness of our market at a time of
vast opportunity in the new global economy.

ORGANISATION
Appreciation
The achievements in 2017 are the result of foresight and hard work over many years. I would like to
express my greatest appreciation to the HKEX Group staff who have not only maintained smooth
operation of our markets in 2017 but also made great progress and breakthroughs under our Strategic
Plan 2016-2018. I would also like to take this opportunity to thank the senior executives who left us in
2017, in particular Bill Chow (Former Chief Technology Officer & Co-head of Information Technology
Division), who retired in April after 24 years of service, and Paul Kennedy (Former Group Chief Financial
Officer), who remains as a Senior Advisor, for their contributions to the HKEX Group.

MD & A
I must also thank our regulators in Hong Kong and other markets, especially the SFC, the Hong Kong
Monetary Authority, market participants and other stakeholders for their continuous support on our
various initiatives.

Last but not least, I would like to thank my fellow members of the Board for their tremendous trust and
guidance. On behalf of the Company, I also would like to express our sincere gratitude to our Chairman,
the Honourable Chow Chung Kong, who will step down in April 2018. During his six years of service on

GOVERNANCE
the Board, he has upheld shareholder value and played a pivotal role in steering HKEX to achieving our
many strategic milestones, including the acquisition of the LME, mutual market access schemes, as well
as the listing regime reform. I look forward to receiving his continued counsel and support for the further
development of HKEX.

I am confident that with our efforts and persistence, we will continue to make the most of the compelling
opportunities ahead and cement Hong Kong’s unique role in connecting China and the world.

FINANCIALS
LI Xiaojia, Charles
Director and Chief Executive

Hong Kong, 28 February 2018 OTHERS

GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 13

 BOARD AND COMMITTEES

From left:
Hugo Leung, Apurv Bagri, Margaret Leung, Rafael Gil-Tienda, Stephen Yiu, Timothy Freshwater and Charles Li

Board Committees
INEDs Audit Committee
CHOW Chung Kong * GBS, JP (Chairman) YIU Kin Wah, Stephen 5 (Chairman)
Apurv BAGRI John Barrie HARRISON 3 (ex-Chairman)
CHAN Tze Ching, Ignatius BBS, JP CHAN Tze Ching, Ignatius
CHEAH Cheng Hye 1 FUNG Yuen Mei, Anita 6
Timothy George FRESHWATER * KWOK Chi Piu, Bill 3
FUNG Yuen Mei, Anita * 2 BBS, JP LEUNG Pak Hon, Hugo 5
Rafael GIL-TIENDA * 2 John Mackay McCulloch WILLIAMSON
John Barrie HARRISON * 3
HU Zuliu, Fred
Environmental, Social and Governance
Committee
KWOK Chi Piu, Bill 3 JP
CHOW Chung Kong (Chairman)
LEE Kwan Ho, Vincent Marshall 3 BBS
Apurv BAGRI 7
LEUNG KO May Yee, Margaret * 2 SBS, JP
Rafael GIL-TIENDA 5
LEUNG Pak Hon, Hugo 1
LEE Kwan Ho, Vincent Marshall 3
John Mackay McCulloch WILLIAMSON
LEUNG Pak Hon, Hugo 5
YIU Kin Wah, Stephen * 4
LI Xiaojia, Charles
Executive Director John Mackay McCulloch WILLIAMSON
LI Xiaojia, Charles (Chief Executive)
Executive Committee
Group Company Secretary CHOW Chung Kong (Chairman)
MAU Kam Shing, Joseph CHEAH Cheng Hye 5
KWOK Chi Piu, Bill 3
LEE Kwan Ho, Vincent Marshall 3
LEUNG KO May Yee, Margaret 6
LEUNG Pak Hon, Hugo 5
LI Xiaojia, Charles

* Government Appointed Director 3 Retired on 26 April 2017

** Appointed by the Financial Secretary 4 Appointed as Director from 26 April 2017 until
Δ Established under Section 65 of the SFO the conclusion of the AGM to be held in 2019
1 Elected as Director from 26 April 2017 until the 5 Appointment effective 27 April 2017
conclusion of the AGM to be held in 2020 6 Re-appointment effective 27 April 2017
2 Re-appointed as Director from 26 April 2017 until 7 Appointment ceased effective 27 April 2017
the conclusion of the AGM to be held in 2019 8 Member by virtue of being HKEX’s Chairman

14 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BOARD AND COMMITTEES

OVERVIEW
ORGANISATION
From left:
Chow Chung Kong, Chan Tze Ching, Anita Fung, Cheah Cheng Hye, John Williamson and Fred Hu

MD & A
Investment Advisory Committee Remuneration Committee
Timothy George FRESHWATER (Chairman) CHOW Chung Kong (Chairman)
CHEAH Cheng Hye 5 CHEAH Cheng Hye 5
FUNG Yuen Mei, Anita 6 Timothy George FRESHWATER
HU Zuliu, Fred HU Zuliu, Fred 5

GOVERNANCE
LEE Kwan Ho, Vincent Marshall 3 KWOK Chi Piu, Bill 3
LEE Kwan Ho, Vincent Marshall 3
Nomination Committee John Mackay McCulloch WILLIAMSON
CHOW Chung Kong (Chairman)
Apurv BAGRI 5 Risk Committee
CHAN Tze Ching, Ignatius CHOW Chung Kong (Chairman)
CHEAH Cheng Hye 5 CHAN Tze Ching, Ignatius
Timothy George FRESHWATER Rafael GIL-TIENDA 6
HU Zuliu, Fred 7 John Barrie HARRISON 3

FINANCIALS
John Mackay McCulloch WILLIAMSON 7 LEUNG KO May Yee, Margaret 6
YIU Kin Wah, Stephen 5
Panel Member Nomination Committee
CHAN Tze Ching, Ignatius (Chairman) Risk Management Committee (statutory) Δ
CHEAH Cheng Hye 5 CHOW Chung Kong 8 (Chairman)
FUNG Yuen Mei, Anita 6 CHAN Tze Ching, Ignatius
Rafael GIL-TIENDA 6 CHENG Fat, Henry ** 9
KWOK Chi Piu, Bill 3 CHENG Siu Hong, Raymond ** 10
OTHERS

LEE Kwan Ho, Vincent Marshall 3 GAO Yingxin ** 11

LEUNG Pak Hon, Hugo 5 LAM Yuk Kun, Lawrence ** 12
LEUNG KO May Yee, Margaret 6
Project Oversight Committee LUI Kei Kwong, Keith ** 13
FUNG Yuen Mei, Anita 6 (Chairman)
Barbara SHIU ** 12
Apurv BAGRI
Rafael GIL-TIENDA 6
HU Zuliu, Fred
GLOSSARY

KWOK Chi Piu, Bill 3

John Mackay McCulloch WILLIAMSON 5

9 Member by virtue of being Executive Director 11 Appointment by virtue of being the Chairman of
(Monetary Management) of the Hong Kong Hong Kong Interbank Clearing Limited effective
Monetary Authority 1 January 2018
10 Appointment by virtue of being the Chairman of 12 Re-appointment effective 1 July 2017
Hong Kong Interbank Clearing Limited ceased 13 Member by virtue of being Executive Director
effective 1 January 2018 (Supervision of Markets) of the SFC

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 15

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Board of Directors

Other positions held with the Group

HKEX – chairman of Environmental, Social and Governance Committee,
Executive Committee, Nomination Committee, Remuneration Committee,
Risk Committee and Risk Management Committee (statutory)
SEHK – chairman of Listing Appeals Committee and member of Listing
Nominating Committee
LME – independent non-executive director and member of Nomination Committee
LMEH – independent non-executive director

Other major offices

AIA Group Limited * – independent non-executive director (2010~)
CHOW Chung Kong Ernst & Young Global Limited – independent non-executive representative of
GBS, JP global governance council (2016~)
The Hong Kong Jockey Club – steward (2011~)
Chairman, INED
Aged 67 World Federation of Exchanges – director (2012~)

Director since 23 April 2012 Past offices

Chairman since 27 April 2012 Brambles Industries plc – chief executive (2001-2003)
Term of office: 28 April 2016 GKN plc – chief executive (1997-2001)
(re-appointed) to 2018 AGM
MTR Corporation Limited * – chief executive officer (2003-2011)

Public service 1
Advisory Committee on Admission of Quality Migrants and Professionals
– chairman (2016~)
Council of the Queen Elizabeth Foundation for the Mentally Handicapped
– member (2015~)
Executive Council of the HKSAR – non-official member (2012~)
Financial Leaders Forum – member (2017~) 2
Independent Commission Against Corruption – chairman of Advisory Committee
on Corruption (2013~)

Qualifications
Chartered Engineer (The Institution of Chemical Engineers, UK)
Bachelor of Science (Chemical Engineering) (University of Wisconsin, US)
Master of Science (Chemical Engineering) (University of California, US)
Master of Business Administration (The Chinese University of Hong Kong)
Honorary Doctor of Engineering (The University of Bath, UK)
Honorary Fellow (The Chinese University of Hong Kong, The Hong Kong Institution of
Engineers, and The Institution of Engineering and Technology)
Fellow (City & Guilds of London Institute, Hong Kong Academy of Engineering Sciences,
The Chartered Institute of Logistics and Transport in Hong Kong,
The Institution of Chemical Engineers, and The Royal Academy of Engineering)

* Listed on the Stock Exchange

1 Ceased to be a non-official member and convenor of Working Group on Transportation of the
Economic Development Commission effective 1 July 2017
2 Appointment effective 18 August 2017

16 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

OVERVIEW
Other positions held with the Group
HKEX – member of Environmental, Social and Governance Committee, and
Executive Committee
SEHK – member of Listing Committee and GEM Listing Committee
HKCC, HKFE, HKSCC, SEHK and SEOCH – chairman
LME – member of Nomination Committee
HKEX’s certain subsidiaries – director

ORGANISATION
Other major offices
China Entrepreneurs Forum – director (2005~)

Past offices
LI Xiaojia, Charles
Brown & Wood, New York – associate (1993-1994)
Executive Director, Davis Polk & Wardwell, New York – associate (1991-1993)
Chief Executive
Aged 56 JP Morgan China – chairman (2003-2009)
Merrill Lynch China (1994-2003: president (1999-2003))
Joined on 16 October 2009

MD & A
Public service
Chief Executive since
16 January 2010 Consulting Committee of Qianhai Shenzhen-Hong Kong Modern Service Industry
Ex-officio member of the Board
Cooperation Zone of Shenzhen – member (2012~)
Term of office: renewed up to Financial Experts Advisory Committee for Guangdong – advisory member (2017~) 1
15 October 2018 Hong Kong Trade Development Council – member of Belt and Road Committee (2017~) 2
The National Committee of the Chinese People’s Political Consultative Conference
– member (2018~) 3

Qualifications

GOVERNANCE
Bachelor of Arts (English Literature) (Xiamen University, China)
Master of Arts (Journalism) (University of Alabama, US)
Juris Doctor (Columbia University, US)

1 Appointment effective 15 November 2017

2 Appointment effective 15 October 2017
3 Appointment effective 24 January 2018

FINANCIALS
Other positions held with the Group
HKEX – member of Nomination Committee and Project Oversight Committee

Other major offices

International Wrought Copper Council – director (2013~)
Metdist Group of Companies, London – president and chief executive officer (1980~)

Public service
Crown Estate Paving Commission, England – commissioner (1996~)
OTHERS

Dubai Financial Services Authority – director (2004~)

Higher Education Funding Council for England – board member (2014~)
Apurv BAGRI London Business School – chairman of governing body (2014~)
Royal Parks Board, England – chairman (2008~)
INED
Aged 58 Qualifications
Director since 28 April 2016 Bachelor of Science in Business Administration
Term of office: 28 April 2016
(Cass Business School, City University London, UK)
Doctor of Science (Honoris Cause) (City University London, UK)
GLOSSARY

(elected) to 2019 AGM

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 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

HKEX – chairman of Panel Member Nomination Committee, member of Audit Committee,
Nomination Committee, Risk Committee and Risk Management Committee (statutory),
and chairman of Clearing Consultative Panel
HKCC and SEOCH – chairman of Participant Admission Appeals Committee
HKSCC – chairman of Disciplinary Appeals Committee and
Participant Admission Appeals Committee

Other major offices

AFFIN Holdings Berhad (listed on Bursa Malaysia) – non-executive director (2013~)
CVC Capital Partners Limited – senior adviser (2010~)
CHAN Tze Ching, Ignatius Mongolian Mining Corporation * – independent non-executive director (2010~)
BBS, JP Rizal Commercial Banking Corporation (listed on the Philippine Stock Exchange)
– non-executive director (2011~)
INED
Aged 61 The Bank of East Asia Limited * – senior adviser (2009~)

Director since 23 April 2009 Past offices

Term of office: 29 April 2015 Bank of China (Hong Kong) Limited – deputy chief executive (2008)
(re-elected) to 2018 AGM Citigroup (1980-2007: Citigroup country officer for Hong Kong and head of corporate and
investment banking business for Greater China (2005-2007), chief operating officer for
Greater China (2004-2005), and Citigroup country officer for Taiwan (2003-2005))

Public service
Financial Reporting Council – member (2014~)
Hong Kong Tourism Board – member (2013~)
Investor Education Centre (established by the SFC)
– member of Executive Committee (2012~)
Standing Commission on Civil Service Salaries and Conditions of Service
– member (2014~)
Standing Committee on Judicial Salaries and Conditions of Service – member (2017~)
The Hong Kong Polytechnic University – chairman of council (2016~)

Qualifications
Bachelor of Business Administration and Master of Business Administration
(University of Hawaii, US)
Certified Public Accountant (American Institute of Certified Public Accountants)

* Listed on the Stock Exchange

18 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

OVERVIEW
HKEX – member of Executive Committee, Investment Advisory Committee, Nomination
Committee, Panel Member Nomination Committee and Remuneration Committee, and
chairman of Cash Market Consultative Panel
SEHK – chairman of Disciplinary Appeals Committee and
Exchange Participant Admission Appeals Committee

Other major offices

Value Partners Group * – chairman (2000~), executive director (1993~), and
co-chief investment officer (2010~)

ORGANISATION
Past offices
CHEAH Cheng Hye Morgan Grenfell Group, Hong Kong – executive director, head of research and
Darjah Gemilang Pangkuan proprietary trader (1989-1993)
Negeri
The Asian Wall Street Journal, Far Eastern Economic Review, Asiaweek, Hong Kong
INED Standard and The Star (Malaysia) – editor and financial journalist (1971-1989)
Aged 63 Value Partners Group * – chief investment officer (1993-2010)
Director since 26 April 2017 Public service
Term of office: 26 April 2017
Financial Services Development Council – member (2015~) and

MD & A
(elected) to 2020 AGM
member of New Business Committee (2013~)

Qualifications
Honorary Fellow (The Hong Kong University of Science and Technology)

* The holding company of the group, namely Value Partners Group Limited, has been listed on the
Stock Exchange since 2007.

GOVERNANCE
Other positions held with the Group
HKEX – chairman of Investment Advisory Committee, and
member of Nomination Committee and Remuneration Committee
SEHK – deputy chairman of Listing Appeals Committee and
member of Listing Nominating Committee

Other major offices

Goldman Sachs (Asia) LLC – advisory director (2012~)
Savills plc (listed on the London Stock Exchange)

FINANCIALS
– independent non-executive director (2012~)
Swire Pacific Limited * – independent non-executive director (2008~)
Timothy George Past offices
FRESHWATER
Aquarius Platinum Limited (formerly listed on the Australian Securities Exchange,
INED Johannesburg Stock Exchange, and London Stock Exchange)
Aged 73 – independent non-executive director (2006-2016)
COSCO SHIPPING Ports Limited * – independent non-executive director (2005-2015)
Director since 23 April 2012
Goldman Sachs (Asia) LLC (2001-2012: director (2001-2012), vice chairman (2005-2012),
Term of office: 28 April 2016
OTHERS

(re-appointed) to 2018 AGM and chairman, corporate finance (2001-2004))

HKEX – INED (2000-2006)
Jardine Fleming (1996-2000: chairman (1999-2000))
Slaughter and May (1967-1996: head of worldwide corporate practice (1993-1996) and
partner (1975-1996))

Public service
Financial Services Development Council – member and
member of New Business Committee (2015~)
GLOSSARY

Qualifications
Solicitor (Hong Kong, and England & Wales)
Bachelor of Laws and Master of Arts (University of Cambridge, UK)

* Listed on the Stock Exchange

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 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

HKEX – chairman of Project Oversight Committee, member of Audit Committee,
Investment Advisory Committee and Panel Member Nomination Committee, and
chairman of Derivatives Market Consultative Panel
HKFE – chairman of Disciplinary Appeals Committee and
Exchange Participant Admission Appeals Committee

Other major offices

China Construction Bank Corporation * – independent non-executive director (2016~)
Hang Lung Properties Limited * – independent non-executive director (2015~)

Past offices
FUNG Yuen Mei, Anita Bank of Communications Co Ltd * – non-executive director (2010-2015)
BBS, JP
HSBC Holdings plc * – group general manager (2008-2015)
INED The Hongkong and Shanghai Banking Corporation Limited
Aged 57 (1996-2015: chief executive officer Hong Kong (2011-2015),
Director since 29 April 2015
head of global banking and markets, Asia Pacific (2010-2011), and
treasurer and head of global markets, Asia Pacific (2005-2010))
Term of office: 26 April 2017
(re-appointed) to 2019 AGM
Public service
Airport Authority Hong Kong – independent non-executive member of the board (2010~)
Hong Kong Housing Authority – non-official member (2012~)
Judicial Officers Recommendation Commission – member (2017~)
Museum Advisory Committee – member (2016~)
The Hong Kong Mortgage Corporation Limited – director (2016~)
West Kowloon Cultural District Authority – board member (2016~)

Qualifications
Bachelor of Social Science (The University of Hong Kong)
Master of Applied Finance (Macquarie University, Australia)

* Listed on the Stock Exchange

Other positions held with the Group

HKEX – member of Environmental, Social and Governance Committee,
Panel Member Nomination Committee, Project Oversight Committee and
Risk Committee, and deputy chairman of Cash Market Consultative Panel and
Clearing Consultative Panel
HKSCC and SEHK – member of Disciplinary Appeals Committee
OTC Clear – chairman, independent non-executive director and
chairman of Risk Management Committee

Other major offices

JP Morgan Securities (Asia Pacific) Limited – independent non-executive director (2017~) 1

Rafael GIL-TIENDA Past offices

INED
Citibank (1977-1998: country manager of Citibank for Spain (1992-1998),
Aged 65 for Malaysia (1988-1992) and for China (1984-1988))
Marsh & McLennan Companies – chairman of Asia Pacific region (2003-2011)
Director since 29 April 2015
Oliver Wyman – chairman of Asia Pacific region (2012-2017)
Term of office: 26 April 2017
(re-appointed) to 2019 AGM Standard Chartered Bank (1998-2003: head of Asian wholesale banking business
(2001-2003), and head of corporate and institutional banking business,
Greater China (1998-2001))

Qualifications
Bachelor of Arts (Philosophy, Politics and Economics) (University of Oxford, UK)
Master of Business Administration (University of California, Berkeley, US)

1 Appointment effective 22 December 2017

20 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

OVERVIEW
HKEX – member of Investment Advisory Committee, Project Oversight Committee and
Remuneration Committee

Other major offices

Dalian Wanda Commercial Properties Co Ltd (formerly listed on the Stock Exchange)
– independent non-executive director (2014~)
Hang Seng Bank Limited * – independent non-executive director (2011~)
Primavera Capital Limited – founder and chairman (2011~)
Tsinghua University – professor and co-director of National Center for

ORGANISATION
Economic Research (1996~)
HU Zuliu, Fred Yum China Holdings, Inc (listed on the New York Stock Exchange)
– non-executive chairman (2016~)
INED
Aged 54 Past offices
Goldman Sachs Group Inc (1997-2010: chairman of Greater China (2008-2010) and
Director since
10 November 2014
managing director (2000-2010))
Term of office: 29 April 2015 Great Wall Pan Asia Holdings Limited * – independent non-executive director (2010-2016)
(elected) to 2018 AGM International Monetary Fund, Washington DC – economist (1991-1996)

MD & A
Qualifications
Master and Doctor of Philosophy (Economics) (Harvard University, US)
Master of Science (Engineering Science) (Tsinghua University, China)

* Listed on the Stock Exchange

GOVERNANCE
FINANCIALS
OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 21

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

HKEX – member of Executive Committee, Risk Committee and Risk Management
Committee (statutory)
SEHK – member of Listing Nominating Committee

Other major offices

Chong Hing Bank Limited * – deputy chairman, executive director and
managing director (2014~)
First Pacific Company Limited * – independent non-executive director (2012~)
Li & Fung Limited * – independent non-executive director (2013~)
Sun Hung Kai Properties Limited * – independent non-executive director (2013~)
LEUNG KO May Yee, The Hong Kong Jockey Club – steward (2014~)
Margaret Yuexiu Financial Holdings Limited – vice-chairman, executive director and
SBS, JP chief executive (2014~)
INED
Past offices
Aged 65
China Construction Bank Corporation * – independent non-executive director (2013-2016)
Director since 24 April 2013 Chong Hing Bank Limited * – chief executive (2016-2017)
Term of office: 26 April 2017
Hang Seng Bank Limited * – vice-chairman and chief executive (2009‑2012)
(re-appointed) to 2019 AGM
HSBC Group – global co-head, commercial banking (2003-2009)
HSBC Holdings plc * – group general manager (2005-2012)
QBE Insurance Group Limited (listed on the Australian Securities Exchange)
– independent non-executive director (2013-2017)
Wells Fargo HSBC Trade Bank, NA – director (2007-2010)

Public service 1, 2
Chinese People’s Political Consultative Conference Guangzhou Committee
– member (2008~)
The National Committee of the Chinese People’s Political Consultative Conference
– member (2013~)

Qualifications
Bachelor in Economics, Accounting and Business Administration
(The University of Hong Kong)

* Listed on the Stock Exchange

1 Ceased to be a member of the Steering Committee on Strategic Review on Healthcare Manpower Planning
and Professional Development effective 1 July 2017
2 Ceased to be a member of the Standing Committee of The Henan Provincial Committee of the Chinese
People’s Political Consultative Conference effective 22 January 2018

Other positions held with the Group

HKEX – member of Audit Committee, Environmental, Social and Governance Committee,
Executive Committee and Panel Member Nomination Committee, and
deputy chairman of Derivatives Market Consultative Panel
HKFE – member of Disciplinary Appeals Committee

Other major offices

BNP Paribas – head of global markets, Hong Kong (2015~)
BNP Paribas Securities (Asia) Limited – chief executive officer (2015~)

Past offices
BNP Paribas – head of global equities and commodity derivatives,
LEUNG Pak Hon, Hugo Greater China (2013-2015)
INED BNP Paribas Securities (Asia) Limited – deputy chief executive officer (2012-2015),
Aged 49 head of equity syndicate and corporate equity (2010-2012),
head of equity brokerage (2007-2010), head of Asia (ex-Greater China) Product (2004-2007),
Director since 26 April 2017 product sales head for Taiwan (2003-2004) and deputy managing director (2000-2003)
Term of office: 26 April 2017
(elected) to 2020 AGM Qualifications
Bachelor of Arts (Economics) (Simon Fraser University, Canada)

22 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

OVERVIEW
HKEX – member of Audit Committee, Environmental, Social and Governance Committee,
Project Oversight Committee and Remuneration Committee

Past offices
HKEX – member of Clearing Consultative Panel (2000-2007)
Morgan Stanley Dean Witter Asia Limited – managing director, and
head of infrastructure and operational risk (1998-2007)
NatWest Investment Services, London – managing director (1992-1994)
NatWest Securities Asia Holdings Limited – chief operating officer (1994-1998)

ORGANISATION
SAIL Advisors Limited – chief executive officer (2011-2018) 1
John Mackay McCulloch Search Investment Group Limited (2007-2018: senior managing director (2012-2018) 2,
WILLIAMSON chief financial officer (2007-2018) 2, and managing director (2007-2011))

INED Qualifications
Aged 59
Bachelor of Arts (Accountancy & Computer Science) (Heriot-Watt University, UK)
Director since 18 June 2008 Chartered Accountant (The Institute of Chartered Accountants of Scotland)
Term of office: 29 April 2015 Fellow (Chartered Institute for Securities and Investment, UK)
(re-elected) to 2018 AGM
Senior Fellow (Hong Kong Securities and Investment Institute)

MD & A
1 Appointment ceased effective 30 January 2018
2 Appointment ceased effective 14 February 2018

Other positions held with the Group

HKEX – chairman of Audit Committee and member of Risk Committee
LME – independent non-executive director, and chairman of Audit and Risk Committee

GOVERNANCE
LME Clear – independent non-executive director, chairman of Audit Committee, and
member of Nomination Committee and Remuneration Committee

Other major offices

China Mobile Limited * – independent non-executive director (2017~)

Past offices
KPMG China (including Hong Kong) (1983-2015: chairman and
chief executive officer (2011-2015), deputy chairman (2010-2011),
YIU Kin Wah, Stephen audit partner‑in-charge (2007-2010), and partner (1994-2015))

FINANCIALS
INED KPMG International – member of executive committee and board (2011‑2015)
Aged 57 KPMG Asia Pacific – member of board (2011-2015) and executive committee (2009-2015)
Director since 26 April 2017 Public service
Term of office: 26 April 2017
Insurance Authority – non-executive director (2015~)
(appointed) to 2019 AGM
Qualifications
Professional Diploma in Accountancy (The Hong Kong Polytechnic University)
Master in Business Administration (Warwick University, UK)
OTHERS

Fellow (Association of Chartered Certified Accountants and HKICPA)

Associate (The Institute of Chartered Accountants in England & Wales)

* Listed on the Stock Exchange

GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 23

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Group Company Secretary

Past offices
Hysan Development Company Limited – company secretary (1988-2000)

Qualifications
Master of Science (Business Administration) (The University of Bath, UK)
Master of Laws in Corporate and Financial Laws (The University of Hong Kong)
Associate (HKICPA)
Fellow (The Hong Kong Institute of Chartered Secretaries,
The Institute of Chartered Secretaries and Administrators,
Association of Chartered Certified Accountants, and
The Institute of Chartered Accountants in England & Wales)
MAU Kam Shing, Joseph

Group Company Secretary and

Head of Secretarial Services
Aged 59

Joined in June 2000

Senior Management

Other positions held with the Group

LME – chairman of Executive Committee, vice chairman of Aluminium Committee, and
member of Charity Committee, Enforcement Committee and User Committee
LME Clear – member of Executive Committee

Past offices
LME – chief operating officer (2016-2017), head of Business Development (2013-2016) and
head of Strategy and Implementation (2012-2013)
UBS – head of European financial technology coverage (2010-2012)
Perella Weinberg Partners – founding member of the financial institutions coverage team
(2006-2010)
Matthew James Citibank – analyst of financial institutions group (2004-2006)
CHAMBERLAIN
Qualifications
Chief Executive, LME Master of Arts (Computer Sciences) (Trinity College, University of Cambridge, UK)
(effective 6 July 2017)
Aged 36

Joined in November 2012

Past offices
Goldman Sachs (Asia) LLC (1996-2015 and 1993-1994:
co-head of human capital management, Asia Pacific (2014-2015) and
managing director (2007-2015); and executive director, investment banking (1993‑1994))
JP Morgan – vice president, investment banking (1994-1996)

Qualifications
Diploma in Business Studies (The Hong Kong Polytechnic University)

CHAU Yee Wah, Eva

Group Head of
Human Resources
Aged 55

Joined in August 2016

24 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

OVERVIEW
LME – member of Charity Committee and Executive Committee
LME Clear – chairman of Executive Committee

Past offices
LME Clear – chief operating officer (2013-2015)
Turquoise Global Holdings Limited (2008-2012: chief executive officer (2010-2012) and
chief operating officer (2008-2009))
Morgan Stanley – executive director of operations and several senior positions in audit,
finance and operations (1994-2007)

ORGANISATION
Qualifications
Adrian John Winston
Bachelor of Science (Management Sciences) (London School of Economics, UK)
FARNHAM
Associate (The Institute of Chartered Accountants in England & Wales)
Chief Executive, LME Clear
Aged 53

Joined in January 2013

MD & A
Other positions held with the Group
LME – chairman of Enforcement Committee, and member of Arbitration Panel Committee,
Audit and Risk Committee, and Special Committee

Past offices
Nomura – global head of legal and general counsel, wholesale division (2011-2013)
UBS (2004-2011: global/co-global general counsel (UBS Investment Bank) (2008-2011),
group general counsel (Europe, Middle East and Africa) (2009-2011), and
general counsel (Asia Pacific) (2004-2008))

GOVERNANCE
Morgan Stanley – general counsel, Asia ex-Japan (2001-2004)
Freshfields Bruckhaus Deringer LLP (1982-2001: partner (1991-2001))
David GRAHAM Public service
Chief Regulatory Officer SFC – member of Advisory Committee (2013~)
and Head of Listing Standing Committee on Company Law Reform – member (2013~)
Aged 59
Qualifications
Joined in January 2013
Master of Arts (Jurisprudence) (University of Oxford, UK)

FINANCIALS
Solicitor (Hong Kong, and England & Wales)

Past offices
Goldman Sachs (Hong Kong) – controller, Asia Pacific (2010-2017)
Deutsche Bank AG / Bankers Trust Co (1995-2010: several senior positions including
head of finance, Asia and Asia Pacific global banking (2009-2010), and
chief financial officer of North Asia (2008-2009) and of Japan (2005-2008))
OTHERS

Banco Santander – assistant controller (1993-1995)

Qualifications
Bachelor of Science (Accounting) (Marist College, US)
Executive Master of Business Administration (Columbia University, US)

John Patrick KILLIAN

Group Chief Financial Officer

Aged 50
GLOSSARY

Joined in December 2017

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 25

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Past offices
HKFE – chief executive (2013-2016)
SEHK – chief executive (2013-2016)
HKEX – Co-head of Global Markets (2013-2015) and Head of Market Development
(2010-2013)
JP Morgan (Hong Kong) – senior adviser, Asia ex-Japan corporate finance and
capital markets business (2008-2010)
Merrill Lynch (Asia Pacific) (2000-2008: managing director, investment banking, and
chief operating officer of China origination business (2006-2008), and
head of Asia energy and power team (2003-2006))
Indosuez WI Carr Securities (Hong Kong) – head of equity capital markets and director,
Romnesh LAMBA investment banking (1997-2000)

Co-head of Market Development Qualifications

Aged 54
Bachelor of Science in Economics (Magna Cum Laude) and
Joined in February 2010 Master of Business Administration (Distinction)
(The Wharton School, University of Pennsylvania, US)

Other positions held with the Group

HKFE – chief executive
SEHK – chief executive, and chairman of Compensation Committee and
Disciplinary Committee

Past offices
HKEX – Deputy Head of Global Markets, Asia and Head of Market Operations (2014-2015),
Head of Structured Products, Fixed Income and Primary Market Information of
the Listing and Regulatory Affairs Division (2013-2014),
Co-head of Information Technology (2010-2011),
Head of Listing Operations (2007-2010 and 2012-2013),
Head of Cash Market (2005-2007), and Head of Information Services (2000-2005)
LEE Kwok Keung, Roger SEHK – director of Trading and Information Services (1997-2000)
Joint Chief Operating Officer
Public service
(effective 1 June 2017) and
Head of Markets SFC – member of Securities Compensation Fund Committee and
Aged 59 Investor Compensation Fund Committee (2014~)

Joined in March 1997 Qualifications

Bachelor of Business Administration (The Chinese University of Hong Kong)
Master of Business Administration (The University of Hong Kong)
Fellow (CPA Australia)
Senior Fellow (Hong Kong Securities and Investment Institute)

Past offices
HKEX – Co-head of Information Technology (2011-2017)
Chi-X Global – chief technology officer (2008-2011)
Cicada Corporation – chief technology officer (1999-2008)
Telerate Inc – regional technical development manager, Asia Pacific (1985-1999)

Qualifications
Master of Science (E-Commerce) (The Hong Kong Polytechnic University)

LEUNG Chung Kwong,

Richard
Deputy Group Chief Information
Officer and Chief Technology
Officer Hong Kong
(both effective 1 June 2017)
Aged 54

Joined in October 2011

26 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other major offices

OVERVIEW
BCCL – director (2017~)

Past offices
HKEX – Co-head of Mainland (2015) and Senior Adviser (2013-2015)
Shanghai Billionton Metal – chief executive officer (2004-2012)

Qualifications
Bachelor of Science (Earth and Space Sciences)
(University of Science and Technology of China, China)

ORGANISATION
LI Gang

Co-head of Market Development

Aged 52

Joined in March 2013

MD & A
Other major offices
Aseana Properties Limited (listed on the London Stock Exchange)
– non-executive director (2015~)

Past offices
Pacific Century Group – executive vice president of business development (2014-2017)
CLSA Limited – group general counsel (2010‑2014)
Societe Generale – general counsel for Asia Pacific (1997-2010)

Qualifications

GOVERNANCE
Bachelor of Laws (The University of Hong Kong)
Bachelor of Civil Law (St John’s College, The University of Oxford, UK)
Ferheen MAHOMED
Solicitor (Hong Kong, and England & Wales)
Group General Counsel
Aged 52

Joined in February 2017

FINANCIALS
Other major offices
BCCL – director (2017~)
China Exchanges Services Company Limited – chief executive (2014~) and director (2013~)

Past offices
HKEX – Head of Mainland Affairs (2016), Co-head of Mainland (2015) and
Head of Mainland Development (2013-2015)
Shenzhen Stock Exchange – several senior positions including director of strategy and
international affairs, director of financial innovation lab and head of derivative product
OTHERS

task force, and deputy director at member supervision department (2001-2013)

WellPoint Inc – various professional and managerial positions across functions including
information technology, product development and risk management (1993-2001)
MAO Zhirong

Head of Mainland Development Qualifications

Aged 54 Bachelor of Arts (Economics) (Fudan University, China)
Master of Arts (Economics) and Doctor of Philosophy (International Affairs)
Joined in March 2013
(University of California, San Diego, US)
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 27

 BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Other positions held with the Group

LME Clear – member of Nomination Committee

Past offices
HKEX – Chief Operating Officer (2016-2017) and
Head of Global Clearing (Europe) (2014-2015)
LME Clear – chief executive (2013-2015)
LME – managing director of Post Trade Services (2011-2013)
European Central Counterparty Ltd (EuroCCP) – chief operating officer (2007-2011)
Merrill Lynch Europe – managing director (European) and head of transaction and
custody services (2001-2006)
Trevor William SPANNER UBS AG – managing director (global operations and logistics division) (1996-2001)

Group Chief Information Officer Qualifications

(effective 1 June 2017) and
Bachelor of Arts (University of Kent, UK)
Group Risk Officer
Aged 58 Associate (The Institute of Chartered Accountants in England & Wales)

Joined the LME in

November 2011

Other positions held with the Group

HKSCC – chief executive and member of Risk Management Committee
OTC Clear – chief executive and chairman of User Committee

Other major offices

China Exchanges Services Company Limited – director (2012~)

Past offices
HKEX – Head of Global Clearing (Asia) (2014-2015), Co-head of the Equities and
Fixed Income and Currency Business (2013-2014), Head of Trading Division (2010-2013),
and Head of Derivatives Market Development and Operations (2003-2010)
HKFE – head of products (1998-2000)
TAI Chi Kin, Calvin
ABN-Amro Bank NV – senior vice president of treasury division (1995-1998)
Joint Chief Operating Officer Royal Bank of Canada – head of treasury department (1994-1995)
(effective 1 June 2017) and
HSBC – various positions in general banking and treasury (1984-1994)
Head of Clearing
Aged 55
Qualifications
Joined in July 1998 Bachelor of Social Sciences (The University of Hong Kong)

Matthew Chamberlain, Adrian Farnham, David Graham, John Killian, Romnesh Lamba, Roger Lee,
Richard Leung, Li Gang, Ferheen Mahomed, Mao Zhirong, Trevor Spanner and Calvin Tai also act as
directors in certain HKEX’s subsidiaries.

28 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

BOARD OF DIRECTORS
MANAGEMENT COMMITTEE
AND SENIOR MANAGEMENT

1 Charles Li 8 Ferheen Mahomed 8 9 10 11 12 13 14

2 Calvin Tai 9 Adrian Farnham
3 Trevor Spanner 10 John Killian 4 3 2 1 5 6 7
4 Roger Lee 11 David Graham
5 Romnesh Lamba 12 Richard Leung
6 Li Gang 13 Mao Zhirong
7 Matthew Chamberlain 14 Eva Chau

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 29

 BUSINESS REVIEW

Overview

104.6

82.2 694
661
597
515
496
345

74% 73%
71% 71% 65% 73% 72%
69% 3,078 3,117
2,726 2,763
2,530 2,632 2,510 2,616

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017

Monthly ADT traded on the Stock Exchange ($bn) Quarterly Revenue 2016 ($m)

Monthly ADV of metals contracts traded (’000 lots) Quarterly Revenue 2017 ($m)

Monthly ADV of derivatives contracts traded on the Futures Exchange EBITDA margin
(’000 contracts)
Monthly ADV of stock options contracts traded (’000 contracts)

Market sentiment turned bullish alongside most global and Asia-Pacific exchanges from early 2017 and
continued to gain momentum, with Cash Market headline ADT rising to $107.3 billion in Q4 2017 1,
15 per cent above Q3 2017, and 67 per cent above Q4 2016. Stock Connect trading volumes continued to
increase and reached record quarterly highs in Q4 2017, with Northbound and Southbound ADT being
58 per cent and 26 per cent higher than Q3 2017. Derivatives Market also started to pick up in Q4 2017,
with a 12 per cent increase in the ADV of HKFE contracts traded against Q3 2017. As a result, the highest
quarterly revenue and other income 2 were achieved in Q4 2017, despite the seasonal decrease in
depository, custody and nominee services fees.

Revenue and other income in 2017 rose by 19 per cent ($2,064 million) compared to the prior year, driven
by higher market volumes, but also helped by a significant increase in net investment income of
$903 million. Revenue and other income, excluding net investment income, increased by 11 per cent,
reflecting higher trading and clearing revenue in the Cash Market and higher Stock Exchange listing fees
from increased number of newly listed securities, partly offset by lower volumes in HKFE and lower
revenue from LME.

Operating expenses in 2017 increased by 3 per cent against the prior year. This resulted from increases in
staff and premises costs, expenses relating to strategic initiatives, which were partly offset by savings in
IT costs and an insurance recovery relating to LME’s US litigation. The Group continues to maintain a
prudent approach to cost management while investing in key strategic initiatives.

1 Q1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q4 = fourth quarter, 1H = first half, 2H = second half
2 Other income comprised net investment income and sundry income

30 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Business Update and Analysis of Results by Operating Segment

OVERVIEW
Analysis of Revenue and Other Income by Segment

CASH EQUITY & COMMODITIES CLEARING PLATFORM & CORPORATE TOTAL *

FINANCIAL INFRASTRUCTURE ITEMS
DERIVATIVES

+25 +8 -8 +17 +4 +398 +19

($m)

ORGANISATION
13,180

4,825
1,599
11,166
4,138 952
809 696
869 857
547 145
816 892
3,363 98 892

MD & A
91 857
490 857 2,691
2,683
70 2,358
422 2,195
828 2,034
6 1,333
9 186
1,092
770 204 1,560
505 1,436
322 2,358 2,691
140
190 139
181
4,856

GOVERNANCE
801 4,428
1,954 1,499 1,498
1,421 1,230 540 560
1,116
161 790
540 560 149
278 288
12 11
2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017

Trading fees and trading tariff Clearing and settlement fees Market data fees
Stock Exchange listing fees Depository, custody and nominee services fees Net investment income
Other revenue and sundry income

FINANCIALS
* Total revenue and other income is not presented in full scale, but is proportionately resized.

Analysis of EBITDA and EBITDA Margin by Segment *

CASH EQUITY & FINANCIAL COMMODITIES CLEARING PLATFORM & GROUP TOTAL
DERIVATIVES INFRASTRUCTURE (INCL. CORPORATE
ITEMS)

+30 +8 -19 +19 +5 +25

OTHERS

80% 83% 78% 78% 62% 54% 83% 84% 72% 73% 69% 73%

($m)
9,614
7,661

4,073
2,782 3,436
GLOSSARY

2,139 1,593 1,718

963 777
388 409

2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017

% EBITDA margin = EBITDA divided by Revenue and Other Income

* Further details of the results by segment are set out in note 4 to the Consolidated Financial Statements of this Annual Report.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 31

 BUSINESS REVIEW

Cash Segment
Key Market Indicators

2017 2016 Change

ADT of equity products traded on the Stock Exchange 1, 2 ($bn) 71.2 50.2 42%
ADT of Northbound Trading – Shanghai-Hong Kong Stock Connect 2 (RMBbn) 5.6 3.2 75%
ADT of Northbound Trading – Shenzhen-Hong Kong Stock Connect 2 (RMBbn) 4.0 1.5 167%
Average daily number of trades of equity products traded on
  the Stock Exchange 1, 2 1,034,651 895,170 16%
Number of newly listed companies on Main Board 3
94 81 16%
Number of newly listed companies on GEM 80 4 45 78%
Number of companies listed on Main Board at 31 Dec 1,794 1,713 5%
Number of companies listed on GEM at 31 Dec 324 260 25%
Total 2,118 1,973 7%
Market capitalisation of companies listed on Main Board at 31 Dec ($bn) 33,718 24,450 38%
Market capitalisation of companies listed on GEM at 31 Dec ($bn) 281 311 (10%)

1 Excludes DWs, CBBCs and warrants (which are included under the Equity and Financial Derivatives segment) and includes Southbound Trading ADT
of $7.5 billion (2016: $3.6 billion) under Shanghai-Hong Kong Stock Connect and $2.3 billion (2016: $0.5 billion) under Shenzhen-Hong Kong Stock
Connect
2 Includes buy and sell trades under Stock Connect. Shenzhen-Hong Kong Stock Connect was launched on 5 December 2016.
3 Includes 13 transfers from GEM (2016: 6)
4 New record high in 2017

2017 2016
$bn $bn Change

Total equity funds raised on Main Board

  – IPOs 122.6 190.7 (36%)
  – Post-IPO 444.8 280.5 59%
Total equity funds raised on GEM
  – IPOs 5.9 4.6 28%
  – Post-IPO 8.1 14.3 (43%)
Total 581.4 490.1 19%

Stock Connect – New Record Highs in 2017

2017 2016 Change

Northbound Trading value (RMBbn) 2,266 771 194%

Southbound Trading value ($bn) 2,259 836 170%
Total revenue and other income 1 ($m) 412 177 133%

1 $238 million of which arose from trading and clearing activities (2016: $81 million)

32 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Analysis of Results

OVERVIEW
Summary

2017 2016
$m $m Change

Trading fees and trading tariff 1 1,954 1,421 38%

Stock Exchange listing fees 1
828 770 8%
Market data fees 1 490 422 16%
Other revenue and sundry income 91 70 30%

ORGANISATION
Total revenue and other income 3,363 2,683 25%
Operating expenses 2
(581) (544) 7%
EBITDA 2,782 2,139 30%
EBITDA margin 83% 80% 3%

1 Excludes DWs, CBBCs and warrants (which are included under the Equity and Financial Derivatives segment)
2 Includes Listing Division costs relating to equity products traded on the Stock Exchange

MD & A
Trading Fees and Trading Tariff
$m
2,500
$50.2 bn $71.2 bn
1,954
2,000
1,708

1,500 1,421
1,205

GOVERNANCE
1,000 1,035
895

500
216 246

0
Trading fees Trading tariff Total

2016 2017 ADT of equity products traded on the Average daily number of trades of
Stock Exchange 1 equity products traded on the Stock

FINANCIALS
Exchange (’000) 1

1 Excludes DWs, CBBCs and warrants (which are included under the Equity and Financial Derivatives segment)

Trading fees and trading tariff increased by $533 million or 38 per cent. The increase was lower than the
42 per cent growth in ADT of equity products primarily due to an increase in average transaction size,
which dampened the increase in trading tariff income.

Stock Exchange Listing Fees

OTHERS

2017 2016
$m $m Change

Annual listing fees 687 646 6%

Initial and subsequent issue listing fees 133 117 14%
Others 8 7 14%
Total 828 770 8%
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 33

 BUSINESS REVIEW

Annual Listing Fees

Fees
$m Number
1,000 2,200
1,973
2,118 2,000
Annual listing fees increased in line with the rise in
800 1,800
the total number of listed companies.
687 1,600
646
1,400
600
1,200
1,000
400
800
600
200 400
200
0 0
2016 2017

Annual listing fees

Total number of listed companies at 31 Dec

Initial and Subsequent Issue Listing Fees

Fees
$m Number
200 180

180 174 160

Initial and subsequent issue listing fees increased
160 140 with the number of newly listed companies.
126
140 133
120
However, the average fee per listing was lower as a
120
117 higher proportion of new listings was on GEM,
100 which charges lower fees than the Main Board.
100
120 80
80
99
60
60

40 40

20 20
18 13
0 0
2016 2017

Initial listing fees

Subsequent issue listing fees
Total number of newly listed companies

Market Data Fees

Market data fees increased by 16 per cent as a result of higher allocated revenue following a higher
percentage increase in the volume of cash equities traded, compared with the increase in the volumes of
DWs, CBBCs and warrants traded.

EBITDA
Operating expenses increased by $37 million or 7 per cent due to additional headcount for strategic
projects, annual payroll adjustments and higher variable pay. The increase in EBITDA margin from
80 per cent to 83 per cent reflects the increase in revenue.

34 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Business Update

OVERVIEW
2017 has been a positive year for the Cash Market, with headline ADT being 32 per cent higher than 2016.
In particular, Q4 2017 ADT was up by 67 per cent compared to Q4 2016 and was 15 per cent higher than
Q3 2017. Market capitalisation reached a record high of $33,999 billion on 29 December 2017.

Stock Connect
The Stock Connect programme continued to gather momentum in 2017. As Shanghai and Shenzhen
Connect celebrated their third and first anniversaries respectively, a number of record highs (see table
under Key Market Indicators section) were reached. The increase in trading volume demonstrates an

ORGANISATION
increasing interest among Mainland investors in diversifying their investments into Hong Kong, and rising
demand from Hong Kong and international investors for A shares. Northbound turnover over the longer
term could potentially benefit from MSCI’s announcement in June 2017 of its plan to include A shares in
the Emerging Markets Index and All Country World Index (ACWI) in 2018.

On 30 November 2017, the SFC announced an investor identification regime for Northbound Trading,
and HKEX published an information paper on the topic on the same date. The new arrangement,
which aims to facilitate market surveillance and monitoring in accordance with the home market rule

MD & A
principle of Stock Connect, requires relevant EPs to assign a unique number to each of their Northbound
Trading clients, and tag the number to every Northbound order on a real-time basis. The regime is
tentatively scheduled to be implemented in Q3 2018.

Issuer Business
To continue to promote Hong Kong as a preferred listing venue of choice, HKEX organised 24 large-scale
events and conducted 86 seminars in both Mainland China and globally in 2017. A key focus for HKEX is

GOVERNANCE
to expand Hong Kong’s listing regime to facilitate listings of companies from emerging and innovative
sectors. In June and August respectively, HKEX jointly organised conferences with two key technology
incubators in Hong Kong – Hong Kong Science and Technology Parks Corporation and Hong Kong
Cyberport – to promote Hong Kong’s fundraising landscape to aspiring “new economy” leaders. Similar
symposiums were co-organised with hi-tech parks in China, as well as internationally, to further
encourage “new economy” companies to consider Hong Kong as the listing venue of choice.

ETF Market Development

FINANCIALS
Following the successful introduction of Leveraged and Inverse Products (L&I Products) on foreign equity
indices in 2016, HKEX further expanded its Exchange Traded Product (ETP) market (which comprises ETF
and L&I Products) with the successful listings of 18 L&I Products tracking HSI and HSCEI in 2017. In 2017,
ETP market capitalisation and ADT grew to $636 billion (up 13 per cent) and $4.7 billion (up 14 per cent)
respectively.

Closing Auction Session

Phase 2 of the Closing Auction Session (CAS) was launched successfully on 24 July 2017 to further
OTHERS

facilitate trade execution at closing prices. The list of CAS Securities was also expanded to include
constituents of the Hang Seng Composite SmallCap Index, and input of regulated short selling orders
during the CAS was also allowed.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 35

 BUSINESS REVIEW

Market Structure Development

HKEX has completed the 2017 Annual Attestation and Inspection Programme and will share our findings
with the market in 2018. Practical guidance on compliance with the Exchange Rules, including a set of
Illustrative Examples on Short Selling Order Flagging Requirements, has been published.

HKEX rolled out enhanced Cash Market and cross market surveillance between SEHK and HKFE markets
in order to expand the monitoring coverage in its robust mechanism for market surveillance. In 2018,
HKEX will deploy artificial intelligence and machine-learning technology in our real-time surveillance to
strengthen market abuse detection.

Bond Connect
Bond Connect is a significant breakthrough in the opening of the Mainland bond market, enhancing
HKEX’s position in the fixed income market while expanding the mutual market access programme, that
began in 2014, from equity into a new asset class. Bond Connect extends HKEX beyond its traditional
equities business and lays the foundation for HKEX’s further developments in FIC, particularly in the
derivatives business. Bond Connect has been operating smoothly since its launch on 3 July 2017, allowing
a broader group of international investors to access the China Interbank Bond Market (CIBM).

Since the launch of Bond Connect, the overall foreign investor holdings in the CIBM’s domestic debt
securities rose to RMB1,147 billion as of 31 December 2017, an increase of 36 per cent from 30 June
2017. As at the end of 2017, 247 approved international investors, 24 onshore dealers, 53 Hong Kong
local custodians and 20 Hong Kong foreign exchange settlement banks were participating in Bond
Connect.

During 2H 2017, the Bond Connect delegation participated in a number of non-deal roadshows and
seminars to help local and international investors understand the practical arrangements and latest
developments of Bond Connect. BCCL, a joint venture established by CFETS and HKEX, is now working
with the Mainland and Hong Kong authorities and financial infrastructure institutions, to introduce
further enhancements to Bond Connect.

Market Data Business

HKEX continues its efforts to further promote market transparency of Stock Connect trading by
increasing the visibility and penetration of securities market data in the Mainland. Marketing programmes
with an aim to provide more flexible fee packages such as discounts, fixed fees and mobile application
services are well received by the market. In addition, historical data products on Stock Connect as well as
a complimentary market data feed, which includes Stock Connect turnover statistics and Northbound
daily quota balance, were also launched during 2017 enhancing HKEX’s market data services.

Listing Regulation
In 2017, the Stock Exchange issued various proposals and conclusions on Listing Rules amendments as
set out in the following table. Details of the consultations and other main policy issues arising in 2017 as
well as the proposals under review in 2018 are set out in the 2017 Listing Committee Report.

36 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Proposals and Conclusions in 2017

OVERVIEW
Effective date
Consultation Consultation of changes
paper 1 conclusions 1 (if any)

• Joint Consultation Paper on Proposed Enhancements to The Stock Jun 2016 Sep 2017 N/A 2
Exchange of Hong Kong Limited's Decision-making and Governance
Structure for Listing Regulation
• New Board Concept Paper Jun 2017 Dec 2017 N/A  3
• Review of the Growth Enterprise Market (GEM) and Changes to the GEM Jun 2017 Dec 2017 15 Feb 2018

ORGANISATION
and Main Board Listing Rules
• Delisting and Other Rule Amendments Sep 2017 1H 2018 –
(tentative)
• Capital Raisings by Listed Issuers Sep 2017 1H 2018 –
(tentative)
• Proposed Changes to Documentary Requirements relating to Listed Nov 2017 1H 2018 –
Issuers and Other Minor Rule Amendments (tentative)
• Review of the Corporate Governance Code and Related Listing Rules Nov 2017 2H 2018 –

MD & A
(tentative)
• Proposed Exemption for Aircraft Leasing Activities Nov 2017 2H 2018 –
(tentative)

1 All the consultation papers and conclusions are available under the News (Market Consultations) section of the HKEX Market website.
2 The SFC and the Stock Exchange have decided to adopt the way forward as set out in the conclusions including establishing a new Listing Policy
Panel and enhancing governance within the Stock Exchange’s structure for reviewing the Listing Committee’s decisions. The Stock Exchange will
conduct a separate consultation on the review system for decisions of the Listing Committee.
3 Drawing on the feedback received in response to the New Board Concept Paper and subsequent regulatory discussions with the SFC, the Stock

GOVERNANCE
Exchange issued the conclusions to the New Board Concept Paper in December 2017 setting out the proposed way forward to expand the existing
listing regime to facilitate the listing of companies from emerging and innovative sectors, subject to appropriate safeguards. Following discussions
with the SFC and other stakeholders, the Stock Exchange published a Consultation Paper on a Listing Regime for Companies from Emerging and
Innovative Sectors on 23 February 2018 to seek public feedback on the detailed proposals and proposed amendments to the Listing Rules to give
effect to the way forward set out in the conclusions.

Key Initiatives by the Stock Exchange to Promote Issuers’ Self-compliance with the Listing Rules

• Issued series of listing decisions on interpretation of the Listing Rules, including reasons for rejection and return of new listing
applications, whether certain proposed acquisitions would constitute a reverse takeover, sufficiency of operations or assets to

FINANCIALS
meet Listing Rule requirements and suitability of listing

• Published guidance materials including (i) guidance letters on pricing flexibility for IPO and reallocation of shares from
placing tranche to the public subscription tranche in an IPO and (ii) revised guidance letters on pre-IPO investments and
simplification of listing documents

• Published reports on the Stock Exchange’s review of disclosure in issuers’ annual reports and key observations under the
financial statements review programme, and provided guidance and recommendations to issuers to promote transparency
and high quality disclosures
OTHERS

• Published findings of the Stock Exchange’s latest review of listed issuers’ corporate governance practices which examined the
level of issuers’ compliance with the Corporate Governance Code and Corporate Governance Report

• Launched a new series of quarterly director training webcasts to assist directors in understanding their roles and
responsibilities as a director of a Hong Kong listed company

• Published the first and bi-annual Enforcement Newsletter summarising news and updates on enforcement activities and
highlighting specific areas or conduct that might impact on rule compliance
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 37

 BUSINESS REVIEW

IPO Processing, Compliance and Monitoring

The following tables illustrate the work of the Stock Exchange in processing new listings and monitoring
issuers’ compliance for the purposes of maintaining an orderly, informed, and fair market under
Section 21 of the SFO.

Stock Exchange’s IPO Work

2017 2016

• Number of listing applications vetted 1 412 349

• Number of applications brought to the Listing Committees (or their delegates) for decisions 2
194 154
– within 120 calendar days 60 82
– between 121 to 180 calendar days 66 43
– after more than 180 calendar days 68 29
• Number of applications for which approval was granted in principle 3
216 181
• Number of requests for guidance from listing applicants or their advisers seeking clarifications
of listing matters 158 159
– Average response time (in business days) 9 8
• Number of listing applications for transfer of listing from GEM to Main Board accepted 22 12
• Applications listed 4 197 163
• New listing applications rejected 5 8 13
• New listing applications withdrawn 14 4
• New listing applications returned 5 7
• Application in process at year-end 139 102

1 Comprises 310 (2016: 275) new applications and 102 (2016: 74) existing applications brought forward from previous year
2 Refers to listing applications heard by the Listing Committees (or their delegates) for the first time and excludes Chapter 20 listing applications
3 At the end of 2017, 33 (2016: 20) approved applications had not yet been listed, and 6 (2016: 12) approved applications had lapsed during the year.
4 Includes 23 investment vehicles listed on Main Board and deemed new listings (2016: 37)
5 In 2017, 2 rejection decisions (2016: 1) were subsequently reversed by the Listing (Review) Committee/Listing Appeals Committee upon review.

Number of Compliance and Monitoring Actions

2017 2016

• Announcements of issuers vetted 57,498 55,946

• Circulars of issuers vetted 1,841 2,214
• Share price and trading volume monitoring actions undertaken 1 6,461 6,279
• Complaints handled 568 493
• Cases (including complaints) referred to Listing Enforcement Team for investigation 40 35

1 In 2017, monitoring actions undertaken included 603 enquiries (2016: 515) on unusual share price and trading volume movements, and the actions
undertaken led to 32 resumption announcements (2016: 24) on trading suspensions.

Long Suspension
Main Board GEM
Status of Long Suspended Companies (at year-end) 2017 2016 2017 2016

Resumption of trading of securities during the year 14 15 1 5

Cancellation/withdrawal of listing during the year 3 2 2 1
Companies in the third stage of delisting 14 11 N/A N/A
Companies notified of the Stock Exchange’s intention
  to cancel their listing 1 1 1 2 –
Companies suspended for 3 months or more 53 53 3 3

1 For GEM, the figures represent companies that had failed to maintain sufficient operations or assets to warrant their continued listing. In these
cases, the Stock Exchange had notified the companies of its intention to cancel the companies’ listing and place them in a one-stage delisting
procedure (as compared to three stages for Main Board).

38 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Listing Enforcement

OVERVIEW
During 2017, the Stock Exchange continued to adopt a themed approach to enforcement activity.
Details are set out in the 2017 Listing Committee Report. To enhance the transparency of the Stock
Exchange’s Listing Rule enforcement work, a bi-annual Enforcement Newsletter was launched in July
2017 which includes news and updates on enforcement activities and specific areas or conduct that
might impact on rule compliance while the dedicated “Disciplinary & Enforcement” section on the HKEX
Market website continues to provide updated enforcement related information and statistics.

Enforcement Statistics

ORGANISATION
2017 2016

Investigations 1, 2, 3
86 71
Public censures 4
8 7
Public statements/criticisms 4 1 1
Warning/caution letters 5
9 15

1 Figures cover cases concluded during the year, and cases which remained active at year-end.
2 There were 28 outstanding investigations (26 of which commenced in 2017) at the end of 2017 as compared to 32 outstanding investigations

MD & A
(all of which commenced in 2016) at the end of 2016.
3 In 2017, 4 cases (2016: 3) originating from complaints were subject to enforcement investigation, and might give rise to disciplinary proceedings
after investigation.
4 Figures represent only the primary regulatory action from a disciplinary matter. They exclude any other actions taken at a lower level, eg, private
reprimand, in the same case.
5 The warning and caution letters were primarily delivered in circumstances where action before the Listing Committees was not considered
appropriate.

Costs of Listing Function

The costs of the front line regulation of listed issuers, performed by the Listing Committees and the

GOVERNANCE
Listing Division, are absorbed by the Cash and Equity and Financial Derivatives segments in proportion to
the listing fee income of the two segments.

Equity and Financial Derivatives Segment

Key Market Indicators

2017 2016 Change

FINANCIALS
ADT of DWs, CBBCs and warrants traded on the Stock Exchange ($bn) 17.0 16.7 2%
Average daily number of trades of DWs, CBBCs and warrants traded on
  the Stock Exchange 205,518 185,850 11%
ADV of derivatives contracts traded on the Futures Exchange 1 440,563 463,722 (5%)
ADV of stock options contracts traded on the Stock Exchange 428,499 297,903 44%
Number of newly listed DWs 7,989 2 4,875 64%
Number of newly listed CBBCs 13,235 2
8,896 49%
OTHERS

ADV of contracts traded during AHFT 1 30,148 37,833 (20%)

At At
31 Dec 2017 31 Dec 2016 Change

Open interest of futures and options 1

11,154,897 9,296,057 20%

1 Excludes London Metal Mini Futures, Gold Futures and Iron Ore Futures contracts (which are included under the Commodities segment)
2 New record highs in 2017
GLOSSARY

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 BUSINESS REVIEW

Analysis of Results
Summary

2017 2016
$m $m Change

Trading fees and trading tariff 1 1,498 1,499 (0%)

Stock Exchange listing fees 505 322 57%
Market data fees 1 186 204 (9%)
Other revenue 6 9 (33%)
Total revenue 2,195 2,034 8%
Operating expenses 2
(477) (441) 8%
EBITDA 1,718 1,593 8%
EBITDA margin 78% 78% 0%

1 Excludes cash equities (which are included under the Cash segment)
2 Includes Listing Division costs related to DWs, CBBCs and warrants traded on the Stock Exchange

Trading Fees and Trading Tariff

$m
2,000

1,499 1,498
1,500
464
441

1,000 894
$16.7 bn $17.0 bn 865

428
457 475 206
500 298
186

51 103 107
45
0
Trading fees of DWs, Trading tariff of DWs, Trading fees of derivatives Trading tariff of stock Total
CBBCs and warrants CBBCs and warrants contracts traded on the options contracts 2
Futures Exchange 1, 2

2016 2017 ADT of DWs, CBBCs and warrants Average daily number of trades of DWs,
CBBCs and warrants (’000)
ADV of derivatives contracts traded on ADV of stock options contracts (’000)
the Futures Exchange (’000) 1

1 Excludes London Metal Mini Futures, Gold Futures and Iron Ore Futures contracts (which are included under the Commodities segment)
2 Excludes trading fees and trading tariff allocated to the Clearing segment (Derivatives contracts traded on the Futures Exchange – 2017:
$218 million; 2016: $229 million; stock options contracts – 2017: $70 million; 2016: $49 million)

Trading fees and trading tariff for the segment are generated from trading of derivatives on the Stock
Exchange (ie, DWs, CBBCs, warrants, and stock options) and trading of futures and options on the Futures
Exchange. A portion of the trading fees and trading tariff for the futures and options contracts is
allocated to the Clearing segment (see Clearing Segment below) as the trading and clearing fees of these
products are bundled together in the form of trading fees and tariff.

Trading fees and trading tariff from trading of DWs, CBBCs and warrants rose by $24 million or 5 per cent
due to increased ADT and average daily number of trades. The percentage increase was higher than the
2 per cent growth in ADT due to the decrease in average transaction size, which generated a higher
growth in trading tariff income.

40 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Market volatility remained subdued in 2017, negatively impacting derivatives trading volumes on the

OVERVIEW
Futures Exchange, similar to equity index derivatives traded on other major exchanges.

Trading fees from futures and options traded on the Futures Exchange dropped by $29 million or 3 per
cent. This drop was lower than the 5 per cent decrease in average daily number of contracts traded, as a
higher proportion of derivatives contracts traded in 2017 were related to higher fee contracts including
HSI products.

Stock Exchange Listing Fees

ORGANISATION
Fees
$m Number
1,400 14,000

13,235
1,200 12,000 Stock Exchange listing fees are mainly derived
from initial and subsequent issue listing fees for
1,000 8,896 10,000 DWs and CBBCs. The fees increased by
7,989 $183 million or 57 per cent, reflecting an increase
800 8,000
in the number of newly listed DWs and CBBCs.
600 6,000
505

MD & A
4,875

400 4,000
322
200 505 2,000
321
0 1 0
2016 2017

Initial and subsequent issue listing fees

Others

GOVERNANCE
Number of newly listed CBBCs
Number of newly listed DWs

Market Data Fees

Market data fees dropped by 9 per cent as a result of lower allocated revenue since the percentage
volume increase for DWs, CBBCs and warrants traded was significantly lower than the increase for cash
equities traded.

FINANCIALS
EBITDA
Operating expenses rose by $36 million or 8 per cent principally due to higher staff costs including annual
payroll adjustments and higher variable pay. As both revenue and operating expenses rose by 8 per cent,
the EBITDA margin remained at 78 per cent.

Business Update
ADV of derivatives contracts traded on the Futures Exchange 3 in 2017 dropped by 5 per cent against 2016
OTHERS

due to reduced market volatility, but improved in Q4 2017, which was up 12 per cent against Q3 2017.

ADV of stock options contracts reached a record high in 2017, 14 per cent above the previous record in
2015. Trading volume was the highest in Q4 2017, with ADV up by 11 per cent against Q3 2017.
GLOSSARY

3 Excludes London Metal Mini Futures, Gold Futures and Iron Ore Futures contracts (which are included under the Commodities segment)

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 41

 BUSINESS REVIEW

New Record Highs – Full Year Trading Volume

2017
Number of Pre-2017 record
contracts Number of contracts

Total Futures and Options 1 214,658,273 189,768,610 (2015)

USD/CNH Futures 732,569 538,594 (2016)
Mini HSI Options 1,640,881 1,424,379 (2016)
HSCEI Options 19,777,920 19,475,726 (2016)
Stock Options 105,839,179 92,463,479 (2015)

1 Excludes London Metal Mini Futures, Gold Futures and Iron Ore Futures contracts (which are included under the Commodities segment)

New Record Highs – Single Day Trading Volume and Open Interest

Single Day Trading Volume Open Interest

Date Number of Date Number of
(2017) contracts (2017) contracts

Total Futures and Options 1 – – 27 Dec 17,343,759

HSI Futures – – 27 Jun 206,082
HSI Dividend Point Index Futures – – 28 Dec 13,902
HSCEI Dividend Point Index Futures 14 Feb 27,501 – –
HSI Options – – 28 Nov 594,941
Mini HSI Options 6 Dec 19,094 29 Aug 34,161
HSCEI Options – – 27 Dec 3,465,052
Mini-HSCEI Options 30 Oct 9,246 – –
Stock Options – – 28 Nov 12,502,433
USD/CNH Futures 5 Jan 20,338 4 Jan 46,711

1 Excludes London Metal Mini Futures, Gold Futures and Iron Ore Futures contracts (which are included under the Commodities segment)

Average Daily Volume of Major Futures and Options Contracts

Number of
contracts
’000
500

450 428
400

350
298
300

250

200

150 131 127 134

117
100 79 80
51 47 38 41
50

0
HSI Futures Mini-HSI Futures HSI Options HSCEI Futures HSCEI Options Stock Options

2016 2017

42 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

After-hours Trading Enhancements

OVERVIEW
A market consultation on the enhancement of after-hours trading (T+1 Session) was completed and
consultation conclusion issued in August 2017. Responses were received from a broad spectrum of
market users with extensive support for the proposal. Subject to regulatory approvals and market
readiness, HKEX plans to implement the proposed enhancements in three phases:

• Extension of trading hours for equity index futures to 01:00 was implemented on 6 November 2017.
This extension proved to be popular with investors, with a 48 per cent increase in equity index futures
volume in the T+1 Session recorded after 6 November 2017 as compared to the volume before the

ORGANISATION
extension 4, and more than 80 per cent of the HKFE EPs participating in the equity index futures in the
T+1 Session also participated in the extended trading hours from 23:45 to 01:00.

• Inclusion of equity index options in the T+1 Session in 1H 2018.

• Further extension of trading hours to 03:00, and the T+1 Session cut-off time will be aligned with the
close of trading hours tentatively in Q1 2019.

MD & A
Equity Futures and Options Market Development
Three new stock options on Hang Seng Index constituents (including the first option on a Real Estate
Investment Trust) were introduced on 10 April 2017, expanding the stock options universe to 87 classes.
Four new stock futures and five new stock options were also launched on 5 February 2018.

In addition, regulatory approval has been received for various product initiatives to be launched in 2018 –
contract month extension for HSI/HSCEI futures and options up to 5.5 years, and narrow strike intervals
for stock index options.

GOVERNANCE
Over 60 product educational seminars and briefing sessions were held in 2017, with over 6,000 attendees
in Hong Kong, China, Taiwan, Singapore and Malaysia.

RMB Currency Futures and Options Market Development

HKEX USD/CNH futures continued to see growth in liquidity and reached a record single-day volume of
20,338 contracts (US$2.0 billion in notional value) and record open interest of 46,711 contracts

FINANCIALS
(US$4.7 billion in notional value) in January 2017. To complement HKEX’s existing RMB Currency Futures
suite, RMB Currency Options were launched on 20 March 2017.

Enhancements were made to the RMB currency products in 2017. The introduction of an additional
contract month in Q1 2017 and the extension of trading hours in Q3 2017 further facilitated efficient
hedging on RMB-related risks. Revision of margin levels in Q4 2017 also enhanced capital efficiency and
reduced market funding costs on RMB-denominated derivatives products. OTHERS

Other FIC Development

On 8 June 2017, HKEX hosted its fourth annual RMB FIC Conference, attracting over 500 industry
experts and business leaders, discussing key regulatory and business issues with a special focus on
Bond Connect.

Stock Option Position Limits

An enhanced stock option position limits (SOPL) regime, which included tripling the maximum position
limit for stock options to 150,000 contracts, and expanding the scope of activities for hedge exemption,
GLOSSARY

was introduced on 1 June 2017. The enhancements were designed to cope with market growth and
enhance Hong Kong’s competitiveness as an international financial centre. Since the launch of the
regime, investors have increasingly utilised derivatives contracts on HKEX to manage risk.

4 A comparison between T+1 Session’s average daily volume of the six weeks from 6 November 2017 to 15 December 2017 and the average daily
volume in the T+1 Session from the beginning of 2017 up to 3 November 2017. T Session volume increased by 22 per cent over the same period.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 43

 BUSINESS REVIEW

HKEX has enhanced the Large Open Position (LOP) surveillance systems to support the introduction of
the revised SOPL model and new products including RMB Currency Options, Ministry of Finance Treasury
Bond (MOF T-Bond) Futures, CNH and USD Gold Futures and Iron Ore Futures during the year.

HKEX issued a set of Frequently Asked Questions (FAQ) on Position Limits and LOP Reporting to provide
guidance on when LOP reporting obligations would be triggered under certain scenarios.

Market Data Business

The derivatives data marketing programme to promote derivatives real-time data in Mainland and
overseas has been extended to Thailand and Vietnam, thereby covering a total of 11 regions. HKEX has
extended this programme until the end of 2019, demonstrating strong commitment to promoting new
derivatives products. Over 40 companies from different regions have joined this marketing programme.

Commodities Segment
Key Market Indicators

2017 2016 Change

ADV of metals contracts traded on the LME (lots)

 Aluminium 217,412 221,671 (2%)
 Copper 141,602 153,121 (8%)
 Zinc 123,037 111,161 11%
 Nickel 87,279 81,779 7%
 Lead 44,136 43,227 2%
 Ferrous 1,476 228 547%
 Precious 2,917 – N/A
 Others 6,621 7,440 (11%)
624,480 618,627 1%

At At
31 Dec 2017 31 Dec 2016 Change

Total futures Market Open Interest (lots) 2,253,477 2,212,501 2%

Analysis of Results
Summary

2017 2016
$m $m Change

Trading fees and trading tariff 1,116 1,230 (9%)

Market data fees 181 190 (5%)
Other revenue:
  Commodities stock levies and warehouse listing fees 77 87 (11%)
 Others 62 53 17%
Total revenue 1,436 1,560 (8%)
Operating expenses (659) (597) 10%
EBITDA 777 963 (19%)
EBITDA margin 54% 62% (8%)

44 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Trading Fees and Trading Tariff

OVERVIEW
Fees Contracts
$m ’000 lots
1,600 700
619 624
600 While the ADV of metals contracts traded was
1,230
1,200 1,116
1 per cent higher compared to 2016, the impact of
500 fee reductions for short- and medium-dated carry
trades, a position transfer fee cap, and new non-fee
400
800
generating administrative trades introduced in
300 June 2017, reduced trading fees by $114 million or

ORGANISATION
9 per cent.
200
400

100

0 0
2016 2017

Trading fees and trading tariff

ADV of metals contracts traded on the LME

MD & A
EBITDA
Operating expenses rose by $62 million (10 per cent). Excluding the one-off insurance recovery of
$23 million (relating to the costs of warehouse litigation in the US incurred in prior years), operating
expenses rose by 14 per cent, largely driven by increased costs for strategic initiatives, including the
establishment of QME in the Mainland. The overall increase was partly offset by savings on IT and LME
operating costs. As a result of the drop in revenue and the increase in operating expenses for strategic
initiatives, EBITDA margin dropped from 62 per cent in 2016 to 54 per cent in 2017.

GOVERNANCE
Business Update
LME
2017 was a key year for the LME’s information technology programme, and several systems upgrades
were undertaken during the year. These included the LMEselect electronic trading engine and the
LMEsmart matching platform. Work was also undertaken to ensure that the LME is compliant with all
applicable Markets in Financial Instruments Directive II (MiFID II) regulations, which came into force on

FINANCIALS
3 January 2018.

In April 2017, the LME published a Discussion Paper on Market Structure, covering various topics of
relevance to the ongoing development of the market. In September 2017, the LME published an analysis
of the feedback received, which included 162 written responses, together with an announcement of the
“LME Strategic Pathway”. The Strategic Pathway set out the LME’s proposed route to further develop its
franchise on the basis of four key principles: serve the physical market, ensure fairness, increase user
choice and maximise trading efficiency. It also provided insight into the LME’s strategic direction,
OTHERS

setting out key projects and changes for the LME Group over the next three years – including proposed
new contracts, systems upgrades and market structure changes.

The most immediate impact of the Strategic Pathway was that the LME reduced fees on both short- and
medium-dated carries (on 1 October 2017 and 1 November 2017 respectively) to further support the
physical user base and encourage use of the daily date structure.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 45

 BUSINESS REVIEW

The LMEprecious contracts were successfully launched on 10 July 2017, and 639,546 lots (1,989 tonnes)
of gold and 95,625 lots (14,871 tonnes) of silver have been traded up to the end of 2017. Since the first
day of trading, there has been liquidity out to 5 years and open interest reached 23,938 and 2,033 lots of
gold and silver respectively as of 29 December 2017. This strong start has demonstrated the industry’s
appetite to trade precious metals on-exchange and to clear centrally, and is also an indication of the
commitment from the industry to the LMEprecious initiative. Going forward, the LME will look to launch
Asian hours market making, trade at settlement functionality and options for gold and silver.

In November 2017, the LME launched a consultation on the introduction of a financial OTC booking fee
and trading regulations in support of market fairness. The aim of the financial OTC booking fee is to
rebalance the current disparity between the fees paid by members servicing their clients with an LME
client contract and those servicing their clients with an OTC contract based on LME prices at a
substantially reduced fee. The consultation closed on 12 January 2018 and the LME will issue a decision
notice to market participants in due course.

2017 also saw the conclusion of the LME’s warehouse reform programme – designed to reduce structural
queues at LME-listed warehouses to below 50 days – with the final structural queue dissipating by the end
of the third quarter. The LME will continue to monitor any operational queues which emerge during the
normal course of warehouse operations.

Product Development
HKFE launched dual currencies physically-delivered Gold Futures contracts and Iron Ore Futures
contracts in July and November 2017 respectively. These products aim to give a boost to RMB
internationalisation and strengthen Hong Kong as a comprehensive capital market that can serve as a
risk management centre for both Mainland and international investors. As of 31 December 2017, a total
of 110,763 contracts of CNH Gold Futures, and 55,372 contracts of USD Gold Futures have been traded,
with the combined ADV increasing from 1,690 contracts in July 2017 (equivalent to 1.69 tonnes) to
2,823 contracts (equivalent to 2.823 tonnes) at the end of December. For Iron Ore Futures, a total of
18,230 contracts (equivalent to 1,823,000 tonnes) were traded up to 31 December 2017.

LME Week
The annual LME Asia Week 2017 event, held in Hong Kong on 10 May 2017, attracted over 800 attendees
to the Metals Seminar and over 1,800 participants to the Gala Dinner. As part of the programme,
HKEX hosted an industry forum at QME, attracting more than 300 guests. The annual LME Week 2017
was held in London, attracting over 900 delegates to the Metals Seminar on 30 October 2017, and
1,950 participants to the Annual Dinner on 31 October 2017.

QME
The development of QME as HKEX’s onshore commodity trading platform is continuing, with the aim of
building an efficient onshore commodities trading platform that serves the Mainland’s real economy by
meeting the needs of domestic producers and industrial users. The operational plans for the delivery of
QME are periodically reviewed with our partners to synchronise its development with the emerging
regulatory environment, which dictates the pace at which the platform can develop.

46 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

Clearing Segment

OVERVIEW
Key Market Indicators

2017 2016 Change

ADT on the Stock Exchange ($bn) 88.2 66.9 32%

Average daily number of Stock Exchange trades 1,240,169 1,081,020 15%
Average value per trade ($) 71,159 61,908 15%
Average daily value of Settlement Instructions (SIs) settled by CCASS ($bn) 220.5 181.9 21%

ORGANISATION
Average daily number of SIs 92,459 83,194 11%
Average value per SI ($) 2,385,005 2,186,693 9%
ADV of metals contracts traded on the LME (lots) 624,480 618,627 1%

Analysis of Results
Summary
2017 2016

MD & A
$m $m Change

Trading fees and trading tariff – allocated from Equity and

  Financial Derivatives segment 288 278 4%
Clearing and settlement fees 2,691 2,358 14%
Depository, custody and nominee services fees 892 857 4%
Other revenue and sundry income 145 98 48%
4,016 3,591 12%
Net investment income 809 547 48%

GOVERNANCE
Total revenue and other income 4,825 4,138 17%
Operating expenses (752) (702) 7%
EBITDA 4,073 3,436 19%
EBITDA margin 84% 83% 1%

Trading Fees and Trading Tariff

Trading fees and trading tariff allocated for clearing derivatives products rose 4 per cent, due to a 44

FINANCIALS
per cent growth in ADV of stock options traded, partially offset by a 5 per cent drop in ADV of derivatives
contracts traded on the Futures Exchange (see commentary for the Equity and Financial Derivatives
segment).

Clearing and Settlement Fees

$m
3,000
2,691
OTHERS

$88.2 bn

$66.9 bn 2,358

2,000
1,645
1,334 624
$220.5 bn 619
$181.9 bn 869
1,000
762
590 547
392 451
GLOSSARY

42 48
0
Clearing fees for Fees for Sls Clearing fees for futures, Clearing fees for Total
Cash Market options and OTC contracts LME Clear

2016 2017 ADT on the Stock Exchange Average daily value of SIs
ADV of futures and options contracts ADV of metals contracts traded on the
(’000) LME (’000 lots)

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 47

 BUSINESS REVIEW

Clearing and settlement fees for the Cash Market and for SIs increased by 23 per cent and 15 per cent
respectively. The increase was primarily driven by a higher number of transactions, and 7 per cent and
3 per cent higher average fee per Cash Market trade and per SI transaction respectively.

Despite a 1 per cent increase in ADV of metals contracts traded, clearing fees for LME Clear dropped by
$43 million or 7 per cent due to a position transfer fee cap, fee reductions for short- and medium-dated
carry trades, and new non-fee generating administrative trades introduced in June 2017.

Depository, Custody and Nominee Services Fees

Depository, custody and nominee services fees are not directly impacted by changes in market activity.
They rose by $35 million or 4 per cent due to higher portfolio fees from the increase in the overall
portfolio value held under Southbound and Northbound Trading of Stock Connect, and increase in
electronic IPO services fees, but was partly offset by lower scrip fees.

Other Revenue and Sundry Income

Other revenue rose by $47 million due to a one-off post-liquidation interest payment of $55 million
received from Lehman’s liquidators in March 2017. The post-liquidation interest was then appropriated to
the HKSCC Guarantee Fund reserve from retained earnings in 2017.

Net Investment Income

Average fund size
$bn
160
149.0
12.4
127.8 The increase in the average size of Margin Funds
120 8.0 during the year arises from increased margin
requirements per contract cleared through HKCC
and LME Clear together with higher open interest
80 and market prices compared to 2016.
136.6
119.8

40

0
2016 2017

Margin Funds
Clearing House Funds

The analysis of net investment income is as follows:

2017 2016
Clearing Clearing
Margin House Margin House
Funds Funds Total Funds Funds Total
$m $m $m $m $m $m

Net investment income from:

  Cash and bank deposits 746 24 770 512 20 532
  Debt securities 36 – 36 13 – 13
  Exchange gains 3 – 3 2 – 2
Total net investment income 785 24 809 527 20 547
Net investment return 0.57% 0.19% 0.54% 0.44% 0.26% 0.43%

The higher net investment income on Margin Funds in 2017 arose from higher interest income on cash
and bank deposits, attributable to both higher average fund size and higher bank deposit rates in
Hong Kong.

48 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

EBITDA

OVERVIEW
Operating expenses rose by $50 million or 7 per cent over 2016, as a result of higher staff costs including
annual payroll adjustments and higher variable pay, and higher premises costs. As the percentage
increase in revenue and other income was higher than the percentage increase in operating expenses,
EBITDA margin increased to 84 per cent in 2017 (2016: 83 per cent).

Business Update
Cash and Derivatives Clearing

ORGANISATION
The portfolio value held under Southbound and Northbound Trading of Stock Connect continued to
increase and reached $927 billion at 31 December 2017 (31 December 2016: $364 billion) and
RMB531 billion (31 December 2016: RMB186 billion) respectively. As a result, Stock Connect related
depository, custody and nominee services fee income rose by 146 per cent to $69 million in 2017
(2016: $28 million).

As part of HKSCC’s ongoing efforts to enhance Stock Connect, Realtime Delivery versus Payment (RDP)
money settlement in RMB, HKD and USD for Northbound SIs of Stock Connect was introduced to reduce

MD & A
counterparty risk exposure between CCASS participants in November 2017. This new feature is expected
to enable more European fund managers to invest in A shares through Stock Connect.

USD and CNH Gold Futures contracts launched in July 2017 are the first physically delivered
commodities contracts cleared in Hong Kong. The physical delivery process has been smooth and the
number of “Physical Delivery Participants” has grown as CPs are showing increasing interest in the newly
launched contracts.

GOVERNANCE
HKCC continues to improve margining efficiencies for CPs by offering margin offsets between correlated
equity derivatives (HSI and HSCEI futures and options) and foreign exchange/commodity derivatives
(USD, Gold and CNH futures and options).

HKEX has undertaken a comprehensive review of its risk management framework across HKSCC,
HKCC and SEOCH and is in the process of implementing changes to its default fund structure and the
introduction of a new value-at-risk (VaR) margin model for the Cash Market. This will offer overall capital
savings to market participants through the implementation of Next Generation Risk Management

FINANCIALS
Platform scheduled for 2019.

To complement the extension of trading hours for equity index futures to 01:00 from November 2017,
HKCC has also extended its clearing risk management and operations coverage to 01:45 to provide CPs
with greater flexibility in managing their post-trade activities.

HKEX, together with ChinaClear, Central Depository Company Pakistan and National Securities
Depository India, co-organised the World Forum of Central Securities Depositories (WFC 2017) in Hong
OTHERS

Kong from 14 to 17 November 2017. Over 250 delegates from 58 regions around the world attended,
exchanging ideas on the business development, application of fintech and market outlook of the Central
Securities Depository industry.

OTC Clear
OTC Clear was awarded the “Best OTC Clearing and Risk Management System Implementation” by the
Asian Banker and the “Clearing House of the Year” by Asia Risk in recognition of its Cross Currency Swap
(CCS) propositions. In 2017, a total of US$38.7 billion notional was cleared by OTC Clear, nearly nine times
GLOSSARY

of that in 2016.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 49

 BUSINESS REVIEW

Apart from launching client clearing services and accepting non-cash collateral in Q1 2017, OTC Clear
expanded its product suite to HKD basis swaps and non-deliverable interest rate swaps denominated in
four Asian currencies in Q2 2017 and increased the daily notional exchanges risk limits for CCS in
response to strong market demand in Q3 2017. OTC Clear also admitted banks incorporated in Australia,
Singapore and France, bringing the number of clearing members to 20 by December 2017
(December 2016: 13).

LME Clear
In 2017, LME Clear delivered two upgrades to its clearing system: providing clearing services for
LMEprecious; and implementing changes to ensure that LME Clear is compliant with all applicable
MiFID II regulations. In addition, changes were made to its reporting tools to meet the requirements of
the Bank of England’s new reporting regime.

Platform and Infrastructure Segment

Analysis of Results
Summary

2017 2016
$m $m Change

Network, terminal user, dataline and software sub-license fees 413 406 2%
Hosting services fees 143 129 11%
Others 4 5 (20%)
Total revenue 560 540 4%
Operating expenses (151) (152) (1%)
EBITDA 409 388 5%
EBITDA margin 73% 72% 1%

Network, Terminal User, Dataline and Software Sub-license Fees

Network, terminal user, dataline and software sub-license fees increased due to organic growth from new
EPs and China Connect Exchange Participants (CCEPs) migrating from Open Gateway to China Connect
Central Gateway (CCCG), but this was partly offset by a decrease in sales of throttles.

Hosting Services Fees

Hosting services fees increased due to organic growth from both new customer subscriptions and
increased usage by existing customers.

EBITDA
EBITDA margin increased from 72 per cent to 73 per cent, reflecting the increase in revenue and other
income.

Business Update
During 2017, all major trading, clearing, settlement, and market data dissemination systems for the Cash,
Derivatives and Commodities Markets continued to perform reliably. The LME experienced two software
incidents during 1H 2017, the second of which temporarily delayed the clearing processes for a number
of trades. These matters have been duly resolved.

The Orion Trading Platform – Securities Market platform, which replaces the current Third Generation
Automatic Order Matching and Execution System (AMS/3.8), was successfully launched in February 2018.
This new system allows HKEX to provide new functionalities and support increased trading capacity for
400 million transactions daily, double that of the previous AMS/3.8 system.

50 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

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CCCG was successfully introduced on 17 July 2017 to facilitate Northbound Trading for CCEPs. Over 90

OVERVIEW
per cent of Northbound Trading is now traded through CCEPs which have migrated onto the CCCG
infrastructure, with full migration expected by Q1 2018.

HKEX continued development work on upgrades to the derivatives platforms, the Hong Kong Futures
Automated Trading System (HKATS) and the Derivatives Clearing and Settlement System (DCASS), which
are scheduled for rollout by 2H 2018. The upgrades will bring simplified infrastructure to the Derivatives
Market, with a reduction of the hardware footprint required at participants’ premises. Project and
technical briefing sessions were held in 2017 and a web corner for the project has been established to

ORGANISATION
foster communication with participants.

The HKEX Market website was rebuilt and rolled out in November 2017 with an entirely new design that
aligns with HKEX’s new corporate image released in 2016. The new website contains multiple
enhancements which streamline navigation and enhance market data functionality.

At the end of December 2017, 108 EPs were using HKEX’s Hosting Services. These EPs generated,
in aggregate, approximately 52 per cent of the Cash Market turnover and 64 per cent of the trading

MD & A
volume of the Derivatives Market.

Corporate Items
“Corporate Items” is not a business segment but comprises central income (including net investment
income of the Corporate Funds), the costs of central support functions that provide services to all
operating segments and other costs not directly related to any operating segments.

Revenue and Other Income

GOVERNANCE
2017 2016
$m $m Change

Net investment income 790 149 430%

Others 11 12 (8%)
Total revenue and other income 801 161 398%

Net Investment Income

FINANCIALS
Average fund size
$bn
24

21 20.6
The average fund size increased principally due to
18 17.4 cash generated and retained by the business after
cash dividends paid.
15
OTHERS

12

0
2016 2017

Corporate Funds
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 51

 BUSINESS REVIEW

The analysis of net investment income is as follows:

2017 2016
$m $m

Net investment income from:

  Cash and bank deposits 142 82
  Collective investment schemes 632 6
  Equity securities 14 27
  Debt securities – 75
  Exchange gains/(losses) 2 (41)
Total net investment income 790 149
Net investment return 3.83% 0.86%

In 2017, a one-off receipt of $14 million deferred consideration on sale of LCH shares was recognised in
net investment income under equity securities. Excluding such gain, net investment income of the
Corporate Funds in 2017 increased by $627 million principally due to the fair value gains on collective
investment schemes held under the external portfolio in 2017. Higher interest income on cash and bank
deposits, attributable to both higher interest rates and higher average fund size, also contributed to the
increase in net investment income.

As the valuation of investments reflect movements in market prices, fair value gains or losses may
fluctuate or reverse until the investments are sold or redeemed.

Expenses, Other Costs and Taxation

Operating Expenses

STAFF COSTS & IT & COMPUTER PREMISES PRODUCT LEGAL & OTHER TOTAL
RELATED MAINTENANCE EXPENSES MARKETING & PROFESSIONAL OPERATING
EXPENSES EXPENSES PROMOTION FEES EXPENSES
EXPENSES

+12 -13 +6 -13 -25 -11 +3

($m) 3,566
3,455

2,273
2,035

500 433 427 380

333 354
54 47 106 79

2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017

Staff costs and related expenses increased by $238 million or 12 per cent mainly due to annual payroll
adjustments, increase in performance-related variable pay, and increased headcount for strategic
initiatives including QME.

52 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 BUSINESS REVIEW

IT and computer maintenance expenses fell by $67 million or 13 per cent, mainly attributable to lower IT

OVERVIEW
costs of the LME Group as a result of cost savings for renewal of IT maintenance contracts and the
depreciation of GBP. IT costs of services and goods directly consumed by Participants amounted to
$73 million, same as in 2016.

Premises expenses increased due to the net effect of the expiry of a number of lease agreements and the
consolidation of office locations to increase operating efficiency.

Legal and professional fees decreased by $27 million or 25 per cent, attributable to a one-off insurance

ORGANISATION
recovery of $23 million relating to the warehouse litigation in the US.

Other operating expenses decreased by $47 million or 11 per cent due to the reclassification of banking
facility commitment fees of $41 million (2016: $38 million) 5 under finance costs (see below). Excluding
such commitment fees, other operating expenses dropped by $9 million or 2 per cent, due to lower
investment management services costs.

Depreciation and Amortisation

MD & A
2017 2016
$m $m Change

Depreciation and amortisation 858 771 11%

Depreciation and amortisation increased by $87 million or 11 per cent, attributable to new offices
completed during the year and depreciation of new IT systems.

GOVERNANCE
Finance Costs

2017 2016
$m $m Change

Finance costs 134 82 63%

The increase in finance costs was due to the reclassification of bank facility commitment fees from other

FINANCIALS
operating expenses of $41 million for 2017 (see above), and negative interest paid for Euro and Japanese
Yen margin deposits.

Taxation

2017 2016
$m $m Change

Taxation 1,255 1,058 19%

OTHERS

Taxation increased due to higher profit before taxation in 2017 and a deferred tax credit of $31 million in
2016 arising from reduction in UK Corporation Tax rate, but was partly offset by higher non-taxable
investment income.
GLOSSARY

5 No restatement of prior year comparatives was made as the amount was considered immaterial.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 53

 FINANCIAL REVIEW

Analysis of Results by Quarter

Quarterly Results

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Total 2017

$m $m $m $m $m

Revenue and other income 3,048 3,155 3,454 3,523 13,180

Operating expenses (833) (878) (887) (968) (3,566)
EBITDA 2,215 2,277 2,567 2,555 9,614
Depreciation and amortisation (175) (187) (185) (311) (858)
Operating profit 2,040 2,090 2,382 2,244 8,756
Finance costs (29) (36) (28) (41) (134)
Share of losses of joint ventures (2) (3) (3) (4) (12)
Profit before taxation 2,009 2,051 2,351 2,199 8,610
Taxation (299) (283) (328) (345) (1,255)
Profit for period/year 1,710 1,768 2,023 1,854 7,355
Loss attributable to non-controlling interests 6 9 10 24 49
Profit attributable to shareholders 1,716 1,777 2,033 1,878 7,404

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Total 2016

$m $m $m $m $m

Profit attributable to shareholders 1,432 1,553 1,543 1,241 5,769

Analysis of Quarterly Results

Profit ADT
$m $bn
5,000 120
107.3

93.2 100 Market sentiment turned bullish in early 2017

4,000
and continued to gain momentum throughout
74.3
77.8
80 the year, with headline ADT rising to
3,000 62.6
68.3
64.3 $107.3 billion in Q4 2017. The increase in ADT
72.7
60
compared to corresponding quarters in 2016
2,033 resulted in 2017 profit attributable to
1,777 1,878
2,000 1,716
1,432 1,553 1,543
40
shareholders being higher than 2016 for all
1,241 quarters.
1,000
20
Q3 2017 was the most profitable quarter
0 0
notwithstanding the higher ADT achieved in
Q1 Q2 Q3 Q4
Q4 2017, due to an increase in operating costs
towards the end of the year. This reflects
seasonal decreases in depository and custody
2016 profit attributable to shareholders
fees, year-end adjustments to performance
2017 profit attributable to shareholders related variable pay together with depreciation
of new IT systems.
2016 ADT on the Stock Exchange
2017 ADT on the Stock Exchange

54 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 FINANCIAL REVIEW

Changes to Key Items in Consolidated Statement of Financial Position

OVERVIEW
(A) Financial Assets and Financial Liabilities

At At
31 Dec 2017 31 Dec 2016
$m $m Change

Financial assets
Cash and cash equivalents 155,660 115,723 35%
Financial assets measured at fair value through profit or loss 95,037 70,066 36%

ORGANISATION
Financial assets measured at amortised cost 30,817 29,167 6%
Total 281,514 214,956 31%

The Group’s financial assets comprised financial assets of Corporate Funds, Margin Funds,
Clearing House Funds, base and precious metals derivatives contracts, and cash prepayments for
A shares traded under Stock Connect, as follows:

MD & A
At At
31 Dec 2017 31 Dec 2016
$m $m Change

Financial assets
Corporate Funds 1 21,464 17,670 21%
Margin Funds 2
155,384 125,803 24%
Clearing House Funds 17,642 9,602 84%
Base and precious metals derivatives contracts cleared

GOVERNANCE
  through LME Clear 85,335 61,618 38%
Cash prepayments for A shares 1,689 263 542%
Total 281,514 214,956 31%

1 The amounts at 31 December 2016 exclude a prepayment of $600 million for collective investment schemes but include $300 million of
investments purchased for collective investment schemes not yet settled.
2 Excludes Settlement Reserve Fund and Settlement Guarantee Fund paid to ChinaClear and margin receivable from CPs of $2,430 million
(31 December 2016: $1,043 million), which are included in accounts receivable, prepayments and other deposits.

FINANCIALS
At At
31 Dec 2017 31 Dec 2016
$m $m Change

Financial liabilities
Base and precious metals derivatives contracts cleared
  through LME Clear 85,335 61,618 38%
Other financial liabilities at fair value through profit or loss – 9 (100%)
Margin deposits, Mainland security and settlement deposits,
  and cash collateral from CPs 157,814 126,846 24%
OTHERS

CPs’ contributions to Clearing House Funds 16,626 8,656 92%

Total 259,775 197,129 32%

The 24 per cent increase in financial assets and financial liabilities of Margin Funds at 31 December
2017 against those at 31 December 2016 was mainly attributable to increased contributions
required from members of LME Clear and CPs of SEOCH in response to an increase in open
positions on metal contracts and stock options respectively, and higher metal contract prices.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 55

 FINANCIAL REVIEW

The increase in financial assets and financial liabilities of Clearing House Funds was mainly
attributable to higher contributions required from members of LME Clear and CPs of SEOCH in
response to changes in risk exposures.

After adjusting for prepayments and unsettled investments in collective investment schemes
(footnote 1 above), Corporate Funds at 31 December 2017 increased by $3,494 million as compared
to those at 31 December 2016 due to the retention of cash generated by the business over the past
year partly offset by the cash paid for the 2016 final dividend and 2017 interim dividend.

A portion of the Corporate Funds is invested in collective investment schemes which are designed
to enhance returns and mitigate portfolio volatility and asset class concentration risk. Further
details of investment in collective investment schemes are included in note 48(a)(iv) to the
Consolidated Financial Statements of this Annual Report.

(B) Fixed Assets, Intangible Assets and Capital Commitments

The total net book value of the Group’s fixed assets and intangible assets rose by $83 million from
$19,311 million at 31 December 2016 to $19,394 million at 31 December 2017. The increase was
mainly due to additions of $788 million, and exchange gains of $153 million arising from the effect
of the appreciation of USD against HKD on the Group’s investments in overseas subsidiaries,
but was partly offset by depreciation and amortisation of $858 million. Additions during the year
mainly related to the establishment of a commodities trading platform in Mainland China, the
renovation of new offices, and the development and upgrade of various trading and clearing
systems including the enhancement of Stock Connect technology infrastructure.

The Group’s capital expenditure commitments at 31 December 2017, including those authorised by
the Board but not yet contracted for, amounted to $1,433 million (31 December 2016:
$981 million). These related mainly to the renovation of new offices, and the development and
upgrade of various IT systems including the cash, derivatives and commodities trading and clearing
systems, and IT systems to facilitate mutual stock market access between Mainland China and
Hong Kong.

(C) Significant Investments Held, Material Acquisitions and Disposals of Subsidiaries, and
Future Plans for Material Investments or Capital Assets
On 22 March 2017, the Group entered into an agreement to sell a 9.99 per cent stake in QME
(formerly known as Gangrong Trading Services (Shenzhen) Limited) to an independent third party
at a consideration of RMB25 million. After the transfer, the Group’s interest in QME dropped to
90.01 per cent. On 26 May 2017 and 1 June 2017, RMB135 million and RMB15 million were
further injected by the Group and the non-controlling interests respectively into QME as its
registered capital.

BCCL, a joint venture established by CFETS and HKEX, was incorporated on 6 June 2017. On 10
August 2017, the Group injected $14 million into BCCL for a 40 per cent stake in BCCL.

Save for those disclosed in this Annual Report, there were no other significant investments held,
nor were there material acquisitions or disposals of subsidiaries during the year under review.
Apart from those disclosed in this Annual Report, there was no plan authorised by the Board for
other material investments or additions of capital assets at the date of this Annual Report.

56 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 FINANCIAL REVIEW

(D) Equity attributable to Shareholders and Return on Equity

OVERVIEW
Equity attributable to shareholders increased by $5,007 million to $37,273 million at 31 December
2017 from $32,266 million at 31 December 2016. This arose principally from the $3,037 million
shares issued in lieu of cash dividends and an increase in retained earnings of $1,756 million mainly
attributable to profit for the year less dividends declared.

Equity attributable to Shareholders and Return on Equity

Return on
Equity equity

ORGANISATION
$m %
70,000 30

60,000 Return on equity increased by 2 per cent

due to the increase in profit attributable
20
50,000
18 20
to shareholders in 2017.
40,000 37,273
32,266
30,000
10
20,000

MD & A
10,000

0 0
2016 2017

Equity attributable to shareholders

Return on equity1

1 Based on equity attributable to shareholders at year-end

GOVERNANCE
Liquidity, Financial Resources and Gearing
Working capital rose by $2,330 million to $19,452 million at 31 December 2017 (31 December 2016:
$17,122 million). The increase was mainly due to profit attributable to shareholders of $7,404 million,
which was partly offset by the 2016 final dividend and 2017 interim dividend (net of scrip dividends)
of $2,587 million, early repayment of USD floating rate bank borrowings of $1,586 million and
reclassification of borrowings of $1,027 million from non-current liabilities to current liabilities as they

FINANCIALS
became repayable within twelve months.

At 31 December 2017, the Group had the following outstanding borrowings:

At 31 Dec 2017 At 31 Dec 2016

Carrying Carrying
value value
$m Maturity $m Maturity
OTHERS

USD floating rate bank borrowings – N/A 1,586 Jul 2020 & Jul 2021
2 USD fixed rate notes with average coupon of 2.8 per cent 1,533 Dec 2018 & Jan 2019 1,519 Dec 2018 & Jan 2019
Written put options to non-controlling interests 327 N/A 317 N/A
1,860 3,422
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 57

 FINANCIAL REVIEW

At 31 December 2017, the Group had a gross gearing ratio (ie, gross debt divided by adjusted capital) of
5 per cent (31 December 2016: 11 per cent), and a net gearing ratio (ie, net debt divided by adjusted
capital) of zero per cent (31 December 2016: zero per cent). For this purpose, gross debt is defined as
total borrowings and net debt is defined as total borrowings less cash and cash equivalents of Corporate
Funds (and will be zero when the amount of cash and cash equivalents of Corporate Funds is greater than
total borrowings), and adjusted capital as all components of equity attributable to shareholders other
than designated reserves.

Apart from the borrowings used to fund the acquisition of the LME Group, banking facilities have been
put in place for contingency purposes. At 31 December 2017, the Group’s total available banking facilities
for its daily operations amounted to $18,963 million (31 December 2016: $18,947 million), which
included $11,954 million (31 December 2016: $11,938 million) of committed banking facilities and
$7,000 million (31 December 2016: $7,000 million) of repurchase facilities.

The Group has also put in place foreign exchange facilities for its daily clearing operations and for the
RMB Trading Support Facility to support the trading of RMB stocks listed on the Stock Exchange.
At 31 December 2017, the total amount of the facilities was RMB21,500 million (31 December 2016:
RMB21,500 million).

In addition, the Group has arranged contingency banking facilities amounting to RMB13,000 million
(31 December 2016: RMB13,000 million) for settling payment obligations to ChinaClear should there be
events that disrupt normal settlement arrangements for Stock Connect, eg, natural disasters or extreme
weather conditions in Hong Kong.

At 31 December 2017, 88 per cent (31 December 2016: 85 per cent) of the Group’s cash and cash
equivalents were denominated in HKD or USD.

Pledges of Assets
Details of pledges of assets are included in note 46 to the Consolidated Financial Statements of this
Annual Report.

Exposure to Fluctuations in Exchange Rates and Related Hedges

Details of the Group’s exposure to fluctuations in exchange rates and related hedges are included in note
48(a)(i) – Foreign exchange risk to the Consolidated Financial Statements of this Annual Report.

Contingent Liabilities
Details of contingent liabilities are included in note 43 to the Consolidated Financial Statements of this
Annual Report.

58 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

10-YEAR FINANCIAL STATISTICS

2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

OVERVIEW
KEY MARKET STATISTICS
ADT traded on the Stock Exchange ($bn) 88.2 66.9 105.6 69.5 62.6 53.9 69.7 69.1 62.3 72.1
ADV of derivatives contracts traded on
  the Futures Exchange (’000 contracts) 441 464 394 275 284 260 269 222 206 207
ADV of stock options contracts traded on
  the Stock Exchange (’000 contracts) 428 298 374 302 249 228 303 246 192 225
ADV of metals contracts traded on LME* (’000 lots) 624 619 670 700 676 634 N/A N/A N/A N/A

ORGANISATION
* HKEX completed the acquisition of the LME Group on 6 December 2012.

CONSOLIDATED INCOME STATEMENT

($m)
Revenue and other income 13,180 11,116 13,375 9,849 8,723 7,211 7,855 7,566 7,035 7,549
Operating expenses (3,566) (3,455) (3,290) (2,958) (2,777) (1,957) (1,733) (1,505) (1,392) (1,511)
EBITDA 9,614 7,661 10,085 6,891 5,946 5,254 6,122 6,061 5,643 6,038
Depreciation and amortisation (858) (771) (684) (647) (507) (158) (90) (107) (101) (110)

MD & A
Costs relating to acquisition of LME Group – – – – – (138) – – – –
Finance costs (134) (82) (114) (196) (183) (55) – – – –
Fair value loss on derivative component of
  convertible bonds – – – – – (55) – – – –
Share of losses of joint ventures (12) (9) (9) (10) (10) (3) – – – –
Profit before taxation 8,610 6,799 9,278 6,038 5,246 4,845 6,032 5,954 5,542 5,928
Taxation (1,255) (1,058) (1,347) (900) (700) (761) (939) (917) (838) (799)
Profit for the year 7,355 5,741 7,931 5,138 4,546 4,084 5,093 5,037 4,704 5,129

GOVERNANCE
Loss attributable to non-controlling interests 49 28 25 27 6 – – – – –
Profit attributable to shareholders 7,404 5,769 7,956 5,165 4,552 4,084 5,093 5,037 4,704 5,129
Dividend per share ($) 5.40 4.25 5.95 3.98 3.54 3.31 4.25 4.20 3.93 4.29
Basic earnings per share ($) 6.03 4.76 6.70 4.44 3.95 3.75 4.71 4.66 4.36 4.76

CONSOLIDATED STATEMENT OF
  FINANCIAL POSITION
($m)

FINANCIALS
Non-current assets 19,586 19,508 19,622 19,672 20,797 20,260 1,580 2,350 2,637 425
Current assets 298,018 227,810 218,571 232,188 65,146 60,577 52,448 45,534 42,695 62,397
Current liabilities (278,566) (210,688) (203,976) (222,564) (57,538) (55,337) (44,809) (39,160) (36,985) (55,220)
Net current assets 19,452 17,122 14,595 9,624 7,608 5,240 7,639 6,374 5,710 7,177
Total assets less current liabilities 39,038 36,630 34,217 29,296 28,405 25,500 9,219 8,724 8,347 7,602
Non-current liabilities (1,663) (4,246) (4,255) (7,937) (7,887) (7,736) (60) (47) (320) (308)
Total equity 37,375 32,384 29,962 21,359 20,518 17,764 9,159 8,677 8,027 7,294
OTHERS

Non-controlling interests (102) (118) (146) (86) (113) – – – – –

Equity attributable to HKEX’s shareholders 37,273 32,266 29,816 21,273 20,405 17,764 9,159 8,677 8,027 7,294
Equity per share 1 ($) 30.14 26.42 24.74 18.26 17.59 15.48 8.50 8.06 7.46 6.79
FINANCIAL RATIOS
Dividend payout ratio 90% 90% 90% 90% 90% 90% 90% 90% 90% 90%
Cost to income ratio 2
27% 31% 25% 30% 32% 27% 22% 20% 20% 20%
Pre-tax profit margin 2 65% 61% 69% 61% 60% 67% 77% 79% 79% 79%
Return on equity 3
20% 18% 27% 24% 22% 23% 56% 58% 59% 70%
GLOSSARY

Current ratio 1.1 1.1 1.1 1.0 1.1 1.1 1.2 1.2 1.2 1.1

Notes:
1 Based on number of shares issued and fully paid less number of shares held for the Share Award Scheme at 31 December
2 For the purpose of computing cost (ie, operating expenses) to income ratio and pre-tax profit margin, income includes share of losses of joint
ventures.
3 Based on equity attributable to HKEX’s shareholders at year end

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 59

 CORPORATE GOVERNANCE REPORT
The Board is committed to high standards of
Committee Reports
corporate governance and recognises that good
governance is vital for the long-term success and Nomination Committee Report: pages 74 to 76
sustainability of HKEX’s business. Audit Committee Report: pages 77 to 79

HKEX’s key corporate governance practices and Risk Committee Report: pages 80 to 82
activities during the year ended 31 December 2017 Remuneration Committee Report: pages 83 to 89
are highlighted in this report and certain ESG Committee Report: pages 90 and 91
Committee Reports, as well as the 2017 CSR
Report which will be published on the HKEX Group HKEX Group website
website together with this Annual Report. All the
About HKEX (Organisation) section ORG
Committee Reports form part of this report.
Investor Relations section IR
More details about HKEX’s corporate governance
Corporate Governance section CG
structure, principles and practices are available on
the HKEX Group website CG . Corporate Social Responsibility section CSR

Governance Highlights

• High level of independence • Effective oversight by Board and committees

• Periodic Board refreshment • Annual compensation policies review
• Rigorous nomination process • Robust risk management and internal controls
• Diverse range of Board expertise and experience framework
• Strong time commitment by Directors • Embedded compliance culture
• Ample training attended by Directors • Accountability and transparency
• Board evaluation by independent consultant • Proactive and ongoing stakeholder engagement

Compliance with Corporate Governance Code

Throughout the year 2017, HKEX complied with all code provisions and, where appropriate, adopted the
recommended best practices set out in the Corporate Governance Code, with the following exceptions:

Code Provision A.4.1 (Re-election of non-executive directors)

The Government Appointed Directors, all being Non-executive Directors, are not subject to election or re-election
by Shareholders as their appointments are governed by the SFO.

Code Provision A.4.2 (Retirement by rotation of directors)

HKEX’s Chief Executive in his capacity as a Director is not subject to retirement by rotation, as his term on the
Board is coterminous with his employment with HKEX under HKEX’s Articles.

HKEX has applied the principles of the Corporate Governance Code to its corporate governance structure
and practices in the manner as described in this report and on the HKEX Group website CG / IR / ORG .
A checklist detailing HKEX’s compliance with the Corporate Governance Code is available on the HKEX
Group website CG . The Board has delegated its corporate governance functions to the ESG Committee.
A summary of the work done by the ESG Committee in 2017/2018 is set out in the ESG Committee Report.

Strategic Planning
HKEX adopts a rigorous and continuing strategic planning process, including a full-day offsite Strategic
Day, to identify and assess the opportunities and challenges that the Group might face and to develop a
planned course of action for the Group to generate sustainable long-term value for Shareholders.

HKEX’s three-year strategic plan for 2016-2018 is available on the HKEX Group website (About HKEX
section). The annual Board offsite meeting was held to review the achievements under the plan, and
discuss and explore potential strategic moves. Details of the progress made during the year are reported
in the Chief Executive’s Review and Business Review sections of this Annual Report.

60 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 CORPORATE GOVERNANCE REPORT

The Board

OVERVIEW
Board Composition
The Board’s structure is governed by HKEX’s Articles and the SFO. The Board has adopted a Board
Diversity Policy which is available on the HKEX Group website CG . Its composition reflects an
appropriate mix of skills, experience and diversity among its members that are relevant to HKEX’s
strategy, governance and business and contribute to the Board’s effectiveness.

Independent Non-executive Directors Executive Director

ORGANISATION
6 Elected Directors 6 Government Appointed Directors Chief Executive

Ethnicity Chinese Non-Chinese

MD & A
9 Directors 4 Directors

Age Group 49-55 56-60 61-65 66-73

2 Directors 5 Directors 4 Directors 2 Directors

Directorship with HKEX 1-2 3-5 6-9 10

(Number of Years) 4 Directors 4 Directors 4 Directors 1 Director

Other Public Companies 0-1 2-3 4

Directorship(s) 8 Directors 4 Directors 1 Director
(Number of Companies)

GOVERNANCE
Board Expertise and Skills
Executive management Financial reporting and
and leadership skills Sound judgement and risk oversight experience
effective oversight of
Global business and Government, legal and
and guidance to
economist experience public policy experience
management
Mainland market expertise Financial market expertise

FINANCIALS
The names of the Directors in office during 2017 and brief biographies of the current Directors are
included in the Board and Committees section and the Board of Directors and Senior Management
section respectively of this Annual Report.

Under HKEX’s Articles, the term of office of Non-executive Directors is not more than three years
(subject to re-appointment or re-election), although each Government Appointed Director is normally
appointed for a term of approximately two years. The staggered terms of service enable the Board to
OTHERS

have a good balance of experienced and new Directors, with an average tenure of 4.4 years as of the date
of this report. The service term of C K Chow and Tim Freshwater (Government Appointed Directors), and
T C Chan, Fred Hu and John Williamson (Elected Directors) will expire at the conclusion of the 2018 AGM.
On 12 February 2018, the Government appointed Cha May-Lung, Laura and Hung Pi Cheng, Benjamin as
members of the Board, each for a term of approximately two years from the conclusion of the 2018 AGM
until the end of the annual general meeting to be held in 2020. On 28 February 2018, the Board accepted
the nomination by the Nomination Committee and recommended Mr Chan, Dr Hu and Mr Williamson to
stand for re-election at the 2018 AGM.
GLOSSARY

Information about the Board Diversity Policy along with the review of the Board’s composition,
nomination of Board candidates and independence assessment of INEDs during 2017/2018 is set out in
the Nomination Committee Report.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 61

 CORPORATE GOVERNANCE REPORT

Roles and Responsibilities

Good governance emanates from an effective and accountable board. At HKEX, the Board directly, and
indirectly through its committees, leads and provides direction to management by laying down strategies
and overseeing their implementation by management. It monitors the Group’s operational and financial
performance, reviews the Group’s compensation policies and succession planning, and ensures that
effective governance and CSR policies and sound internal control and risk management systems are in
place. The Board operates under defined terms of reference which set out matters specifically reserved
for its decision. The terms of reference are available on the HKEX Group website ORG.

For effective oversight and leadership, the Board regularly reviews reports from HKEX’s Chief Executive
and senior management on the progress of the approved strategies, plans and budgets, and receives
updates/advice from the Board committees, Consultative Panels and management on the governance,
business performance and development of the Group. Further details relating to the Board committees,
Consultative Panels and HKEX’s management functions are set out in the Board Delegation section below.

Board Effectiveness
The Board recognises that conducting regular evaluation of its performance is essential to good corporate
governance and Board effectiveness. In 2017, the Board engaged an independent external consultant to
evaluate the performance of the boards of HKEX and its two subsidiaries, the LME and LME Clear.

The evaluation concluded that at HKEX, the Board’s practices are compliant with the Corporate
Governance Code and are in line with international best practices, and the Board operates effectively and
performs well in its governance of HKEX. The evaluation also concluded that the performance of the LME
Board and the LME Clear Board was in compliance with the applicable laws and governance codes and is
largely well aligned with international best practices. The findings and recommendations from the
evaluation were presented to the Board in November 2017.

Key evaluation findings for HKEX Board

• The Directors discharge effectively their overall duties on the Board and its committees.
• The dynamics of the Board are strong, with an appropriate level of debate during Board discussions.
• The mechanics of the Board function well, with timely and quality information provided to the Board and
comprehensive induction training to new Directors.
• The Board composition is broadly reflective of the competencies, knowledge and experience required for
HKEX’s forward looking strategy.
• The relationship between the Board and the management is open, respectful and professional.

Chairman and Chief Executive

The roles of HKEX’s Chairman and Chief Executive are complementary, but importantly, they are distinct
and separate with a clear and well established division of responsibilities. Details of their respective roles
and responsibilities are available on the HKEX Group website CG .

Key Responsibilities of HKEX’s Chairman and Chief Executive

C K Chow Charles Li
HKEX’s Chairman (INED) HKEX’s Chief Executive
• Promote integrity (ex-officio Board member)
• Provides leadership to the Board
and probity • Develops strategies for the
• Monitors Board effectiveness
• Ensure effective Board’s approval
• Fosters constructive stakeholder
relationships among Directors • Executes strategies agreed
communication by the Board
• Leads day-to-day
management of the Group

62 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 CORPORATE GOVERNANCE REPORT

Induction and Development

OVERVIEW
On appointment, Directors are provided with comprehensive induction training to ensure that they have
a thorough understanding of the Group’s operations and governance policies as well as their role and
responsibilities. C H Cheah, Hugo Leung and Stephen Yiu, who became Directors on 26 April 2017,
received the induction training after their appointment. Every new Board member also receives a
Director’s Handbook which contains the Board’s terms of reference, an overview of Directors’
responsibilities, the Guidelines on Conduct and information on other key governance issues.
The Director’s Handbook and more information about induction training for new Directors are available
on the HKEX Group website CG .

ORGANISATION
Ongoing training helps Directors keep abreast of current trends and issues facing the Group, while
enabling them to update and refresh their skills and knowledge necessary for the performance of their
duties. All Directors are required to provide HKEX with their training records, and to confirm their
respective records on a semi-annual basis. The records are maintained by the Group Company Secretary
for annual review by the ESG Committee. During 2017, the Directors received an aggregate of about
480 hours of training by attending management briefings, or participating as speakers, members or
attendees in conferences, seminars, and workshops on various topics relevant to HKEX’s strategy and

MD & A
business, development of the financial markets, and directors’ duties.

2017 Directors’ Training by Topic

Average hours of training: 36 1

Economy/
HKEX’s financial Director’s Financial Legislative/
strategy/ markets and duties/ reporting/risk regulatory

GOVERNANCE
business products ESG practices management compliance Others 2

INEDs
C K Chow (Chairman) √ √ √ √ √
Apurv Bagri √ √ √ √
T C Chan √ √ √ √ √ √
C H Cheah 3 √ √ √ √ √ √
Timothy Freshwater √ √ √ √ √
Anita Fung √ √ √ √ √

FINANCIALS
Rafael Gil-Tienda √ √ √ √ √
John Harrison 1 √ √ √ √
Fred Hu √ √ √ √
Bill Kwok 1
√ √ √ √
Vincent Lee 1 √ √ √ √ √
Margaret Leung √ √ √ √ √
Hugo Leung 3
√ √ √ √ √ √
OTHERS

John Williamson √ √ √ √
Stephen Yiu 4 √ √ √ √ √
Executive Director
Charles Li √ √ √ √

1 This figure excludes the training hours received by Mr Harrison, Dr Kwok and Mr Lee, who retired from the Board at the end of the 2017 AGM.
2 Include topics such as investor relations and management
3 Messrs Cheah and Leung were elected as Directors on 26 April 2017.
4 Mr Yiu was appointed as a Director effective 26 April 2017.
GLOSSARY

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Board Process
In addition to the annual offsite meeting in September, the Board held nine regular meetings in 2017
to discuss matters relating to the Group’s strategies, business operations, performance, governance,
risk management, regulatory compliance and human capital. A site visit to the Qianhai commodities
trading platform project in Shenzhen, Mainland China was arranged for Directors in March 2017.
HKEX’s Chairman also had regular gatherings with other Directors, occasionally without the presence of
HKEX’s Chief Executive, to consider issues in an informal setting.

Attendance Record of Directors and Committee Members in 2017

Panel Risk
Investment Member Project Management
2017 Audit ESG Executive Advisory Nomination Nomination Oversight Remuneration Risk Committee
AGM Board Committee Committee Committee Committee Committee Committee Committee Committee Committee (statutory)

Number of Meetings 1 9 4 1 4 4 1 –1 4 3 4 4
Total Duration (Approximate
number of hours) 1 25 8 1 2 8 1 – 5 3 6 3

INEDs
C K Chow (Chairman) 1/1 9/9 1/1 4/4 1/1 3/3 4/4 3/4
Apurv Bagri 2 1/1 9/9 1/1 – 4/4
T C Chan 1/1 9/9 4/4 1/1 – 3/4 4/4
C H Cheah 3 7/7 3/3 2/2 – – 2/2
Timothy Freshwater 1/1 8/9 4/4 1/1 3/3
Anita Fung 1/1 9/9 4/4 4/4 – 4/4
Rafael Gil-Tienda 4 1/1 9/9 – – 4/4 4/4
John Harrison 5 1/1 2/2 1/1 1/1
Fred Hu 6 1/1 8/9 4/4 1/1 3/4 2/2
Bill Kwok 5 1/1 2/2 1/1 1/1 – 3/3 1/1
Vincent Lee 5 1/1 2/2 1/1 1/1 2/2 – 1/1
Margaret Leung 1/1 9/9 4/4 3/4 4/4
Hugo Leung 7 7/7 3/3 – 3/3 –
John Williamson 8 1/1 9/9 4/4 1/1 1/1 1/1 2/3
Stephen Yiu 9 7/7 3/3 3/3

Executive Director
Charles Li 1/1 9/9 1/1 4/4

Market Professionals
Henry Cheng 3/4
Raymond Cheng 3/4
Lawrence Lam 4/4
Keith Lui 4/4
Barbara Shiu 4/4
Average Attendance Rate 100% 98% 100% 100% 100% 100% 100% N/A 95% 93% 90% 91% 10

1 Although no meeting was held, all members approved a resolution in writing in 2017.
2 Mr Bagri was appointed to the Nomination Committee on 27 April 2017 and ceased to be a member of the ESG Committee on the same date.
No meeting of the Nomination Committee took place between 27 April and 31 December 2017.
3 Mr Cheah was elected as a Director on 26 April 2017 and appointed to the Executive Committee, the Investment Advisory Committee,
the Nomination Committee, the Panel Member Nomination Committee and the Remuneration Committee on 27 April 2017. No meeting of the
Nomination Committee and the Panel Member Nomination Committee took place between 27 April and 31 December 2017.
4 Mr Gil-Tienda was appointed to the ESG Committee on 27 April 2017. No meeting of the ESG Committee took place between 27 April and
31 December 2017.
5 Mr Harrison, Dr Kwok and Mr Lee retired from the Board and the committees on 26 April 2017.
6 Dr Hu was appointed to the Remuneration Committee on 27 April 2017 and ceased to be a member of the Nomination Committee on the
same date.
7 Mr Leung was elected as a Director on 26 April 2017 and appointed to the Audit Committee, the ESG Committee, the Executive Committee and
the Panel Member Nomination Committee on 27 April 2017. No meeting of the ESG Committee and the Panel Member Nomination Committee
took place between 27 April and 31 December 2017.
8 Mr Williamson was appointed to the Project Oversight Committee on 27 April 2017 and ceased to be a member of the Nomination Committee
on the same date.
9 Mr Yiu was appointed as a Director effective 26 April 2017, and as the chairman of the Audit Committee and a member of the Risk Committee on
27 April 2017.
10 The attendance rate took into account the attendance by the alternate member of the committee.

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To facilitate effective oversight and decision making of the Board, HKEX has established the Group

OVERVIEW
Escalation and Incident Reporting Policy to set out the guidelines on handling critical concerns relating to
the Group’s operations and performance. The Continuous Disclosure and Communication Policy is also in
place to ensure timely reporting of inside information to the Board and communication with the Group’s
stakeholders, which together with other key features of the Board process are available on the HKEX
Group website CG .

Group Company Secretary

All Directors have access to the advice and services of the Group Company Secretary. The Group

ORGANISATION
Company Secretary reports to HKEX’s Chairman on board governance matters, and is responsible for
ensuring that Board procedures are followed and for facilitating information flows and communications
among Directors as well as with Shareholders and management.

The Group Company Secretary’s biography is set out in the Board of Directors and Senior Management
section of this Annual Report. During 2017, the Group Company Secretary had over 15 hours of
professional training.

MD & A
Board Delegation
Committees

HKEX Board

GOVERNANCE
Investment
Audit ESG Executive Nomination
Advisory
Committee Committee Committee Committee
Committee

Panel Member Risk 1

Project Oversight Remuneration Risk Management
Nomination Committee
Committee Committee Committee
Committee (statutory)

FINANCIALS
1 A statutory committee established under Section 65 of the SFO

The Board has delegated authority to various committees to deal with specific matters under defined
terms of reference. The composition and terms of reference of the Board committees are reviewed and
updated regularly to ensure that they remain appropriate and in line with the Group’s business and
changes in governance practices. The list of members of the Board committees is set out in the Board
and Committees section of this Annual Report, and their attendance record is set out in “Board Process”
above. More information about the Board committees is available on the HKEX Group website CG / ORG .
OTHERS

Consultative Panels
HKEX has three Consultative Panels which
Number of Panel Meeting(s) Held in 2017
provide market expertise and advice to the
Board in relation to the trading and clearing in Cash Market Consultative Panel 1
Hong Kong’s securities and derivatives markets. Derivatives Market Consultative Panel 2
The composition and terms of reference of the Clearing Consultative Panel 2
Consultative Panels are available on the HKEX
GLOSSARY

Group website ORG .

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Management
Senior management, under the leadership of HKEX’s Chief Executive, is responsible for the day-to-day
management of the Group’s businesses and implementation of the strategies approved by the Board.
The Management Committee, a management decision-making body chaired by HKEX’s Chief Executive
with defined authorities delegated by the Board, aims to meet at least twice a month. Its membership as
at the date of this report is set out in the Management Committee section of this Annual Report, and its
duties are available on the HKEX Group website ORG .

During 2017, several senior management changes were made to support the latest strategic focus and
accountability and to replace retiring executives. Details are set out in the Media Centre (News Releases)
section of the HKEX Group website. HKEX’s updated organisation structure is available on the HKEX
Group website ORG . The members of the Senior Management and their biographies are set out in the
Board of Directors and Senior Management section of this Annual Report.

The Board recognises the importance of ensuring continuity in senior management and identifying
leaders with appropriate skills and experience to support delivery of the Group’s strategic initiatives.
Succession planning for senior management is considered by the Board annually.

Given the competitive business environment in which the Group operates, HKEX arranges professional
development programmes for its senior executives from time to time to support its long-term growth
and success. During 2017, the Senior Management received an aggregate of about 470 hours of training
by participating as speakers, members or attendees in conferences, seminars, and workshops on various
topics, including HKEX’s strategy and business, development of the financial markets, regulatory
compliance, ESG practices and risk management. Other employees of the Group also attended training
throughout the year. Details are set out in the 2017 CSR Report.

Subsidiary Governance
HKEX is committed to fostering good governance and a strong compliance culture at all levels of the
organisation. To ensure there is an integrated, Group-wide approach towards upholding high governance
standards, efforts have been made to strengthen the governance structures and processes of HKEX’s
subsidiaries.

For effective oversight of its subsidiaries, HKEX promotes governance linkages within the Group through
common memberships between the Board and the subsidiaries’ boards/committees and appointment of
HKEX’s senior management to the subsidiaries’ boards. Details about the governance structures of the
Group’s principal subsidiaries (including composition and terms of reference of their boards and
committees) are available on the HKEX Group website ORG . Induction training has also been provided
to subsidiaries’ non-executive directors to facilitate their understanding of the Group’s business and their
duties and obligations as a director. A list of HKEX subsidiaries’ directors is set out in the Directors’
Report contained in this Annual Report.

HKEX has implemented a number of Group-wide

Key governance policies for employees
governance policies, which are subject to review
from time to time, to support its commitment to • Code of Conduct
high standards of business, professional and • Continuous Disclosure and Communication Policy
ethical conduct and to ensure best practices across • Group Anti-Bribery and Anti-Corruption Policy
the organisation. During 2017, all the Group • Group Personal Account Dealing Policy
employees were required to complete training on • Group Whistleblowing Policy
risk awareness and compliance matters.

Information about the Group’s governance policies and practices is available on the HKEX Group
website CG / CSR.

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Remuneration of Directors and Senior Management

OVERVIEW
HKEX has formal and transparent procedures for fixing the remuneration packages of individual Directors
and senior management. Information about HKEX’s remuneration policies and the Remuneration
Committee, including its work in 2017/2018, is set out in the Remuneration Committee Report.

Directors’ Securities Transactions and Interests in HKEX

Compliance with Model Code
HKEX has adopted the Model Code as its own code of conduct regarding Directors’ securities

ORGANISATION
transactions. In response to a specific enquiry by the Company, all Directors confirmed that they
complied with the Model Code at all applicable times during 2017.

Directors’ Interests and Short Positions in Shares and Underlying Shares of HKEX
The interests and short positions of Directors, including HKEX’s Chief Executive, in the shares and
underlying shares of HKEX (within the meaning of Part XV of the SFO) as at 31 December 2017 as
recorded in the register required to be kept under Section 352 of the SFO, or as otherwise notified to
HKEX and the SFC under the Model Code, are set out below.

MD & A
Long Positions in Shares and Underlying Shares of HKEX

Number of shares/underlying shares held

Personal Family Corporate Other % of HKEX 1

Name of Director interests interests interests interests Total shares in issue

C K Chow 15,000 2 – – – 15,000 0.00

GOVERNANCE
Charles Li 967,971 3 – – – 967,971 0.07
Stephen Yiu – 2,000 4
– – 2,000 0.00

1 Based on 1,239,809,477 HKEX shares in issue as at 31 December 2017

2 Mr Chow was the beneficial owner of those shares.
3 It included Mr Li’s interests in Awarded Shares and shares acquired out of the dividends from the Awarded Shares in an aggregate of 448,997 shares
which remained unvested under the Share Award Scheme. Details of Mr Li’s Awarded Shares are set out in the Remuneration Committee Report.
4 Mr Yiu’s spouse was the beneficial owner of those shares.

Save as disclosed above, none of the Directors had any interests or short positions in the shares,

FINANCIALS
underlying shares or debentures of HKEX or any of its associated corporations (within the meaning of
Part XV of the SFO) as at 31 December 2017 as recorded in the register required to be kept under
Section 352 of the SFO, or as otherwise notified to HKEX and the SFC under the Model Code.

Apart from the Awarded Shares as disclosed in the Remuneration Committee Report, during 2017,
none of the Directors (including their spouses and children under the age of 18) had any interests in or
was granted any right to subscribe for the securities of HKEX or its associated corporations (within the
OTHERS

meaning of Part XV of the SFO), or had exercised any such rights.

GLOSSARY

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 CORPORATE GOVERNANCE REPORT

Other Persons’ Interests and Short Positions in Shares and Underlying Shares
of HKEX
Minority Controllers
As at the date of this report, other than the Government which has been a Minority Controller since
7 September 2007, nine entities have been approved as Minority Controllers on the basis that they hold
HKEX shares in custody for their clients. According to the Participant Shareholding Report as at
31 December 2017, these Minority Controllers in aggregate held approximately 61 per cent of HKEX shares
in issue.  More information about Minority Controllers is set out on the HKEX Group website CG .

Other persons’ interests and short positions in the shares and underlying shares of HKEX (within the
meaning of Part XV of the SFO) as at 31 December 2017 as recorded in the register required to be kept
under Section 336 of the SFO are set out below.

Long Positions in Shares and Underlying Shares of HKEX

Number of shares/ % of HKEX 1

Name Capacity underlying shares held Total shares in issue

The Government of the Hong Kong Beneficial owner 66,730,300 2 66,730,300 5.38
Special Administrative Region
(for the account of the Exchange Fund)

1 Based on 1,239,809,477 HKEX shares in issue as at 31 December 2017

2 Based on a confirmation to HKEX by the Government in respect of its holding immediately following completion of a placing of new HKEX shares as
announced on 30 November 2012

Save as disclosed above, no other persons had any interests or short positions in the shares or underlying
shares of HKEX as at 31 December 2017 as recorded in the register required to be kept under Section 336
of the SFO, or as otherwise notified to HKEX and the Stock Exchange.

Senior Management
Members of the senior management are obliged to follow the Company’s restrictions on dealing in
securities, futures contracts and other derivatives, which are on terms no less stringent than the
Model Code, as set out in the Group Personal Account Dealing Policy. Senior Management’s interests in
the shares and underlying shares of HKEX as at 31 December 2017 are set out below.

Number of shares Derivatives

remained unvested under (number of
Senior Management Number of shares held the Share Award Scheme underlying shares)
Matthew Chamberlain – 48,737 –
Eva Chau – 18,671 –
Adrian Farnham 22,724 29,895 –
David Graham 32,697 54,236 –
Romnesh Lamba 45 57,552 –
Roger Lee 331,730 65,250 –
Richard Leung 78,890 31,806 –
Li Gang 13,917 53,793 –
Ferheen Mahomed 8,050 34,350 –
Mao Zhirong 26,252 24,437 –
Trevor Spanner – 47,642 –
Calvin Tai 112,531 50,828 –

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Continuing Connected Transactions

OVERVIEW
In June 2000, the SFC granted a waiver to HKEX from strict compliance with the Main Board Listing
Rules with respect to certain continuing connected transactions as referred to in (A), (B) and (C) below.
The waiver has remained valid since then. During 2017 and subject to the waiver, the Group had the
following continuing connected transactions:

A. Transactions between HKEX or its subsidiaries and the following connected persons arising from or in
connection with the use of the facilities provided by the Group for the trading, clearing and/or settlement of
securities and futures products and transactions, and all services offered by the Group which are ancillary,

ORGANISATION
incidental or otherwise related to the foregoing:

• Bill Kwok, who retired as an INED on 26 April 2017, was interested in the transactions entered into by
Wocom Securities Limited (WSL) and Wocom Limited, EPs and CPs, which are Dr Kwok’s associates by
virtue of the Main Board Listing Rules.
• Vincent Lee, who retired as an INED on 26 April 2017, was interested in the transactions entered into by
Hang Tai Securities Limited, Tung Tai Securities Company Limited and Tung Tai Futures Limited, EPs and
CPs, which are Mr Lee’s associates by virtue of the Main Board Listing Rules.

B. Transactions between HKEX or its subsidiaries and the following connected person arising from or in

MD & A
connection with the listing of securities on the Stock Exchange, and all services offered by the Group which
are ancillary, incidental or otherwise related to the foregoing:

• Bill Kwok was interested in the transactions entered into by his associate, Wing On Company International
Limited, which is listed on the Stock Exchange.

C. Transactions between HKEX or its subsidiaries and the following connected person arising from or in
connection with the HKSCC arrangement on behalf of CCASS Participants for: (i) carrying out “buy-in” when
a CCASS Participant has failed to deliver securities on time for settlement under the CNS System or the
Isolated Trades System operated by CCASS; (ii) the purchase or sale of securities in connection with the

GOVERNANCE
liquidation of the positions of a CCASS Participant that has been declared by HKSCC to be in default; and
(iii) the sale of entitlements of securities held through CCASS (collectively referred as Buy-in Transactions):

• WSL is one of the brokers appointed by HKSCC to assist it in carrying out Buy-in Transactions. Bill Kwok is
interested in any Buy-in Transactions entered into by WSL which is his associate by virtue of the Main Board
Listing Rules. During 2017, no Buy-in Transactions were conducted by WSL.

The Board has delegated authority to the Audit Committee to review the above continuing connected
transactions pursuant to Rule 14A.55 of the Main Board Listing Rules. The results of the Audit

FINANCIALS
Committee’s review are set out in the Audit Committee Report.

The Company’s external auditor was engaged to report on the above continuing connected transactions
of the Group in accordance with Hong Kong Standard on Assurance Engagements 3000 (Revised)
“Assurance Engagements Other Than Audits or Reviews of Historical Financial Information”, and with
reference to Practice Note 740 “Auditor’s Letter on Continuing Connected Transactions under the
Hong Kong Listing Rules” issued by the HKICPA. The external auditor has issued an unqualified report
containing its findings and conclusions in respect of the transactions disclosed above in accordance with
OTHERS

Rule 14A.56 of the Main Board Listing Rules. The Company provided a copy of the report to the SFC and
the Stock Exchange.
GLOSSARY

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Related Party Transactions

During 2017, the Group entered into certain transactions with “related parties” as defined under the
applicable accounting standards. Related party transactions are disclosed in note 45 to the Consolidated
Financial Statements. They include the following connected transactions under the Main Board
Listing Rules.

Related party transactions which constitute Compliance with Listing Rules

connected transactions

Transactions in connection with services incidental or These are continuing connected transactions which
related to facilities provided by the Group for the have satisfied the conditions of the waiver granted by
trading, clearing and/or settlement of securities and the SFC from strict compliance with the Main Board
futures products and transactions, or listing of Listing Rules.
securities on the Stock Exchange as described in
note 45(a) to the Consolidated Financial Statements

Compensation to HKEX’s Chief Executive and directors These are continuing connected transactions exempt
of HKEX’s subsidiaries and remuneration to HKEX’s from the connected transaction requirements under
Non-executive Directors, which form part of the “Key Rule 14A.76 or 14A.95 of the Main Board Listing Rules.
management personnel compensation” described in
note 45(b) to the Consolidated Financial Statements

Accountability and Audit

Financial Reporting
The Board, which is responsible for overseeing the preparation of annual financial statements, receives
monthly management accounts and updates on the Group’s performance, financial position and prospects.
In 2017, HKEX published its annual, interim and quarterly results within three months, two months
and 45 days respectively after the relevant period end. In preparing the financial statements for
the year ended 31 December 2017, the Board adopted appropriate accounting policies consistently,
made prudent and reasonable judgements and estimates, and ensured that the financial statements were
prepared on a going concern basis and show a true and fair view of the consolidated financial position of
the Group as at 31 December 2017 and of the Group’s consolidated financial performance and cash flows
for the year.

Risk Management and Internal Control

The Board has the overall responsibility for evaluating and determining the nature and extent of the risks
(including ESG-related risks) it is willing to take in achieving the Group’s strategic objectives, maintaining
sound and effective risk management and internal control systems (including those for ESG-related risks)
and reviewing their effectiveness to safeguard Shareholders’ investment and the Group’s assets.
To this end, management continues to allocate resources for internal control and risk management
systems compatible with the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) Internal Control – Integrated Framework 2013 principles to provide reasonable, though not
absolute, assurance against material misstatement or loss and to manage rather than eliminate the risk
of failure to achieve business objectives. Details of the Group’s risk governance structure and the Group
Risk Management Framework are set out in the Risk Committee Report. Details of the Group’s key control
procedures and internal audit functions are available on the HKEX Group website CG .

The Board has reviewed the adequacy and effectiveness of the Group’s risk management and internal
control systems, at least quarterly, through the Risk Committee and the Audit Committee.
Information about the Risk Committee and the Audit Committee, including their work in 2017/2018, is set
out in their respective reports contained in this Annual Report.

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 CORPORATE GOVERNANCE REPORT

Independence of External Auditor

OVERVIEW
HKEX has engaged PricewaterhouseCoopers as its external auditor. In accordance with the Group’s audit
partner rotation policy, a new engagement partner was assigned to HKEX in 2017. An analysis of
remuneration for audit and non-audit services provided by PricewaterhouseCoopers and details of the
Audit Committee’s work in assessing the independence of PricewaterhouseCoopers and ensuring audit
effectiveness are set out in the Audit Committee Report.

Information about HKEX’s policies and procedures in safeguarding and supporting the independence and
objectivity of the external auditor is available on the HKEX Group website CG .

ORGANISATION
Shareholder Relations
The Board gives high priority to maintaining balanced, clear and transparent communications with
Shareholders and other investors to facilitate their understanding of the Group’s performance and
prospects as well as the market environment in which it operates. HKEX has an ongoing dialogue with
Shareholders and other investors through various communication channels and takes any areas of
concern into consideration when formulating its business strategies.

MD & A
Investor Engagement and Communications
The investor relations team focuses on effective
Investor Relations Activities in 2017
communication with investors and analysts.
Under its well-established and across-the-board • Small group/one-to-one meetings
engagement programme, institutional investors • Non-deal roadshows
and analysts can interact with HKEX’s • Analyst briefings
Chief Executive and other senior executives. • Investor conferences

GOVERNANCE
Through the programme, the investment community
is updated on the development of the Group’s
Investor Relations Contact Details
strategic initiatives and operations. In 2017,
around 260 meetings were held with institutional Email: info@hkex.com.hk
investors and analysts in Hong Kong, Mainland Fax: (852) 2868 4084
China and overseas. To facilitate effective investor Tel: (852) 2840 3330
relations, shareholding analyses were conducted
under Section 329 of the SFO to gain a better

FINANCIALS
view of HKEX’s shareholding structure.

Investment community views are communicated regularly to the Board, including sell-side consensus
rating and target price for HKEX shares and summaries of questions and feedback from investors and
analysts. During 2017, investors’ major areas of interest included:

(i) Updates on financial performance of the Group;

(ii) Updates on HKEX Strategic Plan 2016-2018; and
OTHERS

(iii) Latest developments regarding the Group’s initiatives, including Bond Connect, ETF Connect,
Primary Connect, LME Strategic Pathway and New Board Consultation.

To foster institutional investors’ understanding of the Group’s governance performance, HKEX continues
to provide related information to international ESG rating agencies upon request.
GLOSSARY

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 CORPORATE GOVERNANCE REPORT

Shareholder Engagement and Communications

Corporate • HKEX ensures prompt dissemination of corporate communications to enable

communications Shareholders and other stakeholders to keep abreast of the Group’s business and
developments so that they can make informed decisions.
• The HKEX Group website has been adopted as the designated company website for
publication of HKEX’s announcements, notices and other corporate communications.
As at 31 December 2017, about 63 per cent of Shareholders had opted to receive
corporate communications via electronic means.

Financial key dates • The financial calendar highlighting important dates for Shareholders in 2018 is set
out in the Shareholder Information section of this Annual Report and is also available
on the HKEX Group website IR.

Scrip dividend scheme • HKEX offers Shareholders the option of receiving their dividends in the form of scrip.
The Board has, since 2015, offered a discount (currently at 3 per cent) on the
subscription price to Shareholders who elect the scrip alternative to facilitate their
reinvestment of their dividends in HKEX shares. Further details of the HKEX scrip
dividend scheme are set out in the Shareholder Information section of this Annual
Report and are also available on the HKEX Group website IR.

General meetings • One or more Shareholders representing at least 5 per cent of the total voting rights
of all Shareholders having a right to vote at general meetings may request the Board
to call a general meeting. The request must state the general nature of the business
to be dealt with, and it may include the text of a resolution that may properly be
moved and is intended to be moved at the meeting. Such requests must be sent to
the Company Secretary at HKEX’s registered office, or by email to ssd@hkex.com.hk.
• Under HKEX’s Articles, if a Shareholder wishes to propose a person for election as a
Director at a general meeting, he or she should give written notice of the nomination
to the Company Secretary at HKEX’s registered office. Details of the procedures for
nominating candidates to stand for election as a Director at the 2018 AGM will be set
out in the circular to Shareholders to be sent together with this Annual Report.
• Shareholders may put forward proposals at general meetings by sending written
notice of their proposals to the Company Secretary at HKEX’s registered office, or by
email to ssd@hkex.com.hk. Details of the procedures for putting forward proposals
by Shareholders are set out on the HKEX Group website CG.

Policies and guidelines • The Shareholders Communication Policy ensures that Shareholders are provided
with ready, equal and timely access to information about HKEX. The policy is
regularly reviewed to ensure its effectiveness and is posted on the HKEX Group
website CG.
• The Shareholders’ Guide with answers to the frequently asked questions of
Shareholders with regard to their interests in HKEX shares is also available on the
HKEX Group website CG.

Shareholding analysis • Based on publicly available information and within the Directors’ knowledge as at the
date of this report, approximately 100 per cent of the HKEX shares were held by the
public. HKEX’s market capitalisation and shareholding distribution as at 31 December
2017 are set out in the Shareholder Information section of this Annual Report.

Further information about the Group’s stakeholder engagement activities in 2017 is set out in the 2017
CSR Report.

The Board is grateful to Shareholders and other stakeholders for their continued support and welcomes
their views as well as any questions they may have about the management and governance of the Group.
Shareholders and other stakeholders may at any time send their enquiries and concerns to the Board by
addressing them to the Group Company Secretary and sending them by post to the Secretarial Services
Department, HKEX,12/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong,
or by email to ssd@hkex.com.hk.

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2017 Annual General Meeting

2017 AGM

OVERVIEW
HKEX uses the AGM as a forum to establish
Total number of participants: 239
constructive dialogue with Shareholders.
Separate resolutions are proposed on each Shares voted: 29 per cent of total issued shares
substantially separate issue, with all resolutions Individual Shareholders 90

considered in a poll conducted by HKEX’s Authorised representatives of 113

registrar and verified by an independent scrutineer. HKSCC Nominees Limited
Electronic voting is used at the AGMs to enhance Shareholders appointing 36
represenatives/proxies to
efficiency and transparency of the vote counting
attend the 2017 AGM

ORGANISATION
process.

At the 2017 AGM, all Directors in office on the meeting date, including HKEX’s Chairman and the
chairmen of the Audit Committee and other Board committees, attended the meeting along with
key senior executives and the external auditor.

The voting results and the minutes of the 2017 AGM are available on the HKEX Group website IR.

MD & A
Key Matters Resolved at the 2017 AGM 1

• Receipt of the 2016 audited financial statements

• Declaration of 2016 final dividend of $2.04 per share
• Election of C H Cheah and Hugo Leung as Directors
• Re-appointment of PricewaterhouseCoopers as the Company’s auditor
• Granting a general mandate to buy back HKEX shares (not exceeding 10 per cent of the number of shares in issue)

GOVERNANCE
• Granting a general mandate to issue HKEX shares (not exceeding 10 per cent of the number of shares in issue
and at a price not exceeding a discount of 10 per cent)
• Remuneration of $180,000 and $120,000 per annum respectively payable to the chairman and each of the other
member (excluding Executive Director, if any) of the Project Oversight Committee, in addition to the attendance
fee of $3,000 per meeting

1 The full text of the resolutions is set out in the Notice of the 2017 AGM.

2018 Annual General Meeting

FINANCIALS
The 2018 AGM will be held on Wednesday, 25 April 2018 at 4:30 pm at the HKEX Connect Hall on the
1st Floor, One and Two Exchange Square, Central, Hong Kong. The Notice of the 2018 AGM, which
constitutes part of a circular to Shareholders, will be sent together with this Annual Report. The Notice of
the 2018 AGM, the circular which sets out details of the business to be conducted at the 2018 AGM and
the proxy form will be available on the HKEX Group website IR. The results of the voting on the proposed
resolutions will be published on the HKEX Group website IR shortly after the 2018 AGM is held.

All Shareholders are encouraged to attend the 2018 AGM and exercise their right to vote. Shareholders are
OTHERS

invited to ask questions related to the business of the meeting, and will be able to meet with Directors
and the senior management.

Changes after Closure of Financial Year

This report takes into account the changes that occurred between the end of 2017 and the date of the
approval of this report.
GLOSSARY

On behalf of the Board

MAU Kam Shing, Joseph
Group Company Secretary

Hong Kong, 28 February 2018

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 73

 NOMINATION COMMITTEE REPORT

The Nomination Committee

The Nomination Committee is delegated with the authority from the Board to formulate and implement
the policy for nominating Board candidates for election by Shareholders and assess INED’s independence
and commitment. Its terms of reference are available on the HKEX Group website ORG .

The Nomination Committee comprises five INEDs whose names and biographies are set out in the Board
and Committees section of this Annual Report. The Nomination Committee held one meeting in 2017.
Members’ attendance records are disclosed in the Corporate Governance Report contained in this Annual
Report.

Summary of Work in 2017/2018

• Nominated Board candidates for election by Shareholders at the AGM

• Reviewed the independence of the INEDs
• Reviewed time commitment of Directors for performance of their responsibilities
• Reviewed the succession plan for the Board

Changes in Directors during 2017

In March 2017, the Government appointed Stephen Yiu and re-appointed Anita Fung, Rafael Gil-Tienda
and Margaret Leung to the Board, each for a term of approximately two years from the close of the
2017 AGM until the conclusion of the AGM in 2019.

At the 2017 AGM, C H Cheah and Hugo Leung were elected by Shareholders for a term of approximately
three years from 26 April 2017 until the conclusion of the AGM in 2020. John Harrison, Bill Kwok and
Vincent Lee retired from the Board after the conclusion of the 2017 AGM.

Retiring Directors
The service term of C K Chow and Tim Freshwater (Government Appointed Directors), and T C Chan,
Fred Hu and John Williamson (Elected Directors) will expire at the conclusion of the 2018 AGM.

Board Diversity
HKEX sees increasing diversity at the Board level as an essential element in attaining its strategic
objectives and achieving sustainable and balanced development for the Group. Since 2013, HKEX has
followed the Board Diversity Policy which is available on the HKEX Group website CG . As part of the
Board’s succession planning, the Nomination Committee reviews the Board structure, size and diversity
annually and considers any proposed changes to the Board composition.

To further enhance Board diversity and strike an appropriate balance between continuity of experience
and Board refreshment, HKEX has, since 2015, set a maximum tenure of 12 consecutive years for the
Non-executive Directors to be eligible for nomination by the Board to stand for re-election by
Shareholders.

74 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 NOMINATION COMMITTEE REPORT

Nomination of Candidates

OVERVIEW
On 14 February 2018, the Nomination Committee, having reviewed the Board’s composition, nominated
T C Chan, Fred Hu and John Williamson to the Board for it to recommend to Shareholders for re-election
at the 2018 AGM. The nominations were made in accordance with the Nomination Policy and the
objective criteria (including without limitation, gender, age, cultural and educational background,
ethnicity, professional experience, skills, knowledge and length of service), with due regard for the
benefits of diversity, as set out under the Board Diversity Policy. The Nomination Committee had also
taken into account the respective contributions of Mr Chan, Dr Hu and Mr Williamson to the Board and
their firm commitment to their roles, and it was satisfied with their independence having regard to the

ORGANISATION
criteria laid down in the Main Board Listing Rules. Mr Chan, who is a member of the Nomination
Committee, abstained from voting at the Committee meeting when his own nomination was being
considered.

Mr Chan, Dr Hu and Mr Williamson do not have any service contracts with any member of the Group that
are not determinable by the Group within one year without compensation (other than statutory
compensation). Their particulars will be set out in the circular to Shareholders to be sent together with
this Annual Report and posted on the HKEX Group website IR.

MD & A
Independence of Non-executive Directors
An independent Board has the benefit of providing objective judgement and constructive challenge to
the viewpoints presented by management. Non-executive Directors’ independence is assessed upon
appointment, annually and at any other time where the circumstances warrant reconsideration.

Assessment upon Director’s Appointment

GOVERNANCE
Each of C H Cheah, Hugo Leung and Stephen Yiu, upon his appointment, confirmed the following in writing to
the SFC:
• his independence having regard to the criteria under Rule 3.13 of the Main Board Listing Rules;
• he has no connection with any of HKEX’s core connected persons (as defined in the Main Board Listing Rules); and
• he has no past or present financial or other interest in the Group’s business, except for his respective interest in a
company which has certain business dealings with the Group (as stated below):
– Mr Cheah is the chairman and co-chief investment officer of Value Partners Group Limited, a company listed
on the Stock Exchange, in which he holds less than 30 per cent of the issued shares.

FINANCIALS
– Mr Leung is a director and the chief executive officer of BNP Paribas Securities (Asia) Limited, which is an EP
and CP.
– Mr Yiu is a non-executive director of China Mobile Limited, a company listed on the Stock Exchange.
Each of Messrs Cheah, Leung and Yiu considered that his respective interest in the relevant company as stated
above would not affect his exercise of independent judgement.

Ongoing Assessment

• Each INED is required to inform HKEX as soon as practicable if there is any change in his or her own personal
OTHERS

particulars that may affect his or her independence. No such notification was received during 2017.
• None of the Directors have any financial, business, family or other material/relevant relationships with each
other, in particular, between HKEX’s Chairman and Chief Executive.
• Details of the Directors’ interests in the Group’s business are set out on pages 69 and 70 of this Annual Report.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 75

 NOMINATION COMMITTEE REPORT

On 14 February 2018, the Nomination Committee assessed the annual independence confirmation
received from each INED, having regard to the criteria under Rule 3.13 of the Main Board Listing Rules.

Annual Assessment

• As a good corporate governance practice, every Nomination Committee member abstained from assessing his
own independence.
• Particular attention was given to assessing the independence of the Government Appointed Directors (including
C K Chow, who is an Executive Councillor) given that the Government is a Minority Controller of HKEX.
• Consideration was given to the independence of T C Chan and John Williamson, who will have served on the
Board for more than nine years by the end of the 2018 AGM.
• The Nomination Committee affirmed that all INEDs continued to demonstrate strong independence in
judgement and were free from any business or other relationship which could interfere with their ability to
discharge their duties effectively, and they therefore all remained independent.

CHOW Chung Kong

Chairman of the Nomination Committee

Hong Kong, 14 February 2018

76 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

AUDIT COMMITTEE REPORT

The Audit Committee

OVERVIEW
The Audit Committee (AC) is delegated with the authority from the Board to provide independent
oversight of the Group’s financial reporting and internal control systems, and the adequacy of the
external and internal audits. The AC is provided with sufficient resources to perform its duties including
support, as necessary, from the Internal Audit Department (IAD), the external auditor, legal counsel and
management in examining all matters relating to the Group’s adopted accounting principles and
practices, and in reviewing all material financial, operational and compliance controls. The AC’s terms of
reference are available on the HKEX Group website ORG .

ORGANISATION
The AC comprises five INEDs whose names and biographies are set out in the Board and Committees
section of this Annual Report. None of the AC members are employed by or otherwise affiliated with the
auditor of HKEX.

The AC held four meetings in 2017. Members’ attendance records are disclosed in the Corporate
Governance Report contained in this Annual Report.

MD & A
Summary of Work in 2017/2018

• Reviewed the AC’s terms of reference and HKEX Internal Audit Charter
• Endorsed amendments to the Group Anti-Bribery and Anti-Corruption Policy, the Group Whistleblowing Policy,
the Group Personal Account Dealing Policy and the Group Record Retention Policy
• Reviewed the Group’s quarterly, half-yearly and annual financial results
• Reviewed the external auditor’s statutory audit scope for the 2017 audit
• Reviewed, with both the external auditor and management, the audit approach and methodology applied, and
in particular to those Key Audit Matters included in the year end auditor’s report

GOVERNANCE
• Approved the annual internal audit plan and internal audit three year strategic plan (2018 to 2020)
• Reviewed significant findings of the IAD, the external auditor and regulators, and management’s response to
their recommendations
• Reviewed quarterly reports on legal and regulatory compliance matters, including anti-bribery and
anti-corruption matters and whistleblowing disclosures
• Reviewed the adequacy and effectiveness of the Group’s internal control systems and its accounting, financial
reporting and internal audit functions
• Reviewed the continuing connected transactions

FINANCIALS
• Reviewed and monitored the external auditor’s independence and engagement to perform non-audit services
• Approved the 2017 external audit engagement letters and fees
• Reviewed changes in accounting principles and practices proposed by management

Review of Financial Results

The AC reviewed the 2017 Consolidated Financial Statements in conjunction with HKEX’s external auditor.
Based on this review and discussions with management, the AC was satisfied that the Consolidated
OTHERS

Financial Statements were prepared in accordance with applicable accounting standards and fairly
present the Group’s financial position and results for the year ended 31 December 2017. The AC therefore
recommended the Consolidated Financial Statements for the year ended 31 December 2017 be approved
by the Board.
GLOSSARY

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 AUDIT COMMITTEE REPORT

Review of Key Audit Matters

The AC reviewed and discussed with the external auditor and management the following key audit matters
for the audit of the 2017 Consolidated Financial Statements.

Key Audit Matters Assessment by the AC

Goodwill impairment assessment The AC reviewed results of the goodwill impairment assessment prepared
by management and was satisfied that sufficient analysis (including the
sensitivity analysis on key assumptions) had been performed in this area to
conclude that there was no impairment in respect of the goodwill allocated
to the group of Cash Generating Units within the respective Commodities
and Clearing operating segments. The impairment review was also an area
of focus for the external auditor, which reported its findings to the AC, as
detailed in the Auditor’s Report on pages 99 and 100.

IT systems and controls over The external auditor’s key audit matters included IT systems and controls
financial accounting and reporting since the Group’s financial accounting and reporting processes are highly
dependent on the design and operating effectiveness of key IT systems and
automated controls. The AC noted and agreed with the external auditor that
the key IT systems are reliable in ensuring the accuracy and completeness of
the revenue recognition during the financial accounting and reporting
processes. The findings of the external auditor are set out in the Auditor’s
Report on page 101.

Review of Internal Control Systems

The AC reviewed the effectiveness of the Group’s policies and procedures regarding internal control
systems (including the financial, operational, IT, risk management, information security, outsourcing, legal,
compliance and those controls designed to detect material fraud) by reviewing the work of the IAD and
the Group’s external auditor, and regular reports from management including those on risk management,
regulatory compliance and legal matters.

The AC reviewed and concurred with the management confirmation that for the year ended
31 December 2017, the Group’s risk management and internal control systems were effective with
reference to the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal
Control – Integrated Framework (2013) principles. The management confirmation was separately
endorsed by the Risk Committee. The AC is satisfied that the Group has adopted necessary control
mechanisms to monitor and correct non-compliance and complied satisfactorily with the requirements of
the Corporate Governance Code in respect of risk management and internal control systems.

Review of Accounting, Financial Reporting and Internal Audit Functions

The AC reviewed and was satisfied with the adequacy of the resources, staff qualifications and
experience, training programmes and budget of the Group’s accounting, financial reporting and internal
audit functions.

Review of Continuing Connected Transactions

During 2017, the Group entered into certain continuing connected transactions as disclosed in the
Corporate Governance Report contained in this Annual Report. The AC, under the authority delegated by
the Board, reviewed these continuing connected transactions pursuant to Rule 14A.55 of the Main Board
Listing Rules. The AC confirmed that the transactions were entered into by the Group in accordance with
the requirements of the Main Board Listing Rules and the conditions of the waiver granted by the SFC that:

(i) continuing connected transactions are entered into in the Group’s ordinary and usual course of
business, and on normal commercial terms or on terms no more favourable than terms available to
independent third parties;

78 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 AUDIT COMMITTEE REPORT

(ii) continuing connected transactions other than Buy-in Transactions are conducted in accordance with

OVERVIEW
the rules and regulations of the relevant Group company governing such transactions, and where the
rules and regulations do not govern those transactions in full, in accordance with the standard terms
and conditions of the relevant Group company relating to such transactions;

(iii) continuing connected transactions in respect of Buy-in Transactions are conducted in accordance
with the standard terms and conditions of HKSCC applicable generally to all buy-in brokers and at the
mutually agreed commission rates payable by HKSCC in respect of Buy-in Transactions generally; and

ORGANISATION
(iv) continuing connected transactions are entered into according to the relevant agreements governing
each of the continuing connected transactions on terms that are fair and reasonable and in the
interests of Shareholders as a whole.

The Company’s external auditor was engaged to report on the transactions in accordance with Rule 14A.56
of the Main Board Listing Rules. The AC reviewed the unqualified report issued by the external auditor
dated 26 February 2018.

MD & A
Independence of External Auditor
The AC is mandated to monitor the independence of the Group’s external auditor, PricewaterhouseCoopers
(PwC), to ensure objectivity in the financial statements. In general, the external auditor has to refrain
from engaging in non-assurance services required by the Group except for limited tax-related services
or specifically approved items. All services provided by PwC must be approved by the AC. To ensure
that the policy of restricting the non-audit work done by the external auditor is followed strictly by all
entities within the Group, appropriate policies and procedures have been established which set out:
(i) the classification of services as pre-approved, not pre-approved and prohibited; and (ii) the approval

GOVERNANCE
process for services that have not been pre-approved.

With respect to the independence of the Group’s external auditor, the AC received confirmation from and
discussed with PwC on its independence and objectivity.

During the year, the AC reviewed PwC’s statutory External Auditor’s Services and Fees
audit scope and non-audit services and approved
its fees. Under the approval procedures for audit 2017 2016

FINANCIALS
$m $m
fees, all audit fees for entities within the Group
were coordinated and presented by PwC Hong Audit services 14 14
Non-audit services
Kong, and all statutory audit fees for the Group • Tax advisory and compliance 1 5
companies were approved by the AC. • Other services 4 1
Total 19 20

Re-appointment of External Auditor

OTHERS

The AC was satisfied with PwC’s work, its independence, and its objectivity, and therefore recommended
the re-appointment of PwC (which has indicated its willingness to continue in office) as the Group’s
external auditor for 2018 for Shareholders’ approval at the 2018 AGM.

YIU Kin Wah, Stephen

Chairman of the Audit Committee
GLOSSARY

Hong Kong, 26 February 2018

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 RISK COMMITTEE REPORT

Risk Statement
Effective risk management is important to HKEX Group’s achievement of its strategic goals. HKEX Group
manages risk across multiple risk domains, including but not limited to financial, business and strategic,
operational (including IT and cyber security) and legal and regulatory risks. Business operations are
managed in line with risk appetite tolerances set by the HKEX Board.

HKEX Group seeks to ensure it achieves its strategic goal of being the global exchange and clearing
provider of choice for investors and other market participants seeking exposure in the Hong Kong,
Mainland China and international markets. This includes maintaining stakeholder trust and supporting
the integrity of the financial system. The Group recognises its role as a market infrastructure provider and
manager of systemic risk, and that its long-term sustainability is dependent on its pursuit of strategic
goals while simultaneously managing risks, having sufficient capital and liquidity, ensuring continuity of
operations, and protecting its reputation.

HKEX Group aims to maintain sufficient capital and liquidity to meet its regulatory obligations, which
require it to have financial resources to cover potential losses and liquidity needs for a range of stress
scenarios taking into account extreme but plausible market conditions. As a business, the Group also
aims to maintain sufficient capital over and above that required to meet its regulatory obligations in
order to fund its strategic development objectives while ensuring the appropriate balance between risk
and shareholder returns. HKEX Group applies risk management measures to strategic initiatives that are
designed to limit the Group’s exposure to potential losses. It also seeks to maintain liquid financial
resources to meet unforeseen cash outflows. The Group strives to maintain stakeholder trust by avoiding
business practices that could lead to reputational damage or harm to the Group. The Group, therefore,
seeks to operate within all relevant rules and regulations and to avoid disruptions to its business
operations that would have a negative impact on stakeholders.

The Risk Committee

The Risk Committee is delegated by the Board to oversee the Group’s overall Risk Management
Framework and to advise the Board on the Group’s risk-related matters. The Committee is also
responsible for endorsing the Group’s risk policies for Board approval and assessing the effectiveness of
the Group’s risk management and internal control systems. The Committee’s terms of reference are
available on the HKEX Group website ORG . The Committee comprises five INEDs whose names and
biographies are set out in the Board and Committees section of this Annual Report. The Committee held
four meetings in 2017. Members’ attendance records are disclosed in the Corporate Governance Report
contained in this Annual Report.

Summary of Work in 2017/2018

During the period, the Risk Committee oversaw key risk management activities including:
• Enhancements to the risk governance model including an update of the Executive Risk Committee’s terms of
reference and the establishment of additional management forums for specific risks;
• Review of the risk appetite statements and risk tolerances;
• Improvements to the enterprise risk and compliance reporting and management attestation processes;
• Implementation of risk and compliance culture initiatives;
• Enhancements to the clearing house default management and margining practices;
• Review of the LME market surveillance system and the European MIFID II compliance programme to ensure
compliance;
• Implementation of the HKEX Compliance Monitoring Programme (CMP) and receipt of the CMP Review Report
for HKSCC;
• Receipt of the assessment of the state of Regulatory Compliance at HKEX and the results of an independent
high-level assessment of HKEX’s Regulatory Compliance;
• Receipt of the results of the Group’s quarterly Enterprise Risk Management processes including risk heatmaps
and dashboards, summaries of assurance activities, emerging risks and clearing house liquidity, capital adequacy
and solvency levels; and
• Endorsement of the management confirmation on the effectiveness of the Group’s risk management and
internal control systems.

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 RISK COMMITTEE REPORT

Operating an appropriate and effective risk management and internal control system is essential to

OVERVIEW
achieving HKEX Group strategic objectives and maintaining service delivery targets. The Risk Committee
is responsible for overseeing the Group’s risk management approach, policy and framework. HKEX Group
operates a consistent methodology using the Group Risk Management Framework for the identification,
assessment, reporting and management of risks. Risk identification and management is the responsibility
of HKEX Group Management. HKEX Group operates a risk governance model to effectively identify and
manage risk.

Risk Governance

ORGANISATION
The Group’s risk governance structure is based on a “Three Lines of Defence” model, with oversight
and directions from the Board, the Risk Committee, and Group Management through the Executive
Risk Committee.

HKEX Board

MD & A
Risk Committee Audit Committee

Executive Risk Committee

1st Line of Defence 2nd Line of Defence 3rd Line of Defence

Business Functions Risk and Compliance Functions Internal Audit/
External Assurance Providers

GOVERNANCE
Group Risk Management
The Group Risk Management Framework, approved by the Risk Committee, mandates a consistent and
effective approach applied across the Group to manage the risks associated with its business and
operations. The framework is based on the International Standard ISO (International Organisation for
Standardisation) ISO 31000:2009 Risk Management – Principles and Guidelines. The following diagram
illustrates the key processes adopted under the Group Risk Management Framework.

FINANCIALS
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

Establish Risk Risk Risk Risk Risk Reporting &

Context Identification Assessment Treatment Monitoring
OTHERS

HKEX Group Risk Divisions and Divisions and Divisions and Divisions and
Management departments departments assess departments assess departments
establishes identify the risks and score the risks effectiveness of monitor risk
common risk that potentially identified along existing controls mitigating
assessment criteria impact the key with their impact and provide activities. Risks are
and sets up risk processes of their on the business and treatment plans regularly reported
reference tables operations. the likelihood of where required. at appropriate
for the Group. their occurrence. management levels
within the Group
and assurance
GLOSSARY

is provided on
the progress of
treatment plans.

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 RISK COMMITTEE REPORT

Principal Risks
HKEX Group faces a number of principal risks and uncertainties that if not properly managed could
create an exposure for the Group. Thorough risk assessment and mitigation help ensure these risks are
well managed and governed effectively. HKEX Group focuses on addressing the following principal risks.

Principal Risks Description Key Mitigations

Business and The risk of material adverse • Proactive monitoring of global exchange industry
Strategic Risk changes to the Group’s business trends, competitors and innovations;
performance, development prospects • Proactive monitoring of and preparation for global
and/or ability to deliver its strategy, and local changes in regulations affecting the
caused by changes in the business, Group; and
economic, competitive, regulatory or
political environment in which the • Responsive project controls to allow strategic
Group operates. flexibility and dedicated strategy resources.

Credit Risk The risk that a counterparty will • Default management and recovery procedures in place;
not settle an obligation in full value, • Established credit risk management function;
either when due or at any time
thereafter. • Stress tested collateral and margin deposits; and
• Clearing market risk managed through collateral
management and margin practices.

Market Risk The risk resulting from adverse • Investment capital at risk limited by investment
movements in market rates or prices policies, restrictions and guidelines; and
such as foreign exchange rates, interest • Exposure to foreign exchange risk through
rates or equity prices impacting the subsidiaries limited due to HKD/USD peg.
Group’s investment portfolio
(Investment Market Risk).

Liquidity Risk The risk of being unable to settle • Investment policy, restrictions and guidelines in
obligations as they fall due whether place covering Corporate Funds, Margin Funds and
relating to HKEX’s cash flow Clearing House Funds; and
requirements and/or regulatory • Clearing liquidity risk management requirements
requirements for clearing coverage met through established stress testing practices.
confidence levels under extreme but
plausible market conditions.

Operational Risk The risk of financial or reputational • Environment, Social and Governance programmes;
loss or inability to deliver services and • Low latency, highly resilient IT service design;
products to customers due to
inadequate or failed internal • Defence-in-depth cyber security controls;
processes, IT systems or external • Comprehensive cyber testing programme; and
events. • Service delivery controls covering people, process
and technology.

Legal and The risk of loss resulting from • Internal and where appropriate external legal advice
Compliance Risk breach of or non-compliance with sought and compliance reviews conducted on
applicable laws, regulations or business activities and new initiatives;
contractual obligations. • Legal review of contracts; and
• Compliance review monitoring programme.

Listing Risk The risk of reputational damage • Existing checks and balances under three-tiered
resulting from a failure on the part regulatory structure (including the Listing Committee);
of SEHK to comply fully with its • Listing Division Market Contingency Plan to deal
statutory obligations or the with potential business disruption events;
provisions of, or obligations under,
the January 2003 MOU • Monitoring of unusual movements in price or
trading volume of issuers’ listed securities; and
• Segregation from other parts of HKEX using
Chinese Wall arrangements to avoid leakage of
inside information.

CHOW Chung Kong

Chairman of the Risk Committee

Hong Kong, 12 February 2018

82 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

REMUNERATION COMMITTEE REPORT

The Remuneration Committee

OVERVIEW
The Remuneration Committee (RC) is delegated with the authority from the Board to establish, review,
and make recommendations to the Board on the Group’s remuneration policy and practices. The RC
ensures that all employees and Executive and Non-executive Directors are appropriately remunerated in
accordance with the Group’s strategy as well as its long-term and short-term performance. Its terms of
reference are available on the HKEX Group website ORG.

The RC comprises five INEDs whose names and biographies are set out in the Board and Committees
section of this Annual Report. The RC held three meetings in 2017. Members’ attendance records are

ORGANISATION
disclosed in the Corporate Governance Report contained in this Annual Report.

Summary of Work in 2017/2018

• Reviewed the remuneration of non-executive directors of HKEX, the LME, LME Clear and OTC Clear
• Recommended the 2017 performance bonus and share award pools and the 2018 salary adjustment rates for
the Group’s employees
• Recommended the 2017 performance bonus and share award for HKEX’s Chief Executive

MD & A
• Reviewed the achievements of HKEX’s Chief Executive and recommended to the Board the appropriate vesting
percentage of the Senior Executive Awards for the relevant performance period

Non-executive Directors’ Remuneration

Objective

To remunerate Non-executive Directors at an appropriate level for their commitment to HKEX and to attract and

GOVERNANCE
retain high calibre and experienced individuals to oversee HKEX’s business and development

Policy

• To conduct an annual review with reference to companies with comparable business or scale and recommend
remuneration adjustments, if appropriate
• To seek the Board’s endorsement and Shareholders’ approval of any recommended changes

Annual review for 2017/2018

FINANCIALS
• McLagan, a firm specialising in performance and rewards for the financial services industry, was appointed to
conduct an independent review of the non-executive directors’ remuneration for HKEX and certain subsidiaries
to ensure their remuneration is competitive and appropriate. The study included benchmarking against other
listed exchanges as well as banks and constituent companies of the FTSE 100 Index and the HSI.
• Based on the findings and the consultant’s recommendation, the RC (none of the RC members participated in
the decision on his remuneration) recommended that the remuneration for the Non-executive Directors should
remain unchanged for 2017/2018. However, the RC recommended that the remuneration of $180,000 per annum
and $120,000 per annum respectively be payable to the chairman and each of the other members of the Project
Oversight Committee (POC), together with an attendance fee of $3,000 per meeting to each member of the
POC, in light of the time and effort spent by them to oversee the development of HKEX’s Qianhai commodities
OTHERS

trading platform. The proposal received endorsement from the Board and was approved by Shareholders at the
2017 AGM.

Annual review for 2018/2019

• McLagan was appointed again to conduct a review of the non-executive directors’ remuneration for HKEX and
certain subsidiaries. The methodology and the benchmark used in the study largely followed those used in the
2017/2018 review.
• After reviewing the market information and the recommendation provided by the consultant, the RC (none of
the RC members participated in the decision of his remuneration) recommended an inflationary adjustment of
GLOSSARY

the remuneration for the chairman of the Board from $2,100,000 to $2,190,000 per annum and for the other
Non-executive Directors from $700,000 to $730,000 per annum. These changes will be proposed to the Board
for it to recommend to Shareholders for their approval at the 2018 AGM.

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 83

 REMUNERATION COMMITTEE REPORT

Non-executive Directors’ remuneration review for 2018/2019

Proposed Fee Current Fee

for 2018/2019 onwards for 2017/2018
$ $

Board
– Chairman 2,190,000 2,100,000
– Other Non-executive Director 730,000 700,000

Audit Committee
– Chairman 200,000 200,000
– Other member 120,000 120,000
– Attendance fee per meeting 3,000 3,000

Executive Committee, Investment Advisory Committee, Project Oversight

Committee, Remuneration Committee and Risk Committee
– Chairman 180,000 180,000
– Other member 120,000 120,000
– Attendance fee per meeting 3,000 3,000

Non-executive Directors are not entitled to participate in the Share Award Scheme, or to receive other
fringe benefits.

The remuneration paid to the Non-executive Directors in 2016 and 2017 for their service on the Board
and, where applicable, on its committees and the board and committees of HKEX’s subsidiaries is set out
below.

2017 2016
$ $

Apurv Bagri 793,000 525,000

T C Chan 961,000 964,000
C H Cheah 1 816,000 –
C K Chow 3,240,108 3,282,732
Timothy Freshwater 1,021,000 1,018,000
Anita Fung 1,102,000 964,000
Rafael Gil-Tienda 1,259,333 832,000
John Harrison 2 699,978 2,486,095
Fred Hu 1,018,000 829,000
Bill Kwok 2 431,667 1,597,000
Vincent Lee 2 277,000 1,075,000
Margaret Leung 961,000 964,000
Hugo Leung 1 723,000 –
John Williamson 1,051,000 964,000
Stephen Yiu 3 1,786,359 –
Total 16,140,445 15,726,827 4

1 Mr Cheah and Mr Leung were elected as Directors on 26 April 2017.

2 Mr Harrison, Dr Kwok and Mr Lee retired on 26 April 2017.
3 Mr Yiu was appointed as a Director on 26 April 2017.
4 Includes the remuneration of $226,000 paid to Oscar Wong who retired on 28 April 2016

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 REMUNERATION COMMITTEE REPORT

Employees’ Remuneration

OVERVIEW
Objective

To ensure that employees are remunerated equitably and competitively with consideration of the achievement of
their individual performance goals, the key business objectives at corporate level, and the market conditions

Policy

• To recommend, based on up-to-date market information, the appropriate salary adjustments, if any, for the
Board’s approval

ORGANISATION
• To evaluate the corporate performance based on a set of pre-determined indicators and to recommend the
appropriate level of performance bonus and share award pools, if any, for the year to the Board
• To consult HKEX’s Chief Executive about the performance of the members of the Senior Management and to
ensure that they are remunerated equitably and in accordance with the established guidelines
• To review and recommend the remuneration of HKEX’s Chief Executive to the Board. As a good corporate
governance practice, HKEX’s Chief Executive is not involved in the Board’s discussion and decision.

Review for 2017/2018

MD & A
• The RC recommended and the Board approved in November and December 2017:
(i) a base salary adjustment and promotion increase effective January 2018. The salary adjustment took into
consideration the competitive positioning, the cost of living and the projected pay increase in the financial
services industry;
(ii) a discretionary performance bonus for eligible employees in recognition of their contributions in 2017;
(iii) a sum of $253.52 million for the purchase of HKEX shares pursuant to the Share Award Scheme for
311 selected employees, including HKEX’s Chief Executive ($13.5 million), and for selected employees to be
recruited in 2018; and

GOVERNANCE
(v) an additional sum of $14.25 million for the purchase of HKEX shares for a performance-based Senior
Executive Award pursuant to the Share Award Scheme for HKEX’s Chief Executive for the performance
period between 2018 and 2020.
• The performance cash bonus and share award pools for the Group’s employees were determined based on the
overall achievements with respect to the following on the corporate performance scorecard:

Performance measures

Financial Strategic Market & regulatory Organisation

FINANCIALS
development development
• Relative to selected • Key initiatives from
peers of other global HKEX Strategic Plan • System stability • Recruitment effectiveness
exchanges: 2016-2018: and reliability • Talent retention and
– Performance in – Equity & Equity • Listing regulation development
principal market Derivatives • Market structure • Organisation development
activities – Commodities and culture
• Regulatory compliance
• Relative to budget – FIC • Succession planning
and prior year: • Stakeholders’ relationships
– Platform and • CSR
– Revenue and profit Infrastructure
performance
– Listing
OTHERS

– Profit margin
– Overall cost / income
ratio
• Relative to budget:
– Absolute expenses
excluding incentives

Weighting for performance bonus and share award in 2017

GLOSSARY

Performance bonus 40% 25% 20% 15%

Share award 20% 40% 15% 25%

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 REMUNERATION COMMITTEE REPORT

• Employees had to undergo a thorough annual performance appraisal process in which their performances were
assessed according to the pre-determined and agreed work objectives before they were given their performance
ratings (on a five-point scale) for the year. An additional multi-rater appraisal process was applied to employees
at management level to ensure the assessment was multi-dimensional.
• Distribution matrices referencing to the employee’s grade and year-on-year rating changes were set up to guide
managers in the allocation of performance bonuses and share awards to individual employees. Managers were
allowed to make adjustments to account for other factors, eg, overall total compensation position (ie, base salary
plus the performance bonus and share award), internal pay levels and external remuneration benchmarks.

Further details of HKEX’s remuneration policy and structure are available on the HKEX Group website CG .

As at 31 December 2017, the Group had 1,698 permanent employees and 79 temporary employees.

A performance development process is in place to ensure that employees’ performance objectives are
defined, their performance progress is tracked, and training and development opportunities are identified
for them. Employee training details are set out in the 2017 CSR Report.

Emoluments for 2017

Executive Director

2017 2016 2017

Cash Other 1 Retirement 2 Director’s Share award 4

Salary bonus benefits benefits cost fee Total 3 Total 3 benefits
$ $ $ $ $ $ $ $

HKEX’s Chief Executive

Charles Li 9,000,000 15,000,000 402,501 1,125,000 – 25,527,501 21,592,241 23,327,849 5

Senior Management

2017 2016 2017

Cash 6 Other 1 Retirement 2 Share award 4

Salary Bonuses benefits benefits cost Total 3 Total 3 benefits
$ $ $ $ $ $ $

Matthew Chamberlain 7 3,153,067 3,924,592 262,990 253,567 7,594,216 6,481,668 4,002,472

Eva Chau 3,240,000 3,330,850 61,829 405,000 7,037,679 3,025,053 738,419
Adrian Farnham 7 2,760,263 2,634,797 24,177 469,244 5,888,481 5,617,065 2,629,332
David Graham 4,691,040 5,163,750 363,293 586,380 10,804,463 9,928,031 4,337,553
John Killian 8 202,258 3,400,000 2,363 25,282 3,629,903 – –
Romnesh Lamba 4,691,040 5,296,500 84,216 586,380 10,658,136 10,067,686 5,356,900
Roger Lee 2,913,840 4,860,570 77,741 364,230 8,216,381 7,372,810 5,193,576
Richard Leung 3,213,600 3,421,600 39,758 401,700 7,076,658 6,545,058 2,611,225
Li Gang 3,600,000 5,104,000 46,011 360,000 9,110,011 8,404,153 3,892,656
Ferheen Mahomed 9 3,805,714 6,479,960 3,479,047 475,714 14,240,435 – 3,510,705
Mao Zhirong 2,958,084 3,391,110 44,239 369,761 6,763,194 6,454,913 2,117,901
Trevor Spanner 4,500,000 4,055,960 581,617 562,500 9,700,077 9,549,818 4,377,804
Calvin Tai 3,528,000 4,233,600 62,624 441,000 8,265,224 7,576,436 4,300,657

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 REMUNERATION COMMITTEE REPORT

1 Other benefits include leave pay, insurance premium, club membership, special allowance, settlement of the UK tax liability on behalf of the
employee and payment in lieu of pension contributions, as applicable.

OVERVIEW
2 An employee who retires before normal retirement age is eligible to 18 per cent of the employer’s contribution to the provident fund after
completion of two years of service. The rate of vested benefit increases by 18 per cent annually thereafter and reaches 100 per cent after
completion of seven years of service.
3 This excludes the amounts approved by the Board for the purchase of HKEX shares pursuant to the Share Award Scheme, details of which are set
out in the Share Award Scheme section below.
4 These represent the aggregate of the amortised fair value of the Awarded Shares of HKEX’s Chief Executive and the members of the Senior
Management that was charged to the Consolidated Income Statement for the year ended 31 December 2017.
5 This includes the share award benefits relating to the Senior Executive Award granted to Mr Li in December 2017, the vesting of which is not
affected if Mr Li ceases employment with the Group before the end of the performance assessment period. In accordance with prevailing
accounting standards, such award is considered to be vested immediately upon grant. The actual number of shares to be transferred to Mr Li under
the Senior Executive Awards is conditional on the satisfaction of performance criteria approved by the Board as set out in note 4 under the Share

ORGANISATION
Award Scheme section below.
6 These include year end cash bonus and sign-on bonus paid, as applicable. Sign-on bonus is amortised to the Consolidated Income Statement over
the required service period as stipulated in the employment contracts.
7 Messrs Chamberlain and Farnham were members of the LME pension scheme operating in the UK during 2017. The vesting scale of HKEX’s
provident fund scheme as specified in note 2 above is not applicable to them.
8 Mr Killian joined HKEX on 13 December 2017.
9 Ms Mahomed joined HKEX on 13 February 2017.

Further details of Directors’ emoluments and the five top-paid employees are set out in notes 13 and
14 respectively to the Consolidated Financial Statements.

MD & A
Share Award Scheme
HKEX has adopted the Share Award Scheme to recognise the contributions of certain employees and
help in retaining them for the Group’s operations and further development. The Scheme was adopted by
the Board on 14 September 2005 (Adoption Date) and shall be valid until 31 December 2025.
The maximum number of shares which can be awarded under the Scheme is 3 per cent (ie, 31,871,575
shares) of HKEX shares in issue as at the Adoption Date and the maximum number of shares which can
be awarded to a selected employee in the Scheme is 1 per cent (ie, 10,623,858 shares). The rules and

GOVERNANCE
trust deed of the Scheme are available on the HKEX Group website CG .

On 8 December 2017, the Board approved a total sum of $267.77 million for the purchase of HKEX shares
pursuant to the Scheme, details of which are set out in the Employees’ Remuneration section above.
Based on the Board’s recommendation, the Scheme’s trustee applied 135,970 shares held under the
Scheme which were unallocated or forfeited pursuant to the Scheme to partly satisfy such awards.

Further details of the Scheme are set out in note 37 to the Consolidated Financial Statements.

FINANCIALS
Since the Adoption Date and up to the date of this report, a total of 10,652,786 shares had been awarded
under the Scheme, representing about 1 per cent of the number of HKEX shares in issue on the
Adoption Date.

As at 31 December 2017, taking into account the shares acquired out of the dividends from the shares
held under the trust, there were 3,023,649 shares held in trust under the Scheme.
OTHERS
GLOSSARY

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 REMUNERATION COMMITTEE REPORT

Details of the interests of HKEX’s Chief Executive and the Senior Management in the Awarded Shares
(save for those which had been fully vested as of 31 December 2016) are set out below.

Number of shares 1

Shares
acquired
during
Number of the year Vested Lapsed
Date of 2 Awarded As at out of the during during As at
award Shares 1 Jan 2017 dividends the year the year 31 Dec 2017 Vesting period 3

HKEX’s Chief Executive

Charles Li 3 Dec 2014 47,467 4 50,096 – 45,086 5 5,010 5 – End of a performance
period of 2014 – 2016
2 Jan 2015 88,345 46,626 1,092 47,718 – – 15 Dec 2016 – 15 Dec 2017
2 Jan 2015 95,100 4 100,375 2,351 – – 102,726 6 End of a performance
period of 2015 – 2017
31 Dec 2015 60,429 62,173 1,456 31,812 – 31,817 9 Dec 2017 – 9 Dec 2018
31 Dec 2015 56,800 4 58,440 1,368 – – 59,808 End of a performance
period of 2016 – 2018
30 Dec 2016 63,210 63,210 1,481 – – 64,691 7 Dec 2018 – 7 Dec 2019
30 Dec 2016 67,400 4 67,400 1,579 – – 68,979 End of a performance
period of 2017 – 2019
29 Dec 2017 58,853 – – – – 58,853 8 Dec 2019 – 8 Dec 2020
29 Dec 2017 62,123 4 – – – – 62,123 End of a performance
period of 2018 – 2020
Senior Management
Matthew Chamberlain 2 Jan 2015 31,948 16,863 394 17,257 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 21,220 21,832 511 11,171 – 11,172 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 16,492 16,492 385 – – 16,877 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 20,688 – – – – 20,688 8 Dec 2019 – 8 Dec 2020

Eva Chau 30 Dec 2016 8,533 8,533 199 – – 8,732 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 9,939 – – – – 9,939 8 Dec 2019 – 8 Dec 2020

Adrian Farnham 2 Jan 2015 19,157 10,115 236 10,351 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 14,854 15,282 357 7,819 – 7,820 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 10,745 10,745 250 – – 10,995 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 11,080 – – – – 11,080 8 Dec 2019 – 8 Dec 2020

David Graham 2 Jan 2015 25,059 13,228 309 13,537 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 21,653 22,277 521 11,397 – 11,401 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 22,755 22,755 532 – – 23,287 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 19,548 – – – – 19,548 8 Dec 2019 – 8 Dec 2020

Romnesh Lamba 2 Jan 2015 39,323 20,756 485 21,241 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 30,214 31,085 727 15,905 – 15,907 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 22,123 22,123 517 – – 22,640 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 19,005 – – – – 19,005 8 Dec 2019 – 8 Dec 2020

Roger Lee 2 Jan 2015 11,468 6,056 141 6,197 – – 15 Dec 2016 – 15 Dec 2017
18 Nov 2015 14,658 15,080 176 7,539 – 7,717 1 Mar 2017 – 1 Mar 2018
31 Dec 2015 28,703 29,531 691 15,110 – 15,112 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 23,177 23,177 542 – – 23,719 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 18,702 – – – – 18,702 8 Dec 2019 – 8 Dec 2020

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 REMUNERATION COMMITTEE REPORT

Number of shares 1

OVERVIEW
Shares
acquired
during
Number of the year Vested Lapsed
Date of 2 Awarded As at out of the during during As at
award Shares 1 Jan 2017 dividends the year the year 31 Dec 2017 Vesting period 3

Richard Leung 2 Jan 2015 14,556 7,684 179 7,863 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 14,100 14,507 339 7,422 – 7,424 9 Dec 2017 – 9 Dec 2018

ORGANISATION
30 Dec 2016 12,852 12,852 300 – – 13,152 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 11,230 – – – – 11,230 8 Dec 2019 – 8 Dec 2020

Li Gang 31 Dec 2015 26,437 27,200 637 13,917 – 13,920 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 21,070 21,070 493 – – 21,563 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 18,310 – – – – 18,310 8 Dec 2019 – 8 Dec 2020

Ferheen Mahomed 1 Mar 2017 24,939 – 508 6,050 – 19,397 1 May 2017 – 1 May 2019 7
29 Dec 2017 14,953 – – – – 14,953 8 Dec 2019 – 8 Dec 2020

MD & A
Mao Zhirong 2 Jan 2015 12,110 6,393 149 6,542 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 12,337 12,692 297 6,493 – 6,496 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 9,481 9,481 221 – – 9,702 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 8,239 – – – – 8,239 8 Dec 2019 – 8 Dec 2020

Trevor Spanner 2 Jan 2015 35,229 18,596 434 19,030 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 22,694 23,348 545 11,947 – 11,946 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 18,963 18,963 443 – – 19,406 7 Dec 2018 – 7 Dec 2019

GOVERNANCE
29 Dec 2017 16,290 – – – – 16,290 8 Dec 2019 – 8 Dec 2020

Calvin Tai 2 Jan 2015 26,991 14,248 333 14,581 – – 15 Dec 2016 – 15 Dec 2017
31 Dec 2015 23,668 24,351 570 12,459 – 12,462 9 Dec 2017 – 9 Dec 2018
30 Dec 2016 19,700 19,700 461 – – 20,161 7 Dec 2018 – 7 Dec 2019
29 Dec 2017 18,205 – – – – 18,205 8 Dec 2019 – 8 Dec 2020

1 This includes shares acquired out of the dividends from the Awarded Shares according to the Scheme.

FINANCIALS
2 This refers to the date on which the trustee allocated the Awarded Shares to the selected employees from the shares purchased with the awarded
sum determined by the Board.
3 Save for those Senior Executive Awards referred to in note 4 below and the awards granted as part of the hiring agreement with a special vesting
schedule, the Awarded Shares and the related income are vested in two equal tranches in the second and third year after the grant.
4 The awards were granted under the Scheme as long-term incentives for selected senior executives of the Group (Senior Executive Awards).
The Board has full discretion to determine the actual amount of the Senior Executive Awards to be vested at the end of a performance period in
accordance with the performance criteria recommended by the RC and approved by the Board. These performance criteria include total
shareholder return, achievements made in business development initiatives and sustaining the organisation’s effectiveness.
5 On 27 February 2017, the Board approved the vesting of 45,086 shares to Mr Li based on his actual performance for the period 2014-2016.
Pursuant to the terms of the Scheme, the remaining 5,010 Awarded Shares previously allocated to Mr Li lapsed on 27 February 2017.
6 The RC recommended a vesting of 73,963 shares to Mr Li based on the actual performance for the period 2015-2017. *
7 The awards were granted as part of the hiring agreement with a special vesting schedule.
OTHERS

CHOW Chung Kong

Chairman of the Remuneration Committee

Hong Kong, 12 February 2018

GLOSSARY

* The recommendation was approved by the Board on 28 February 2018.

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 ENVIRONMENTAL, SOCIAL AND GOVERNANCE COMMITTEE REPORT

The ESG Committee

The ESG Committee is delegated with the authority from the Board to review and monitor the Group’s
ESG policies and practices to ensure compliance with the relevant legal and regulatory requirements,
monitor and respond to emerging ESG issues and make recommendations to the Board where
appropriate to improve the Group’s ESG performance. Its terms of reference are available on the
HKEX Group website ORG .

The ESG Committee comprises four INEDs and HKEX’s Chief Executive, whose names and biographies
are set out in the Board and Committees section of this Annual Report. The ESG Committee held one
meeting in 2017. Members’ attendance records are disclosed in the Corporate Governance Report
contained in this Annual Report.

Summary of Work in 2017/2018

• Reviewed the training and continuing professional development of the Directors and Senior Management
• Endorsed the annual Corporate Governance Report and the annual CSR Report

ESG Policies and Performance

HKEX is committed to the highest standards of corporate governance and aims to integrate CSR into its
business strategy and management approach. Details of HKEX’s key corporate governance practices and
activities during 2017 are disclosed in the Corporate Governance Report. HKEX’s Corporate Governance
Statement and CSR Policy are available on the HKEX Group website CG / CSR.

In view of the business nature of the Group, HKEX is not aware of any environmental laws or regulations
that would have a significant impact on the Group. The Group, however, continues to do more than is
required by adopting measures to reduce energy and other resource utilisation, minimise waste and
increase recycling, encourage its employees to adopt environmentally responsible behaviour and
promote environmental protection in its supply chain and marketplace. During 2017, HKEX was awarded
the “Excellence” Level Wastewi$e Certificate under the Hong Kong Green Organisation Certification
scheme. HKEX was also awarded the CarbonCare® ESG Label by CarbonCare InnoLab in recognition of
its effort to adopt high standards of reporting in respect of its environmental policies and performance.

HKEX promotes the development of socially responsible practices in its marketplace and community in
accordance with its Community Investment Policy. In 2017, the Group donated a total of $3.1 million to
different causes in communities where it operates and helped raise $73 million for The Community Chest
of Hong Kong via the Stock Code Balloting for Charity Scheme, and approximately £47,000 for the LME’s
charity partner, Little Havens Hospice. Throughout the year, the Group continued to encourage its
employees to participate in different events organised by charities in their communities. The Group’s
employees and their guests contributed over 4,300 hours of volunteer services in total. To further deepen
the Group’s connection with communities, the Board has approved the plan to establish a charitable
foundation to implement a more structured approach to the determination and oversight of the Group’s
corporate giving in the future.

HKEX supports efforts by its Directors and Senior Management to develop and refresh their knowledge
and skills to ensure that their contributions to the Board and the Group remain informed and relevant.
On 14 February 2018, the ESG Committee reviewed the training records of Directors and Senior
Management for 2017 and concluded that the training they received was appropriate and adequate.

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 ENVIRONMENTAL, SOCIAL AND GOVERNANCE COMMITTEE REPORT

Relationships with Major Stakeholders

OVERVIEW
HKEX continues to engage with its employees, market participants, investors, suppliers and other
stakeholders through different channels to develop mutually beneficial relationships and promote
sustainability.

Employees are remunerated equitably and competitively. Training and development opportunities are
provided to equip staff members to deliver their best performance and achieve corporate goals.
HKEX conducted its latest employee engagement survey in May 2017 and communicated the survey
results to its employees in November 2017. The survey had a high response rate of 89 per cent.

ORGANISATION
The market is usually consulted (formally or informally) on major initiatives and the views of the
respondents are carefully and thoroughly considered to ensure that decisions are made in an informed
manner and any changes are acceptable to the market. The Exchange launched a two-month
consultation in June 2017 to seek market views on the New Board Concept Paper and a consultation
paper on the GEM reform, and the respective conclusions were issued in December 2017. In addition,
five other market consultations on listing matters were undertaken in 2017 to seek views on capital raisings,
delisting, the Corporate Governance Code and various proposed amendments to the Listing Rules.

MD & A
In August 2017, HKEX published its conclusions on proposed after-hours derivatives trading (T+1 session)
enhancements following a two-month market consultation. In September 2017, the SFC and the Exchange
published conclusions to their consultation regarding proposed enhancements to the Exchange’s
decision-making and governance structure for listing regulation. In the UK, the LME announced
its strategic pathway in September 2017, following publication of a discussion paper in April 2017 –
a comprehensive market engagement process undertaken to elicit market feedback on its market structure.
The LME further issued a market consultation in November 2017 on the introduction of an OTC booking
fee for financial participants and enhanced trading regulations in support of market fairness, and the

GOVERNANCE
consultation decision notice will be published in due course.

HKEX uses suppliers that reflect its values and commitment to being a good corporate citizen.
During 2017, 10 representatives from HKEX’s suppliers and other business partners supported and
attended seminars related to anti-discrimination and prevention of bribery organised by HKEX under its
ongoing stakeholder engagement programme.

CSR Reporting

FINANCIALS
During 2017, HKEX’s Chief Executive provided to the Board quarterly CSR progress reports summarising
the CSR initiatives undertaken by the Group. Details of the Group’s CSR performance in 2017 are disclosed
in the 2017 CSR Report.

CHOW Chung Kong

OTHERS

Chairman of the ESG Committee

Hong Kong, 14 February 2018

GLOSSARY

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 DIRECTORS’ REPORT
The Directors are pleased to present this Annual Report together with the audited consolidated financial
statements for the year ended 31 December 2017.

Principal Activities
HKEX is a recognised exchange controller under the SFO. HKEX operates the only recognised stock and
futures markets in Hong Kong through its wholly-owned subsidiaries, SEHK and HKFE. HKEX also
operates HKSCC, HKCC, SEOCH and OTC Clear, which are the only recognised clearing houses in
Hong Kong. HKSCC, HKCC and SEOCH provide integrated clearing and settlement services to their
Participants, while OTC Clear provides clearing and settlement services for interest rate and foreign
exchange derivatives traded over-the-counter. HKSCC also provides depository and nominee services to
its Participants. HKEX provides market data through its data dissemination entity, HKEX Information
Services Limited.

HKEX also owns the LME and LME Clear in the UK. The LME is a recognised investment exchange under
the Financial Services and Markets Act 2000 (FSMA), and LME Clear is a European Market Infrastructure
Regulation (EMIR) authorised CCP, which provides clearing services for the exchange contracts of
the LME.

A list of HKEX’s principal subsidiaries as of 31 December 2017 and their particulars are set out in note 24
to the Consolidated Financial Statements.

Business Review
The Group’s revenue is derived primarily from business activities conducted in Hong Kong and the UK.
An analysis of the Group’s performance for the year by operating segment is set out in note 4 to the
Consolidated Financial Statements.

A fair review of the Group’s business, including the important events affecting the Group that have
occurred since the end of 2017 and the likely future developments, is set out in the Chief Executive’s
Review, Business Review and Financial Review sections of this Annual Report. Principal risks and
uncertainties facing the Group were reviewed by the Board as delineated in the Risk Committee Report.
Details about the Group’s financial risk management are set out in note 48 to the Consolidated Financial
Statements.

Throughout 2017, there was no incidence of non-compliance with the relevant laws and regulations that
have a significant impact on the Group’s business as outlined in the following table.

Primary legislation/
regulations 1 Key scope Compliance measures

Exchange and clearing business in Hong Kong

SFO HKEX is a recognised exchange controller A corporate governance structure 2 is in

and has duties under section 63(1) to place to enable HKEX to balance its public
ensure that the statutory duties placed functions and its commercial profit making
on the recognised exchange companies objectives.
(under section 21) and recognised
clearing houses (under section 38) it The Regulatory Compliance Department is
controls are complied with. responsible for ensuring compliance with
rules and regulations.

SEHK and HKFE are recognised exchange Rule amendments by SEHK, HKFE and
companies; and HKSCC, HKCC, SEOCH each of the RCHs are approved by the SFC
and OTC Clear are recognised clearing under section 24 (for recognised exchange
houses (RCHs). companies) and section 41 (for RCHs).

Fees imposed by SEHK, HKFE and each of

the RCHs are approved by the SFC under
section 76.

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 DIRECTORS’ REPORT

Primary legislation/

OVERVIEW
regulations 1 Key scope Compliance measures

PFMI HKSCC, HKCC, SEOCH and OTC Clear The approach of each of the RCHs to
as the RCHs are required to observe observing each applicable PFMI is
the applicable PFMI on an ongoing summarised in its disclosure document
basis pursuant to the guidelines issued which is available on the HKEX Market
by the SFC. website.

Exchange and clearing business in the UK

ORGANISATION
Part I and Part II of The LME is a recognised investment The LME follows the rules and guidance on
the FSMA (Recognition exchange under Part XVIII of the FSMA recognition and notification requirements
Requirements for and is required to ensure that its rules, as set out in the FCA’s Handbook.
Investment Exchanges procedures and practices are adequate
and Clearing Houses) for the protection of investors and for The Audit and Risk Committee of the LME,
Regulations 2001 the maintenance of an orderly market. as required by the FCA and on behalf of the
LME’s board, has to satisfy itself formally
on an annual basis that the LME continues
to meet the recognition requirements.

MD & A
The LME conducts a bottom-up in-depth
analysis, listing all of the recognition
requirements, systems, procedures and
policies in place to demonstrate how each
requirement has been met.

Regulation on OTC LME Clear is an authorised CCP and is To ensure compliance with EMIR, LME Clear
Derivatives, Central required to comply with the applicable has implemented robust governance
Counterparties and EMIR requirements. arrangements and a comprehensive risk
Trade Repositories management framework.

GOVERNANCE
(known as EMIR)
LME Clear’s Rules and Procedures have
been developed to reflect the legal
framework which applies to LME Clear,
including primarily the requirements
of EMIR.

All documentation in relation to LME Clear’s

compliance with EMIR is publicly disclosed
on the LME website.

FINANCIALS
FSMA LME Clear is a recognised clearing LME Clear provides a high degree of legal
house under Part XVIII of the FSMA certainty for each material aspect of its
and is required to ensure that its activities by setting out the rights and
rules, procedures and practices are obligations of LME Clear and those of its
adequate for the protection of investors Members in its Rules and Procedures
and for the maintenance of an orderly (the Rules). The Rules support and allow
operation. LME Clear to conduct such material
aspects appropriately and effectively,
ensure Members understand the full
OTHERS

extent of their obligations when using

LMEmercury and clarify the protection
provided to investors. Any changes to the
Rules are notified to the Bank of England
which, when appropriate, will approve the
change. The Rules are publicly disclosed on
the LME website.
GLOSSARY

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 DIRECTORS’ REPORT

Primary legislation/
regulations 1 Key scope Compliance measures

Financial Markets and LME Clear’s secure payment system is LME Clear has adopted, as part of its rules
Insolvency (Settlement a designated system and is required to and procedures, a Settlement Finality Rule
Finality) Regulations meet the SFR requirements. (Rule 11) and related Settlement Finality
1999 (SFR) Procedures which define the system and
the point of irrevocability and finality of
instructions as well as the participants in
the system. The procedures explaining how
the system meets the SFR requirements
are available on the LME website.

PFMI LME Clear, as financial market LME Clear’s approach to observing each
infrastructure, is required to observe the applicable PFMI is summarised in its
applicable PFMI on an ongoing basis. disclosure document, which is available on
the LME website.

LME Clear performs a self-assessment on

an annual basis against the PFMI. This
assessment is shared with LME Clear’s
primary regulator, the Bank of England.

Operations in Hong Kong and the UK

Prevention of Bribery HKEX, SEHK, HKFE, HKSCC, HKCC HKEX has adopted the Group Anti-Bribery
Ordinance (Chapter 201 and SEOCH are public bodies and are and Anti-Corruption Policy to ensure that
of the Laws of Hong subject to prohibitions on bribery (under employees within the Group comply with
Kong) sections 4 to 8) and corrupt transactions the Prevention of Bribery Ordinance and
with agents (under section 9). the Bribery Act 2010, where applicable.

Bribery Act 2010 The Group’s subsidiaries in the UK and

persons who are British citizens are
subject to the Bribery Act provisions.

1 On the corporate level, all of the Group companies comply with the laws of the place in which the companies are incorporated, the Main Board
Listing Rules and the SFO where they are applicable.
2 HKEX’s corporate governance structure is available on the HKEX Group website, and its principal corporate governance practices are set out in the
Corporate Governance Report, Nomination Committee Report, Audit Committee Report, Risk Committee Report, Remuneration Committee
Report and ESG Committee Report.

Disclosures related to the Group’s environmental policies and performance, and relationships with major
stakeholders are included in the ESG Committee Report.

Major Customers and Suppliers

During the year ended 31 December 2017, the combined value of the Group’s contracts with its five
largest suppliers, which were not of a capital nature, was less than 30 per cent of the total value of
supplies purchased. The Group’s five largest customers combined contributed less than 30 per cent of its
total revenue and other income during the year ended 31 December 2017.

Results and Appropriations

The Group’s results for the year ended 31 December 2017 are set out in the Consolidated Income
Statement.

An interim dividend of $2.55 per share (2016: $2.21 per share) was declared by the Board.
On 21 September 2017, dividends in the total sum of $3.1 billion (2016: $2.7 billion) were paid to
Shareholders. This included the dividends of $8 million (2016: $7 million) paid to shares held in trust
under the Share Award Scheme.

94 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 DIRECTORS’ REPORT

The Board recommends the payment of a final dividend of $2.85 per share (2016: $2.04 per share) to

OVERVIEW
Shareholders whose names appear on HKEX’s Register of Members on 3 May 2018, and the retention of
the remaining profit for the year. Including the interim dividend, total dividend for 2017 amounts to a
total of $5.40 per share (2016: $4.25 per share), which represents a payout ratio of 90 per cent
(2016: 90 per cent) of the profit attributable to shareholders for the year ended 31 December 2017.
Dividends for shares held in trust under the Share Award Scheme amount to $16 million (2016:
$14 million). The Board also proposes to offer a scrip dividend alternative to allow Shareholders to elect
to receive the final dividend wholly or partly in the form of new fully paid shares in lieu of cash.
More information about the final dividend for 2017 is set out in the Shareholder Information section of

ORGANISATION
this Annual Report.

Donations
The Group’s charitable donations during the year amounted to $3.1 million (2016: $2.1 million). There
have never been any political donations.

HKEX continues to raise funds for The Community Chest of Hong Kong via the Stock Code Balloting for
Charity Scheme. During 2017, a total sum of $73 million (2016: $62 million) was raised via the Stock

MD & A
Code Balloting for Charity Scheme for The Community Chest of Hong Kong.

Share Capital
Details of the movements in share capital of the Company during the year are set out in note 36 to the
Consolidated Financial Statements. HKEX shares were issued during the year on election of scrip in lieu
of cash dividends for the 2016 final dividend and 2017 interim dividend pursuant to HKEX’s scrip dividend
scheme. Details are set out in note 36(a) to the Consolidated Financial Statements.

GOVERNANCE
Equity-linked Agreements
No equity-linked agreements were entered into by the Company during the year or subsisted at the end
of the year.

Reserves
As at 31 December 2017, HKEX’s distributable reserves, calculated under Part 6 of the Companies
Ordinance (Chapter 622 of the Laws of Hong Kong), amounted to $7.3 billion (31 December 2016:

FINANCIALS
$6.4 billion).

Details of the movements in the reserves of the Group and HKEX during the year are set out in the
Consolidated Statement of Changes in Equity and notes 37 to 40 and note 49(a) to the Consolidated
Financial Statements.

Purchase, Sale or Redemption of HKEX’s Listed Securities

OTHERS

During 2017, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of
HKEX shares, except that the trustee of the Share Award Scheme, pursuant to the terms of the rules and
trust deed of the Share Award Scheme, purchased on the Stock Exchange a total of 999,700 HKEX shares
at a total consideration of $228 million.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 95

 DIRECTORS’ REPORT

Directors
The following is the list of Directors during the year and up to the date of this report (unless otherwise
stated). Brief biographies of the current Directors are set out in the Board of Directors and Senior
Management section of this Annual Report. Their interests in HKEX shares are set out in the Corporate
Governance Report. Information about Directors’ appointments, retirements and remuneration is set out
in the Nomination Committee Report and the Remuneration Committee Report.

INEDs
CHOW Chung Kong (Chairman)
Apurv BAGRI
CHAN Tze Ching, Ignatius
CHEAH Cheng Hye (Elected on 26 April 2017)
Timothy George FRESHWATER
FUNG Yuen Mei, Anita (Re-appointed on 26 April 2017)
Rafael GIL-TIENDA (Re-appointed on 26 April 2017)
John Barrie HARRISON (Retired on 26 April 2017)
HU Zuliu, Fred
KWOK Chi Piu, Bill (Retired on 26 April 2017)
LEE Kwan Ho, Vincent Marshall (Retired on 26 April 2017)
LEUNG KO May Yee, Margaret (Re-appointed on 26 April 2017)
LEUNG Pak Hon, Hugo (Elected on 26 April 2017)
John Mackay McCulloch WILLIAMSON
YIU Kin Wah, Stephen (Appointed on 26 April 2017)

Executive Director
LI Xiaojia, Charles (Chief Executive)

The following is the list of directors of HKEX’s subsidiaries during the year and up to the date of
this report (unless otherwise stated).

Brian Geoffrey BENDER Marye Louise HUMPHERY Ferheen MAHOMED 2

Matthew James CHAMBERLAIN 2 Garry Peter JONES 3 MAO Zhirong 2
CHAN Wing Kwong 3 Paul Michael KENNEDY 3 Ketan B PATEL
CHENG Mo Chi, Moses John Patrick KILLIAN 2 POON Hon Cheung
CHEUNG Man Leung, Billy KWAN Wai Hung POON Tim Fung
CHIN Chin Fai KWOK Chi Piu, Bill 3 David Bolton RUSSELL
CHOW Chung Kong 1 LAI Tat Sze, Darcy 3 Trevor William SPANNER 2
Adrian John Winston FARNHAM 2 LAM Kin Marco Andrea STRIMER
Rafael GIL-TIENDA 1 Romnesh LAMBA 2 Antony John STUART
David GRAHAM 2 LEE Kwok Keung 2 TAI Chi Kin 2
Hugh Edward GRAHAM LEUNG Chung Kwong, Richard 2 Richard John THORNHILL
GUO Xiaoli LI Gang 2 YIU Kin Wah, Stephen 1
John Barrie HARRISON 3 LI Xiaojia, Charles 1 ZUO Tao
Elizabeth Noel HARWERTH LIANG Cheng
HUI Ching Yu LIN Jiemin

1 Member of the Board

2 Member of Senior Management
3 No longer a director of any subsidiary of HKEX as at the date of this report

96 HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT

 DIRECTORS’ REPORT

Directors’ Interests in Transactions, Arrangements and Contracts

OVERVIEW
Details of the continuing connected transactions and related party transactions are set out in the
Corporate Governance Report and note 45 to the Consolidated Financial Statements.

Notwithstanding the above, no transaction, arrangement or contract that is significant in relation to the
Group’s business to which the Company or any of its subsidiaries was a party and in which a person who
at any time in 2017 was a Director or his or her connected entity had, directly or indirectly, a material
interest subsisted at any time during the year or at the end of 2017.

ORGANISATION
Directors’ Rights to Acquire Shares or Debentures
Li Xiaojia, Charles, Executive Director, was awarded HKEX shares pursuant to the Share Award Scheme.
Details are set out in the Remuneration Committee Report and note 37 to the Consolidated Financial
Statements.

Save for the above, neither HKEX nor any of its subsidiary undertakings was a party to any arrangements
to enable Directors to acquire benefits by means of the acquisition of shares in, or debentures of, HKEX or
any other body corporate at any time during the year or at the end of 2017.

MD & A
Management Contracts
No contract, other than employment contracts, concerning the management and administration of the
whole or any substantial part of the Company’s business was entered into or existed during 2017.

Permitted Indemnity Provision

Pursuant to the HKEX’s Articles, subject to the provisions of the statutes, every Director shall be entitled

GOVERNANCE
to be indemnified by the Company against all costs, charges, losses, expenses and liabilities incurred by
him or her in the execution and discharge of his or her duties or in relation thereto. The Directors and
Officers Liability Insurance (D&O Insurance) undertaken by the Company provides such indemnities to
all the directors of the Company and its subsidiaries. The relevant provisions in the HKEX’s Articles and
the D&O Insurance were in force during the financial year ended 31 December 2017 and as of the date of
this report.

Auditor

FINANCIALS
The financial statements for the year ended 31 December 2017 have been audited by
PricewaterhouseCoopers, which retires and, being eligible, offers itself for re-appointment at the
2018 AGM. A resolution to re-appoint PricewaterhouseCoopers and to authorise the Directors to fix its
remuneration will be proposed at the 2018 AGM.

All references above to other sections, reports or notes in this Annual Report form part of this report. OTHERS

Approved by the Board on 28 February 2018

CHOW Chung Kong

Chairman
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED  2017 ANNUAL REPORT 97

 AUDITOR’S REPORT

Independent Auditor’s Report to the Members of

Hong Kong Exchanges and Clearing Limited
(incorporated in Hong Kong with limited liability)

Opinion
What we have audited
The consolidated financial statements of Hong Kong Exchanges and Clearing Limited (the “Company”)
and of its subsidiaries (together, “the Group”) set out on pages 104 to 188, which comprise:

• the consolidated statement of financial position as at 31 December 2017;

• the consolidated income statement for the year then ended;
• the consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of changes in equity for the year then ended;
• the consolidated statement of cash flows for the year then ended; and
• the notes to the consolidated financial statements, which include a summary of significant
accounting policies.

Our opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial
position of the Group as at 31 December 2017, and of its consolidated financial performance and its
consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting
Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and
have been properly prepared in compliance with the Hong Kong Companies Ordinance.

Basis for Opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the
HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Consolidated Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.

Independence
We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional
Accountants (“the Code”), and we have fulfilled our other ethical responsibilities in accordance with the
Code.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our
audit of the consolidated financial statements of the current period. These matters were addressed in the
context of our audit of the consolidated financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.

Key audit matters identified in our audit are summarised as follows:

• Goodwill impairment assessment

• IT systems and controls over financial accounting and reporting

98 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT

 AUDITOR’S REPORT

Key Audit Matters (continued)

OVERVIEW
Goodwill impairment assessment
Nature of the Key Audit Matter How our audit addressed the Key Audit Matter

As at 31 December 2017, the Group has goodwill Our work included testing management’s key
of HK$13,277 million arising from the acquisition controls over the goodwill impairment assessment
of LME Holdings Limited and its subsidiaries including:
(collectively “LME Group”) in 2012. Goodwill was
allocated to groups of Cash Generating Units 1. controls exercised by management over the

ORGANISATION
(“CGUs”) within the “Commodities” segment, development of future cash flow projections
HK$10,396 million, and the “Clearing” segment, used in the budget;
HK$2,881 million and is monitored by
management at the operating segment level. 2. approval by the board of directors over the
budget developed by management; and
Management has performed an impairment
assessment over the goodwill allocated to the 3. control processes performed by management
Commodities and Clearing segments at the to monitor the actual performance against the

MD & A
operating segment level by: budget approved by the board of directors.

1. calculating the “value-in-use” for groups of Our audit procedures also included the following:
CGUs within each operating segment using a
discounted cash flow model. These models use 1. We have assessed the discounted cash flow
future cash flow projections (revenue, model used by management to estimate the
expenses and capital expenditure) for each value-in-use of the respective groups of CGUs
group of CGUs over a five-year period, with a within the Commodities and Clearing

GOVERNANCE
terminal growth rate applied to the period segments.
beyond the fifth year. These cash flows are
discounted to net present value using the 2. We have assessed the reasonableness of the
weighted average cost of capital (“WACC”) of WACCs used and the terminal growth rates
groups of CGUs; and applied to the period beyond the fifth year by
reviewing management’s assumptions
2. comparing the resulting value-in-use of each underlying the cash flow projections from the
group of CGUs to their respective book values. commodities and clearing business and

FINANCIALS
comparing them to independent market data,
We focus on goodwill due to the size of the industry forecasts and historical average daily
balance and significant judgement applied by volume growth for trading and clearing;
management in the value-in-use assessments.
3. We have evaluated the reasonableness of
Significant judgement was involved on the key management’s key assumptions used in the
assumptions underlying the future cash flow underlying cash flow projections for the
projections for the LME Group, including expected five-year period, by comparing historical
OTHERS

trade volume and pricing within the CGUs in each budgets and achievements and the reasons for
of the operating segments. Other assumptions any deviations. We have also agreed the cash
involved are the discount rates applied and growth flow projections against the latest budgets
rates applied to the period beyond the fifth year approved by the board of directors;
(“terminal growth rate”) to those future cash flow
projections.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 99

 AUDITOR’S REPORT

Key Audit Matters (continued)

Goodwill impairment assessment (continued)
Nature of the Key Audit Matter How our audit addressed the Key Audit Matter

Management has also assessed and monitored the 4. We have obtained and have evaluated
budgeted future cash flow projections used in management’s sensitivity analyses to assess
calculating the value-in-use for each group of the impact of reasonably possible changes to
CGUs against the actual performance. the key assumptions (cash flow projections,
WACCs and growth rates). We have also
Management has concluded that there is no performed our own independent sensitivity
impairment in respect of the goodwill allocated to analyses on these key assumptions, including
the groups of CGUs within the respective those applied to the period beyond the fifth
Commodities and Clearing segments using the year, and evaluated the impact that such
value-in-use model. possible changes have on the recoverable
amount of the goodwill allocated to each
Refer to note 3 for critical accounting estimates group of CGUs at the financial year end;
and assumptions and note 26 for the goodwill
disclosure relating to the impairment assessment. 5. We have reviewed the appropriateness of the
goodwill impairment assessment disclosure.

Based on the above audit procedures, no material

exceptions to management’s assessment were
noted.

100 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 AUDITOR’S REPORT

Key Audit Matters (continued)

OVERVIEW
IT systems and controls over financial accounting and reporting
Nature of the Key Audit Matter How our audit addressed the Key Audit Matter

The Group operates securities and derivatives As part of our audit, we obtained a front-to-end
trading, clearing and settlement systems, which understanding of the revenue recognition and
process significant volumes of daily transactions financial reporting processes and identified the
and market data. The trading, clearing and automated controls we planned to rely on and the
settlement fees generated from the transactions corresponding key IT systems that support the

ORGANISATION
processed are the key drivers of the Group’s processes.
revenue. The revenue recognition of these fees rely
heavily on the Information Technology (“IT”) Our audit procedures over the relevant IT systems
systems processing those transactions and data. and related controls included the following:

Our audit effort focused on the key IT systems and 1. We have assessed the IT control environment,
related controls we planned to rely on over the examined the IT governance framework and
revenue recognition and financial reporting tested the IT general controls of the key IT

MD & A
processes. This focus includes (1) the core trading, systems that support the revenue recognition
clearing and settlement systems that process and financial reporting processes to evaluate
transactions for revenue recognition of these fees, whether the system functionality, data and
(2) the financial accounting and reporting system controls could be relied on throughout the
that generates financial information utilised in the period. Our testing of IT general controls
preparation of the Group’s financial statements covered access to programs and data, program
and (3) the interfaces between the core systems changes, computer operations and program
and the financial accounting and reporting system development.

GOVERNANCE
(“key IT systems”).
2. We have tested the identified automated
We focused on these areas as the Group’s revenue application controls, which are critical to the
recognition and financial reporting processes are revenue recognition and financial reporting
highly dependent on automated controls, system processes. Our testing procedures included the
generated information and system interfaces, testing of system logical access, system
which are underpinned by the design and automated calculations and validations, testing
operating effectiveness of the IT general controls of system generated information, system

FINANCIALS
over the key IT systems and the automated interfaces and reconciliations.
application controls over the processes. The Group
relied on the key IT systems and controls to ensure 3. We have placed certain reliance on the work of
the accuracy and completeness of the revenue HKEX’s internal audit function over the testing
recognition during the financial accounting and of automated calculations and system
reporting processes. interfaces. In order to rely on their work, we
have evaluated the objectivity and competence
OTHERS

of the internal audit function and determined

the nature and extent of work that can be
relied on by us. Additionally, we have
independently performed audit procedures to
evaluate the results of the work of the internal
audit function.

Based on the above audit procedures, no material

GLOSSARY

exceptions that would impact our level of reliance

on the key IT systems and the related controls for
the purpose of our audit were noted.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 101
 AUDITOR’S REPORT

Other Information
The directors of the Company are responsible for the other information. The other information comprises
the section Overview, Organisation, Management Discussion and Analysis, Governance, Shareholder
Information and Glossary included in the Annual Report, but does not include the consolidated financial
statements and our auditor’s report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Directors for the Consolidated Financial Statements

The directors of the Company are responsible for the preparation of the consolidated financial statements
that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong
Companies Ordinance, and for such internal control as the directors determine is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.

The Audit Committee of the Group assists the directors in discharging their responsibilities for overseeing
the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. We report our opinion solely to you, as a body, in accordance with Section 405 of
the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or
accept liability to any other person for the contents of this report. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain
professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

102 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 AUDITOR’S REPORT

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

OVERVIEW
(continued)
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the directors.
• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or

ORGANISATION
conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to
the related disclosures in the consolidated financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Group to cease to continue as a
going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the underlying

MD & A
transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Group to express an opinion on the consolidated financial statements.
We are responsible for the direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.

We communicate with the Audit Committee regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control

GOVERNANCE
that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.

From the matters communicated with the Audit Committee, we determine those matters that were of

FINANCIALS
most significance in the audit of the consolidated financial statements of the current period and are
therefore the key audit matters. We describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances,
we determine that a matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public interest benefits of such
communication.

The engagement partner on the audit resulting in this independent auditor’s report is Colin Stuart
OTHERS

Shaftesley.

PricewaterhouseCoopers
Certified Public Accountants

Hong Kong, 28 February 2018

GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 103
 CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2017
2017 2016
Note $m $m

Trading fees and trading tariff 5(a) 4,856 4,428

Stock Exchange listing fees 5(b) 1,333 1,092
Clearing and settlement fees 2,691 2,358
Depository, custody and nominee services fees 892 857
Market data fees 857 816
Other revenue 5(c) 945 847

REVENUE 5 11,574 10,398

Investment income 2,171 826
Interest rebates to Participants (572) (130)
Net investment income 6 1,599 696
Sundry income 7 7 22

REVENUE AND OTHER INCOME 4 13,180 11,116

OPERATING EXPENSES
Staff costs and related expenses 8 (2,273) (2,035)
Information technology and computer maintenance expenses 9 (433) (500)
Premises expenses (354) (333)
Product marketing and promotion expenses (47) (54)
Legal and professional fees (79) (106)
Other operating expenses 10 (380) (427)

(3,566) (3,455)

EBITDA 4 9,614 7,661

Depreciation and amortisation (858) (771)

OPERATING PROFIT 11 8,756 6,890

Finance costs 12 (134) (82)
Share of losses of joint ventures (12) (9)

PROFIT BEFORE TAXATION 4 8,610 6,799

TAXATION 15(a) (1,255) (1,058)

PROFIT FOR THE YEAR 7,355 5,741

PROFIT/(LOSS) ATTRIBUTABLE TO:

Shareholders of HKEX 40 7,404 5,769
Non-controlling interests 24(a)(i) (49) (28)

PROFIT FOR THE YEAR 7,355 5,741

Basic earnings per share 16(a) $6.03 $4.76

Diluted earnings per share 16(b) $6.02 $4.75

The notes on pages 109 to 188 are an integral part of these consolidated financial statements.

Details of dividends are set out in note 17 to the consolidated financial statements.

104 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2017
2017 2016

OVERVIEW
Note $m $m

PROFIT FOR THE YEAR 7,355 5,741

OTHER COMPREHENSIVE INCOME
Items that may be reclassified subsequently to profit or loss:
Currency translation differences of foreign subsidiaries
recorded in exchange reserve 2(e)(iii) 156 (6)
Cash flow hedges 38 1 –

ORGANISATION
OTHER COMPREHENSIVE INCOME 157 (6)

TOTAL COMPREHENSIVE INCOME 7,512 5,735

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO:

Shareholders of HKEX 7,561 5,763
Non-controlling interests 24(a)(i) (49) (28)

TOTAL COMPREHENSIVE INCOME 7,512 5,735

MD & A
The notes on pages 109 to 188 are an integral part of these consolidated financial statements.

GOVERNANCE
FINANCIALS
OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 105
 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December 2017
At 31 Dec 2017 At 31 Dec 2016
Non- Non-
Current current Total Current current Total
Note $m $m $m $m $m $m
ASSETS
Cash and cash equivalents 18, 19 155,660 – 155,660 115,723 – 115,723
Financial assets measured at fair value
through profit or loss 18, 20 95,037 – 95,037 70,066 – 70,066
Financial assets measured at amortised cost 18, 21 30,757 60 30,817 29,093 74 29,167
Accounts receivable, prepayments and deposits 23 16,564 21 16,585 12,928 21 12,949
Interests in joint ventures 25 – 61 61 – 59 59
Goodwill and other intangible assets 26 – 17,925 17,925 – 17,812 17,812
Fixed assets 27 – 1,469 1,469 – 1,499 1,499
Lease premium for land – 20 20 – 21 21
Deferred tax assets 35(d) – 30 30 – 22 22

Total assets 298,018 19,586 317,604 227,810 19,508 247,318

LIABILITIES AND EQUITY

Liabilities
Financial liabilities at fair value through
profit or loss 28 85,335 – 85,335 61,627 – 61,627
Margin deposits, Mainland security and
settlement deposits, and cash
collateral from Clearing Participants 18, 29 157,814 – 157,814 126,846 – 126,846
Accounts payable, accruals and other liabilities 30 16,159 51 16,210 12,246 30 12,276
Deferred revenue 957 – 957 842 – 842
Taxation payable 505 – 505 356 – 356
Other financial liabilities 31 58 – 58 37 – 37
Participants’ contributions to Clearing
House Funds 18, 32 16,626 – 16,626 8,656 – 8,656
Borrowings 33 1,027 833 1,860 – 3,422 3,422
Provisions 34 85 68 153 78 81 159
Deferred tax liabilities 35(d) – 711 711 – 713 713

Total liabilities 278,566 1,663 280,229 210,688 4,246 214,934

Equity
Share capital 36 25,141 22,085
Shares held for Share Award Scheme 36 (606) (599)
Employee share-based compensation reserve 37 222 226
Hedging reserve 38 1 –
Exchange reserve 2(e)(iii) (104) (260)
Designated reserves 32, 39 822 773
Reserve relating to written put options to
non-controlling interests (293) (293)
Retained earnings 40 12,090 10,334
Equity attributable to shareholders of HKEX 37,273 32,266
Non-controlling interests 24(a)(i) 102 118

Total equity 37,375 32,384

Total liabilities and equity 317,604 247,318

Net current assets 19,452 17,122

The notes on pages 109 to 188 are an integral part of these consolidated financial statements.

Approved by the Board of Directors on 28 February 2018

CHOW Chung Kong LI Xiaojia, Charles

Director Director

106 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2017

Attributable to shareholders of HKEX

OVERVIEW
Reserve
Share capital Employee relating to
and shares share-based written put
held for Share compensation Hedging Designated options to non- Retained Non-
Award Scheme reserve reserve Exchange reserves controlling earnings controlling Total
(note 36) (note 37) (note 38) reserve (note 39) interests (note 40) Total interests equity
$m $m $m $m $m $m $m $m $m $m
At 1 Jan 2016 18,695 199 – (254) 778 (293) 10,691 29,816 146 29,962
Profit for the year – – – – – – 5,769 5,769 (28) 5,741

ORGANISATION
Other comprehensive income – – – (6) – – – (6) – (6)
Total comprehensive income – – – (6) – – 5,769 5,763 (28) 5,735
Total transactions with shareholders of HKEX,
recognised directly in equity:
– 2015 final dividend at $2.87 per share – – – – – – (3,459) (3,459) – (3,459)
– 2016 interim dividend at $2.21 per share – – – – – – (2,683) (2,683) – (2,683)
– Unclaimed HKEX dividends forfeited
(note 30(a)) – – – – – – 22 22 – 22

MD & A
– Shares issued in lieu of cash dividends 2,782 – – – – – – 2,782 – 2,782
– Shares purchased for Share Award Scheme (188) – – – – – – (188) – (188)
– Vesting of shares of Share Award Scheme 197 (186) – – – – (11) – – –
– Employee share-based compensation
benefits – 213 – – – – – 213 – 213
– Transfer of reserves – – – – (5) – 5 – – –
2,791 27 – – (5) – (6,126) (3,313) – (3,313)

GOVERNANCE
At 31 Dec 2016 21,486 226 – (260) 773 (293) 10,334 32,266 118 32,384

At 1 Jan 2017 21,486 226 – (260) 773 (293) 10,334 32,266 118 32,384
Profit for the year – – – – – – 7,404 7,404 (49) 7,355
Other comprehensive income – – 1 156 – – – 157 – 157
Total comprehensive income – – 1 156 – – 7,404 7,561 (49) 7,512
Total transactions with shareholders of HKEX,

FINANCIALS
recognised directly in equity:
– 2016 final dividend at $2.04 per share – – – – – – (2,491) (2,491) – (2,491)
– 2017 interim dividend at $2.55 per share – – – – – – (3,133) (3,133) – (3,133)
– Unclaimed HKEX dividends forfeited
(note 30(a)) – – – – – – 26 26 – 26
– Shares issued in lieu of cash dividends 3,037 – – – – – – 3,037 – 3,037
– Shares purchased for Share Award Scheme (228) – – – – – – (228) – (228)
– Vesting of shares of Share Award Scheme 240 (224) – – – – (16) – – –
OTHERS

– Employee share-based compensation

benefits – 220 – – – – – 220 – 220
– Tax credit relating to Share Award Scheme – – – – – – 3 3 – 3
– Transfer of reserves – – – – 49 – (49) – – –
– Changes in ownership interests in
a subsidiary (note 44) – – – – – – 12 12 33 45
3,049 (4) – – 49 – (5,648) (2,554) 33 (2,521)

At 31 Dec 2017 24,535 222 1 (104) 822 (293) 12,090 37,273 102 37,375
GLOSSARY

The notes on pages 109 to 188 are an integral part of these consolidated financial statements.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 107
 CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2017
2017 2016
Note $m $m

CASH FLOWS FROM PRINCIPAL OPERATING ACTIVITIES

Net cash inflow from principal operating activities 41(a) 8,013 6,164
CASH FLOWS FROM OTHER OPERATING ACTIVITIES
Net payments to external fund managers for purchases of
financial assets measured at fair value through profit or loss (600) (2,701)

Net cash inflow from operating activities 7,413 3,463

CASH FLOWS FROM INVESTING ACTIVITIES

Payments for purchases of fixed assets and intangible assets (688) (620)
Payment for interest in a joint venture (14) –
Net decrease/(increase) in financial assets of Corporate Funds:
Decrease/(increase) in time deposits with original maturities
more than three months 2,285 (2,419)
Payments for purchases of financial assets measured
at amortised cost (excluding time deposits) (315) (312)
Sales proceeds from financial assets measured at fair value
through profit or loss 14 –
Interest received from financial assets measured at fair
value through profit or loss 32 16

Net cash inflow/(outflow) from investing activities 1,314 (3,335)

CASH FLOWS FROM FINANCING ACTIVITIES

Repayment of bank borrowings 41(b) (1,603) –
Purchases of shares for Share Award Scheme (228) (188)
Payments of interest on borrowings 41(b) (66) (69)
Payments of other finance costs (54) –
Dividends paid to shareholders of HKEX (2,561) (3,329)
Proceeds from disposal of interest in a subsidiary without loss of control 28 –
Capital injection by non-controlling interest to a subsidiary 17 –

Net cash outflow from financing activities (4,467) (3,586)

Net increase/(decrease) in cash and cash equivalents 4,260 (3,458)

Cash and cash equivalents at 1 Jan 9,286 12,744

Cash and cash equivalents at 31 Dec 13,546 9,286

Analysis of cash and cash equivalents

Cash on hand and balances and deposits with
banks and short-term investments of Corporate Funds 19 13,546 9,286

The notes on pages 109 to 188 are an integral part of these consolidated financial statements.

(a) “Cash flows from principal operating activities” is a non-Hong Kong Financial Reporting Standard
(non-HKFRS) measure used by management for monitoring cash flows of the Group (defined in
note 1) and represents the cash flows generated from the trading and clearing operations of the
three exchanges and five clearing houses and ancillary services of the Group. Cash flows from
principal operating activities and cash flows from other operating activities together represent cash
flows from operating activities as defined by Hong Kong Accounting Standard (HKAS) 7: Statement
of Cash Flows. This non-HKFRS measure may not be comparable to similar measures presented by
other companies.

108 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. General Information

OVERVIEW
Hong Kong Exchanges and Clearing Limited (HKEX or the Company) and its subsidiaries
(collectively, the Group) own and operate the only stock exchange and futures exchange in Hong
Kong and their related clearing houses, a clearing house for clearing over-the-counter derivatives
contracts in Hong Kong, and an exchange and a clearing house for the trading and clearing of base
and precious metals futures and options contracts operating in the United Kingdom (UK).

HKEX is a limited company incorporated and domiciled in Hong Kong. The address of its registered

ORGANISATION
office is 12th Floor, One International Finance Centre, 1 Harbour View Street, Hong Kong.

These consolidated financial statements were approved for issue by the Board of Directors (Board)
on 28 February 2018.

2. Principal Accounting Policies

Apart from the accounting policies presented within the corresponding notes to the consolidated

MD & A
financial statements, other principal accounting policies applied in the preparation of these
consolidated financial statements are set out below. These policies have been consistently applied
to all the years presented, unless otherwise stated.

(a) Statement of compliance

These consolidated financial statements have been prepared in accordance with Hong Kong
Financial Reporting Standards (HKFRSs) issued by the Hong Kong Institute of Certified Public

GOVERNANCE
Accountants (HKICPA), and accounting principles generally accepted in Hong Kong.
These consolidated financial statements also comply with the applicable disclosure
requirements of the Rules Governing the Listing of Securities on The Stock Exchange of
Hong Kong Limited (Main Board Listing Rules) and the applicable requirements of the
Hong Kong Companies Ordinance (Chapter 622).

(b) Basis of preparation

FINANCIALS
These consolidated financial statements have been prepared under the historical cost
convention, as modified by the revaluation of certain financial assets and financial liabilities
measured at fair value.

The preparation of consolidated financial statements requires the use of certain critical
accounting estimates, and requires management to exercise its judgement when applying the
Group’s accounting policies. Areas involving significant estimates and judgement are disclosed
in note 3.
OTHERS

Adoption of new/revised HKFRSs

In 2017, the Group has adopted the following amendments to HKFRSs which were effective
for accounting periods beginning on or after 1 January 2017:

Amendments to HKAS 7 Statement of Cash Flows – Disclosure Initiative

Amendments to HKAS 12 Income Taxes – Recognition of Deferred Tax Assets
GLOSSARY

for Unrealised Losses

The adoption of these amendments to HKFRSs does not have any financial impact on the
Group. Only amendments to HKAS 7 require the disclosure of changes in liabilities arising
from financing activities (note 41(b)).

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 109
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. Principal Accounting Policies (continued)

(b) Basis of preparation (continued)

New/revised HKFRSs issued before 31 December 2017 but not yet effective and not early
adopted

The Group has not applied the following new/revised HKFRSs which were issued before
31 December 2017 and are pertinent to its operations but not yet effective:

HKFRS 9 (2014) Financial Instruments 1

HKFRS 15 Revenue from Contracts with Customers 1
HKFRS 16 Leases 2
HK(IFRIC) Interpretation 22 Foreign Currency Transactions and Advance Consideration 1
HK(IFRIC) Interpretation 23 Uncertainty over Income Tax Treatments 2

1 Effective for accounting periods beginning on or after 1 January 2018

2 Effective for accounting periods beginning on or after 1 January 2019

HKFRS 9 (2014) will only affect the classification of debt securities held for Margin Funds and
recognition of impairment provisions. It will not affect the classification of other securities
held by the Group.

Currently, debt securities held for Margin Funds amounting to $3,059 million are classified as
financial assets measured at fair value through profit or loss. Under HKFRS 9 (2014), they will
satisfy the conditions for classification as a new category of financial assets, financial assets
measured at fair value through other comprehensive income. Accordingly, the related
cumulative fair value losses of $4 million will have to be transferred from retained earnings to
the revaluation reserve on 1 January 2018. Subsequent changes in fair value of these debt
securities shall be taken to the revaluation reserve. Interest income, foreign exchange
differences, impairment losses, and gains or losses on disposal of these debt securities will
continue to be recognised in consolidated income statement.

The new impairment model under HKFRS 9 (2014) requires the recognition of provision for
impairment losses based on expected credit losses rather than incurred credit losses.
There will be no significant change in the amount of provision for impairment losses to be
recognised at 1 January 2018.

The Group will apply the new rules retrospectively from 1 January 2018. With the practical
expedients permitted under the standard, comparatives for 2017 will not be restated.

HKFRS 15 is based on the principle that revenue is recognised when control of goods or
services is transferred to customers. Based on the assessments undertaken to date, the Group
does not expect significant financial impact arising from the change in revenue recognition
policy adopted by the Group. The Group will apply the standard using the modified
retrospective approach and comparatives will not be restated.

HKFRS 16 will primarily affect the accounting for the Group’s operating leases.
At 31 December 2017, the Group had non-cancellable operating lease commitments of
$2,629 million (note 42(b)). Upon adoption of HKFRS 16 the majority of operating lease
commitments will be recognised in the consolidated statement of financial position as lease
liabilities and right-of-use assets. The lease liabilities would subsequently be measured at
amortised cost and the right-of-use asset will be measured at cost and depreciated on a
straight-line basis during the lease term. The Group intends to apply the simplified transition
approach and will not restate comparatives amounts for the year prior to its first adoption.

110 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. Principal Accounting Policies (continued)

OVERVIEW
(b) Basis of preparation (continued)

New/revised HKFRSs issued before 31 December 2017 but not yet effective and not early
adopted (continued)

The adoption of HK(IFRIC) Interpretation 22 and HK(IFRIC) Interpretation 23 would not have
any financial impact on the Group.

ORGANISATION
There are no other new/revised HKFRSs not yet effective that are expected to have any
impact on the Group.

(c) Basis of consolidation

Subsidiaries are entities (including structured entities) over which the Group has control.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group.

MD & A
They are deconsolidated from the date that control ceases. All material intra-group
transactions and balances have been eliminated on consolidation.

Accounting policies of subsidiaries have been aligned on consolidation to ensure consistency

with the policies adopted by the Group.

(d) Impairment of non-financial assets

GOVERNANCE
Assets with an indefinite useful life, which include interests in joint ventures, goodwill and
tradenames, are not subject to amortisation and are tested at least annually for impairment.
Assets subject to amortisation are reviewed for impairment whenever there is any indication
that the carrying amount may not be recoverable. An impairment loss is recognised for the
amount by which the asset’s carrying amount exceeds its recoverable amount (ie, the higher
of an asset’s fair value less costs to sell and value-in-use). Such impairment losses are
recognised in the consolidated income statement. An impairment loss other than goodwill is
reversed if the circumstances and events leading to the impairment cease to exist.

FINANCIALS
(e) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured
using the currency of the primary economic environment in which the entity operates
(the functional currency). The consolidated financial statements are presented in Hong
OTHERS

Kong Dollar (HKD), which is the Company’s functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the
exchange rates prevailing at the dates of transactions. Foreign exchange gains and
losses resulting from the settlement of such transactions and from the translation at
year-end exchange rates of monetary assets and liabilities denominated in foreign
GLOSSARY

currencies are recognised in the consolidated income statement. They are deferred in
hedging reserve under equity if they relate to qualifying cash flow hedges (note 38).

Translation differences on non-monetary financial assets that are classified as financial

assets measured at fair value through profit or loss are reported as part of the fair value
gain or loss.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 111
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. Principal Accounting Policies (continued)

(e) Foreign currency translation (continued)

(iii) Group companies

The results and financial position of all the Group entities that have a non-HKD
functional currency are translated into HKD as follows:

– assets and liabilities (including goodwill and fair value adjustments arising on the
acquisition of foreign subsidiaries) for each statement of financial position
presented are translated at the closing rate at the end of the reporting period;

– income and expenses for each income statement are translated at the exchange
rates approximating the foreign exchange rates ruling at the dates of the
transactions; and

– all resulting currency translation differences are recognised in other

comprehensive income in the exchange reserve under equity.

3. Critical Accounting Estimates and Assumptions

The Group makes estimates and assumptions concerning the future when the consolidated
financial statements are prepared. The resulting accounting estimates may differ from the related
actual results. The estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next financial year are
discussed below:

(a) Goodwill and tradenames

The Group tests annually whether goodwill and tradenames have suffered any impairment in
accordance with the accounting policy stated in note 26.

The recoverable amounts of relevant cash generating units (CGUs) and relevant group of
CGUs have been determined based on value-in-use calculations which are disclosed in note
26. These calculations require the use of estimates and significant judgement by
management, including the future cash flows expected to arise from the CGUs, discount rates
for calculating the present value and growth rates used to extrapolate cash flow projections
beyond the financial forecasts approved by management.

Changes in facts and circumstances may result in revisions to estimates of recoverable

amounts and to the conclusion as to whether an indication of impairment exists, which could
affect the consolidated income statement in future years.

112 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. Critical Accounting Estimates and Assumptions (continued)

OVERVIEW
(b) Valuation of investments

The Group has a significant amount of investments that are not classified as Level 1
investments under HKFRS 13: Fair Value Measurement. The valuations have been determined
based on quotes from market makers, alternative pricing sources supported by observable
inputs, latest transactions prices or redemption prices provided by funds administrators of
collective investment schemes.

ORGANISATION
At 31 December 2017, the financial assets that were not classified as Level 1 investments
(excluding the base and precious metals futures and options contracts cleared through LME
Clear Limited (LME Clear) that did not qualify for netting under the current accounting
standards) under HKFRS 13 amounted to $4,802 million (31 December 2016: $3,201 million)
which represented investments under collective investment schemes (31 December 2016:
mainly comprised of $2,886 million of investments under collective investment schemes).

MD & A
As the valuation of investments reflects movements in their estimated fair value, fair value
gains or losses may fluctuate or reverse until the investments are sold, mature or realised
upon redemption. The potential impact of the fair value change of such investments on the
Group’s consolidated income statement is disclosed in note 48(a)(iv).

4. Operating Segments

GOVERNANCE
Accounting Policy
Operating segments are reported in a manner consistent with the internal management
reports that are used to make strategic decisions provided to the chief operating decision-
maker. The chief operating decision-maker, who is responsible for allocating resources and
assessing performance of the operating segments, is the Chief Executive of HKEX.
Information relating to segment assets and liabilities is not disclosed as such information is
not regularly reported to the chief operating decision-maker.

FINANCIALS
The accounting policies of the reportable segments are the same as the Group’s accounting
policies. Taxation charge/credit is not allocated to reportable segments.

The Group has five reportable segments (“Corporate Items” is not a reportable segment). The
segments are managed separately as each segment offers different products and services and
requires different information technology systems and marketing strategies. The operations in each
of the Group’s reportable segments are as follows:
OTHERS

The Cash segment covers all equity products traded on the Cash Market platforms, the Shanghai
Stock Exchange and the Shenzhen Stock Exchange through Shanghai-Hong Kong Stock Connect
and Shenzhen-Hong Kong Stock Connect (Stock Connect), sales of market data relating to these
products and other related activities. The major sources of revenue of the segment are trading fees,
trading tariff, listing fees of equity products and market data fees.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 113
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4. Operating Segments (continued)

The Equity and Financial Derivatives segment refers to derivatives products traded on The Stock
Exchange of Hong Kong Limited (Stock Exchange) and Hong Kong Futures Exchange Limited
(Futures Exchange) and other related activities. These include the provision and maintenance of
trading platforms for a range of equity and financial derivatives products, such as stock and equity
index futures and options, derivative warrants (DWs), callable bull/bear contracts (CBBCs) and
warrants and sales of related market data. The major sources of revenue are trading fees, trading
tariff, listing fees of derivatives products and market data fees.

The Commodities segment refers to the operations of The London Metal Exchange (LME), which
operates an exchange in the UK for the trading of base and precious metals futures and options
contracts, and the development of a new commodity trading platform in the Mainland. It also
covers the Asia Commodities contracts and gold and iron ore futures contracts traded on the
Futures Exchange. The major sources of revenue of the segment are trading fees of commodity
products, commodity market data fees and fees from ancillary operations.

The Clearing segment refers to the operations of the five clearing houses, which are responsible for
clearing, settlement and custodian activities of the exchanges of the Group and Northbound trades
under Stock Connect, and clearing and settlement of over-the-counter derivatives contracts.
Its principal sources of revenue are derived from providing clearing, settlement, depository, custody
and nominee services and net investment income earned on the Margin Funds and Clearing House
Funds.

The Platform and Infrastructure segment refers to all services in connection with providing users
with access to the platform and infrastructure of the Group. Its major sources of revenue are
network, terminal user, dataline and software sub-license fees and hosting services fees.

Central income (including net investment income of Corporate Funds) and central costs (costs of
central support functions that provide services to all operating segments and other costs not
directly related to any operating segment) are included as “Corporate Items”.

The chief operating decision-maker assesses the performance of the operating segments principally
based on their EBITDA (defined below).

EBITDA is defined as earnings before interest expenses and other finance costs, taxation,
depreciation and amortisation. It excludes the Group’s share of results of the joint ventures.
EBITDA is a non-HKFRS measure used by management for monitoring business performance.
It may not be comparable to similar measures presented by other companies.

114 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4. Operating Segments (continued)

OVERVIEW
An analysis by operating segment of the Group’s EBITDA, profit before taxation and other selected
financial information for the year is as follows:

2017
Equity and
Financial Platform and Corporate
Cash Derivatives Commodities Clearing Infrastructure Items Group
$m $m $m $m $m $m $m

ORGANISATION
Revenue from external customers 3,363 2,195 1,436 4,009 560 11 11,574
Net investment income – – – 809 – 790 1,599
Sundry income – – – 7 – – 7
Revenue and other income 3,363 2,195 1,436 4,825 560 801 13,180
Operating expenses (581) (477) (659) (752) (151) (946) (3,566)

Reportable segment EBITDA 2,782 1,718 777 4,073 409 (145) 9,614
Depreciation and amortisation (69) (77) (395) (196) (42) (79) (858)

MD & A
Finance costs – – – (38) – (96) (134)
Share of losses of joint ventures (4) (8) – – – – (12)

Reportable segment profit

before taxation 2,709 1,633 382 3,839 367 (320) 8,610

Other segment information:

Interest income – – – 1,342 – 142 1,484

GOVERNANCE
Interest rebates to Participants – – – (572) – – (572)
Other material non-cash item:
Employee share-based
compensation expenses (36) (25) (40) (39) (2) (78) (220)

2016
Equity and
Financial Platform and Corporate
Cash Derivatives Commodities Clearing Infrastructure Items Group

FINANCIALS
$m $m $m $m $m $m $m

Revenue from external customers 2,683 2,034 1,560 3,577 540 4 10,398
Net investment income – – – 547 – 149 696
Sundry income – – – 14 – 8 22
Revenue and other income 2,683 2,034 1,560 4,138 540 161 11,116
Operating expenses (544) (441) (597) (702) (152) (1,019) (3,455)

Reportable segment EBITDA 2,139 1,593 963 3,436 388 (858) 7,661
OTHERS

Depreciation and amortisation (88) (86) (298) (179) (44) (76) (771)
Finance costs – – – – – (82) (82)
Share of loss of a joint venture – (9) – – – – (9)

Reportable segment profit

before taxation 2,051 1,498 665 3,257 344 (1,016) 6,799

Other segment information:

GLOSSARY

Interest income – – – 663 – 81 744

Interest rebates to Participants – – – (130) – – (130)
Other material non-cash item:
Employee share-based
compensation expenses (33) (23) (41) (37) (2) (77) (213)

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 115
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4. Operating Segments (continued)

(a) Geographical information

The Group’s revenue from external customers is derived from its operations in Hong Kong
and the UK. Such information and the Group’s non-current assets (excluding financial assets
and deferred tax assets) by geographical location are detailed below:

Revenue Non-current assets

At At
2017 2016 31 Dec 2017 31 Dec 2016
$m $m $m $m

Hong Kong (place of domicile) 9,544 8,192 2,067 1,978

United Kingdom 2,030 2,206 17,351 17,333
Mainland China – – 78 101

11,574 10,398 19,496 19,412

(b) Information about major customers

In 2017 and 2016, the revenue from the Group’s largest customer amounted to less than
10 per cent of the Group’s total revenue.

5. Revenue

Accounting Policy
Revenue excludes value added tax or other sales tax, and is recognised in the consolidated
income statement on the following basis:
Trading fees and trading tariff are recognised on a trade date basis.
Stock Exchange listing fees mainly comprise annual listing fees and initial listing fees.
Annual listing fees are recognised on a straight-line basis over the period covered. Initial
listing fees for initial public offering (IPO) are recognised upon the listing of an applicant,
cancellation of the application or six months after submission of the application, whichever is
earlier. Initial and subsequent listing fees for warrants, CBBCs and other securities are
recognised upon the listing of the securities.
Clearing and settlement fees arising from trades between Participants transacted on the
Stock Exchange are recognised on the day following the trade day, upon acceptance of
the trades. Fees for clearing and settlement of trades transacted on the Shanghai Stock
Exchange and Shenzhen Stock Exchange through Stock Connect (A shares) are recognised
on the trade day upon acceptance of the trades. Fees for clearing and settlement of trades in
respect of base and precious metals futures and options contracts transacted on LME are
recognised on the trade day (or trade match day, if later). Fees for all other settlement
transactions are recognised upon completion of the settlement.
Custody fees for securities held in the Central Clearing and Settlement System (CCASS)
depository are calculated and accrued on a monthly basis. Portfolio fees for A shares held or
recorded in the CCASS depository and for Hong Kong securities held by China Securities
Depository and Clearing Corporation Limited (ChinaClear) are calculated and accrued on a
daily basis.
Income on registration and transfer fees on nominee services are calculated and accrued on
the book close dates of the relevant stocks during the financial year.
Market data fees and other fees are recognised when the related services are rendered.

116 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5. Revenue (continued)

OVERVIEW
(a) Trading Fees and Trading Tariff

2017 2016
$m $m

Equity securities traded on the Stock Exchange and through Stock Connect 1,954 1,421
DWs, CBBCs and warrants traded on the Stock Exchange 526 502
Futures and options contracts traded on the Stock Exchange and the

ORGANISATION
Futures Exchange 1,260 1,275
Base and precious metals futures and options contracts traded on the LME 1,116 1,230

4,856 4,428

(b) Stock Exchange Listing Fees

2017 2016

MD & A
Equity CBBCs, Equity CBBCs,
Main DWs Main DWs
Board GEM & others Total Board GEM & others Total
$m $m $m $m $m $m $m $m

Annual listing fees 642 42 3 687 609 34 4 647

Initial and subsequent
issue listing fees 87 32 519 638 85 22 331 438
Other listing fees 5 3 – 8 5 2 – 7

GOVERNANCE
734 77 522 1,333 699 58 335 1,092

(c) Other Revenue

2017 2016
$m $m

Network, terminal user, dataline and software sub-license fees 413 406
Hosting services fees 143 129

FINANCIALS
Commodities stock levies and warehouse listing fees 77 87
Participants’ subscription and application fees 84 76
Accommodation income (note (i)) 48 48
Sales of Trading Rights 41 26
Post-liquidation interest arising from a Participant’s default
on market contracts (note (ii)) 55 –
Miscellaneous revenue 84 75
OTHERS

945 847

(i) Accommodation income mainly comprises income from Participants on securities

deposited as alternatives to cash deposits of Margin Funds, income from Participants on
currencies deposited if the relevant bank deposit rates are negative, and interest
shortfall collected from LME Clear Participants on cash collateral where the investment
return on the collateral is below the benchmarked interest rates stipulated in the
GLOSSARY

clearing rules of LME Clear.

(ii) In 2017, the liquidators of Lehman Brothers Securities Asia Limited (LBSA) paid post-
liquidation interest of $55 million on LBSA’s debts arising from its default on market
contracts, and an equal amount was appropriated to the Guarantee Fund reserve of
Hong Kong Securities Clearing Company Limited (HKSCC) from retained earnings
during the year ended 31 December 2017 (note 39).

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 117
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6. Net Investment Income

Accounting Policy
Interest income on investments and interest rebates to Participants are recognised on a time
apportionment basis using the effective interest method.
Gains and losses arising from changes in fair value of financial assets measured at fair value
through profit or loss and financial liabilities at fair value through profit or loss are included
under net investment income in the consolidated income statement.

2017 2016
$m $m

Gross interest income from financial assets measured at amortised cost 1,484 744
Interest rebates to Participants (572) (130)

Net interest income 912 614

Net fair value gains including interest income on financial assets

mandatorily measured at fair value through profit or loss and
financial liabilities at fair value through profit or loss 682 98
Others 5 (16)

Net investment income 1,599 696

7. Sundry Income
2017 2016
$m $m

Forfeiture of unclaimed dividends (note (a)) 7 14

Others – 8

7 22

(a) In accordance with CCASS Rule 1109, the Group exercised its forfeiture right to appropriate
cash dividends of $7 million (2016: $14 million) held by HKSCC Nominees Limited, which had
remained unclaimed for a period of more than seven years and recognised these as sundry
income. The Group has, however, undertaken to honor all forfeited claims amounting to
$178 million at 31 December 2017 (31 December 2016: $171 million) if adequate proof of
entitlement is provided by the beneficial owner claiming any dividends forfeited.

118 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. Staff Costs and Related Expenses

OVERVIEW
2017 2016
$m $m

Salaries and other short-term employee benefits 1,865 1,675

Employee share-based compensation benefits of Share Award Scheme (note 37) 220 213
Termination benefits 38 10
Retirement benefit costs (note (a)):
– ORSO Plan 116 111

ORGANISATION
– MPF Scheme 2 2
– LME Pension Scheme 23 24
– PRC Retirement Schemes 9 –

2,273 2,035

(a) Retirement Benefit Costs

MD & A
Accounting Policy
Contribution to the defined contribution plans are expensed as incurred.

The Group has sponsored a defined contribution provident fund scheme (ORSO Plan) which is
registered under the Occupational Retirement Schemes Ordinance (ORSO) and a Mandatory
Provident Fund scheme (MPF Scheme) for the benefits of its employees in Hong Kong.

GOVERNANCE
The Group contributes 12.5 per cent of the employee’s basic salary to the ORSO Plan if an
employee contributes 5 per cent. If the employee chooses not to contribute, the Group will
contribute 10 per cent of the employee’s salary to the ORSO Plan. Contributions to the MPF
Scheme are in accordance with the statutory limits prescribed by the MPF Ordinance.
Forfeited contributions of the ORSO Plan for employees who leave before the contributions
are fully vested are not used to offset existing contributions but are credited to a reserve
account of that Plan, and are available for distribution to the members of the Plan at the
discretion of the trustees.

FINANCIALS
The Group has also sponsored a defined contribution pension scheme for all employees of
HKEX Investment (UK) Limited, LME Holdings Limited (LMEH), LME and LME Clear
(collectively, LME Group) (LME Pension Scheme). For all employees who joined the LME Group
before 1 May 2014, the Group contributes 15 per cent to 17 per cent of the employee’s basic
salary to the LME Pension Scheme. For all employees who joined the LME Group on or after
1 May 2014, they are automatically enrolled into the LME Pension Scheme on a matched
contribution basis and may choose a personal contribution level ranging from 3 per cent to
OTHERS

5 per cent of their basic salaries, which is matched by the Group’s contribution ranging from
6 per cent to 10 per cent of their basic salaries. Staff may opt-out of the scheme if they wish.
There are no forfeited contributions for the LME Pension Scheme as the contributions are
fully vested to the employees upon payment to the scheme.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 119
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. Staff Costs and Related Expenses (continued)

(a) Retirement Benefit Costs (continued)

Pursuant to the relevant laws and regulations in the People’s Republic of China (PRC),
the Group has joined defined contribution retirement schemes for the employees arranged by
local government labour and security authorities. The Group makes contributions to the
retirement schemes at the applicable rates based on the amounts stipulated by the local
government organisations. Upon retirement, the local government labour and security
authorities are responsible for the payment of the basic retirement benefits to the retired
employees.

Assets of the ORSO Plan, MPF Scheme, LME Pension Scheme and PRC Retirement Schemes
are held separately from those of the Group and are independently administered and are not
included in the consolidated statement of financial position.

9. Information Technology and Computer Maintenance Expenses

2017 2016
$m $m

Costs of services and goods:

– consumed by the Group 360 427
– directly consumed by Participants 73 73

433 500

10. Other Operating Expenses

2017 2016
$m $m

Bank charges (note 12(a)) 19 57

Communication expenses 14 14
Contribution to Financial Reporting Council 8 7
Custodian and fund management related fees 27 35
Financial data subscription fees 28 25
Insurance 11 11
License fees 31 32
Repairs and maintenance expenses 61 62
Security expenses 18 18
Travel expenses 54 39
Other miscellaneous expenses 109 127

380 427

120 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11. Operating Profit

OVERVIEW
2017 2016
$m $m

Operating profit is stated after charging/(crediting):

Auditor’s remuneration
– audit fees 14 14
– other non-audit fees 5 6
Operating lease rentals

ORGANISATION
– land and buildings 263 241
– computer systems and equipment 31 28
Net foreign exchange (gains)/losses on financial assets and
liabilities (excluding financial assets and financial liabilities
measured at fair value through profit or loss) (5) 7

12. Finance Costs

MD & A
Accounting Policy
Interest expenses are charged to the consolidated income statement and recognised on a
time apportionment basis, taking into account the principal outstanding and the applicable
interest rates using the effective interest method. Other finance costs are recognised in the
consolidated income statement in the period in which they are incurred.

GOVERNANCE
2017 2016
$m $m

Interest and finance charges for financial liabilities not

at fair value through profit or loss (note (a)) 121 81
Negative interest on Euro and Japanese Yen deposits 13 –
Net foreign exchange losses on financing activities – 1

134 82

FINANCIALS
(a) For the year ended 31 December 2017, the total interest expenses for financial liabilities not
at fair value through profit or loss amounted to $80 million (2016: $81 million). For the year
ended 31 December 2017, banking facility commitment fees of $41 million (2016:
$38 million) that relate to liquidity support provided to the Group’s clearing houses, have
been reclassified from bank charges, under other operating expenses, to finance costs to more
appropriately reflect the nature of the costs incurred. No restatement of prior year
comparatives was made as the amount was considered immaterial to the overall financial
OTHERS

statements.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 121
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13. Directors’ Emoluments and Interests of Directors

All Directors, including one Executive Director (HKEX’s Chief Executive), received emoluments
during the years ended 31 December 2017 and 31 December 2016. The aggregate emoluments
paid and payable to the Directors during the year were as follows:

2017 2016
$’000 $’000

Executive Director:
Salaries and other short-term employee benefits 9,403 9,217
Performance bonus 15,000 11,250
Retirement benefit costs 1,125 1,125

25,528 21,592
Employee share-based compensation benefits (note (a)) 23,328 22,471

48,856 44,063

Non-executive Directors:
Fees 16,140 15,727

64,996 59,790

(a) Employee share-based compensation benefits represent the fair value of share awards
granted under the Share Award Scheme (Awarded Shares) on grant date (note 37) amortised
to the consolidated income statement during the year.

(b) The emoluments of all Directors, including HKEX’s Chief Executive who is an ex-officio
member, are set out below. The amounts represent emoluments paid or receivable in respect
of their services as a director.

2017
Employee
Other Retirement share-based
benefits Performance benefit costs compensation
Fees Salary (note (i)) bonus (note (ii)) Sub-total benefits Total
Name of Director $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000

C K Chow 3,240 – – – – 3,240 – 3,240

Charles X Li – 9,000 403 15,000 1,125 25,528 23,328 48,856
Apurv Bagri (note (iii)) 793 – – – – 793 – 793
T C Chan 961 – – – – 961 – 961
C H Cheah (note (v)) 816 – – – – 816 – 816
Timothy G Freshwater 1,021 – – – – 1,021 – 1,021
Anita Y M Fung 1,102 – – – – 1,102 – 1,102
Rafael Gil-Tienda 1,259 – – – – 1,259 – 1,259
John B Harrison (note (vii)) 700 – – – – 700 – 700
Fred Z Hu 1,018 – – – – 1,018 – 1,018
Bill C P Kwok (note (vii)) 432 – – – – 432 – 432
Vincent K H Lee (note (vii)) 277 – – – – 277 – 277
Margaret M Y Leung Ko 961 – – – – 961 – 961
Hugo P H Leung (note (v)) 723 – – – – 723 – 723
John M M Williamson 1,051 – – – – 1,051 – 1,051
Stephen K W Yiu (note (vi)) 1,786 – – – – 1,786 – 1,786

Total 16,140 9,000 403 15,000 1,125 41,668 23,328 64,996

122 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13. Directors’ Emoluments and Interests of Directors (continued)

OVERVIEW
(b) (continued)

2016
Employee
Other Retirement share-based
benefits Performance benefit costs compensation
Fees Salary (note (i)) bonus (note (ii)) Sub-total benefits Total
Name of Director $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000

ORGANISATION
C K Chow 3,283 – – – – 3,283 – 3,283
Charles X Li – 9,000 217 11,250 1,125 21,592 22,471 44,063
Apurv Bagri (note (iii)) 525 – – – – 525 – 525
T C Chan 964 – – – – 964 – 964
Timothy G Freshwater 1,018 – – – – 1,018 – 1,018
Anita Y M Fung 964 – – – – 964 – 964
Rafael Gil-Tienda 832 – – – – 832 – 832
John B Harrison (note (vii)) 2,486 – – – – 2,486 – 2,486

MD & A
Fred Z Hu 829 – – – – 829 – 829
Bill C P Kwok (note (vii)) 1,597 – – – – 1,597 – 1,597
Vincent K H Lee (note (vii)) 1,075 – – – – 1,075 – 1,075
Margaret M Y Leung Ko 964 – – – – 964 – 964
John M M Williamson 964 – – – – 964 – 964
Oscar S H Wong (note (iv)) 226 – – – – 226 – 226

Total 15,727 9,000 217 11,250 1,125 37,319 22,471 59,790

GOVERNANCE
Notes:

(i) Other benefits represented estimated money value of leave pay, insurance premium, club membership and UK
tax liability of Non-Resident Director.

(ii) Employees who retire before normal retirement age are eligible for 18 per cent of the employer’s contribution
to the provident fund after completion of two years of service. The rate of vested benefit increases at an annual
increment of 18 per cent thereafter reaching 100 per cent after completion of seven years of service.

FINANCIALS
(iii) Elected on 28 April 2016

(iv) Retired on 28 April 2016

(v) Elected on 26 April 2017

(vi) Appointment effective 26 April 2017

(vii) Retired on 26 April 2017

OTHERS

(c) Directors’ material interests in transactions, arrangement or contracts

No significant transactions, arrangements and contracts in relation to HKEX’s business to

which HKEX was a party and in which a director of HKEX had a material interest, whether
directly or indirectly, subsisted at the end of the year or at any time during the year.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 123
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14. Five Top-paid Employees

One (2016: one) of the five top-paid employees was a Director whose emoluments are disclosed in
note 13. Details of the emoluments of the other four (2016: four) top-paid employees were as
follows:

2017 2016
$’000 $’000

Salaries and other short-term employee benefits 22,196 19,651

Performance bonus 17,946 16,219
Sign-on bonus 3,050 –
Retirement benefit costs 2,211 2,465

45,403 38,335
Employee share-based compensation benefits (note (a)) 17,583 21,221

62,986 59,556

(a) Employee share-based compensation benefits represent the fair value of Awarded Shares on
grant date (note 37) amortised to the consolidated income statement during the year.

(b) The emoluments of these four (2016: four) employees, including share-based compensation
benefits, were within the following bands:

2017 2016
Number of Number of
employees employees

$14,000,001 – $14,500,000 1 1
$14,500,001 – $15,000,000 – 2
$15,000,001 – $15,500,000 1 –
$16,000,001 – $16,500,000 1 1
$17,500,001 – $18,000,000 1 –

4 4

The above employees included senior executives who were also Directors of the subsidiaries
during the years. No Directors of the subsidiaries waived any emoluments.

124 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15. Taxation

OVERVIEW
Accounting Policy
Tax charge for the period comprises current and deferred tax. Tax is recognised in the
consolidated income statement, except to the extent that it relates to items recognised
directly in equity, in which case, the tax is also recognised directly in equity.
The current tax charge is calculated on the basis of the tax laws enacted or substantively
enacted at the end of the reporting period in the countries where HKEX and its subsidiaries

ORGANISATION
operate and generate taxable income. Provisions are established where appropriate on the
basis of amounts expected to be paid to the tax authorities.
The Group’s accounting policy for recognition of deferred tax is described in note 35.

(a) Taxation charge/(credit) in the consolidated income statement represented:

MD & A
2017 2016
$m $m

Current tax – Hong Kong Profits Tax

– Provision for the year 1,047 879
– Over provision in respect of prior years (4) (3)
1,043 876
Current tax – Overseas Tax
– Provision for the year 229 223

GOVERNANCE
– (Over)/under provision in respect of prior years (4) 8
225 231

Total current tax (note (i)) 1,268 1,107

Deferred tax
– Reversal of temporary differences (13) (18)
– Impact of changes in UK Corporation Tax rate (note (ii)) – (31)
Total deferred tax (note 35(a)) (13) (49)

FINANCIALS
Taxation charge 1,255 1,058

(i) Hong Kong Profits Tax has been provided at the rate of 16.5 per cent
(2016: 16.5 per cent) on the estimated assessable profit for the year. Taxation on
overseas profits has been calculated on the estimated assessable profit at the rates of
taxation prevailing in the countries in which the Group operates, with the average
corporation tax rate applicable to the subsidiaries in the UK being 19.25 per cent (2016:
OTHERS

20 per cent).

(ii) The UK Corporation Tax rate will be reduced to 17 per cent effective from 1 April 2020
through the enactment of the 2016 Finance Act. As a result of the reduction in
UK Corporation Tax rate, the Group’s net deferred tax liabilities decreased by
$31 million in 2016.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 125
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15. Taxation (continued)

(b) The taxation on the Group’s profit before taxation differs from the theoretical amount that
would arise using the weighted average tax rate applicable to profits of the consolidated
entities as follows:

2017 2016
$m $m

Profit before taxation 8,610 6,799

Tax calculated at domestic tax rates applicable to profits
in the respective countries (note (i)) 1,424 1,144
Income not subject to taxation (267) (107)
Expenses not deductible for taxation purposes 32 31
Remeasurement of deferred tax assets and liabilities
arising from changes in UK Corporation Tax rate – (31)
Change in deferred tax arising from unrecognised tax losses
and other deferred tax adjustments 74 16
(Over)/under provision in respect of prior years (8) 5

Taxation charge 1,255 1,058

(i) The weighted average applicable tax rate was 16.5 per cent (2016: 16.8 per cent).

16. Earnings Per Share

The calculation of the basic and diluted earnings per share is as follows:

(a) Basic earnings per share

2017 2016

Profit attributable to shareholders ($m) 7,404 5,769

Weighted average number of shares in issue less

shares held for Share Award Scheme (in ’000) 1,227,674 1,212,376

Basic earnings per share ($) 6.03 4.76

(b) Diluted earnings per share

2017 2016

Profit attributable to shareholders ($m) 7,404 5,769

Weighted average number of shares in issue less

shares held for Share Award Scheme (in ’000) 1,227,674 1,212,376
Effect of Awarded Shares (in ’000) 3,124 3,071

Weighted average number of shares for the purpose

of calculating diluted earnings per share (in ’000) 1,230,798 1,215,447

Diluted earnings per share ($) 6.02 4.75

126 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

17. Dividends

OVERVIEW
Accounting Policy
Dividends declared are recognised as liabilities in the consolidated financial statements in the
period in which the dividends are approved by shareholders or directors, where appropriate.

2017 2016
$m $m

ORGANISATION
Interim dividend paid:
$2.55 (2016: $2.21) per share 3,141 2,690
Less: Dividend for shares held by Share Award Scheme (note (a)) (8) (7)

3,133 2,683

Final dividend proposed (note (b)):

$2.85 (2016: $2.04) per share based on issued share capital at 31 Dec 3,533 2,498

MD & A
Less: Dividend for shares held by Share Award Scheme at 31 Dec (note (a)) (8) (7)

3,525 2,491

6,658 5,174

(a) The results and net assets of The HKEx Employees’ Share Award Scheme (Share Award
Scheme) are included in HKEX’s financial statements. Therefore, dividends for shares held by

GOVERNANCE
the Share Award Scheme were deducted from the total dividends.

(b) The final dividend proposed after 31 December was not recognised as a liability at
31 December as it had not been approved by the shareholders.

(c) The 2017 final dividend will be payable in cash with a scrip dividend alternative subject to the
permission of the Securities and Futures Commission (SFC) of the listing of and permission to
deal in the new shares to be issued.

FINANCIALS
OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 127
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18. Financial Assets

Accounting Policy
Investments and other financial assets of the Group are classified under financial assets
measured at fair value through profit or loss (note 20) or financial assets measured at
amortised cost (note 21).
Financial assets of Clearing House Funds and Margin Funds are classified as current assets as
they will be liquidated whenever liquid funds are required.
Other financial assets are classified as current assets unless they are expected to mature or
be disposed of after twelve months from the end of the reporting period, in which case, they
are included in non-current assets. For collective investment schemes which have no
maturity date, they are included in current assets unless they cannot be redeemed within
twelve months from the end of the reporting period.
Financial assets are derecognised when the rights to receive cash flows from the assets have
expired or the Group has transferred substantially all the risks and rewards of ownership of
the assets.

The financial assets of the Group include:

• Margin Funds (note 29);
• Clearing House Funds (note 32);
• Metals derivatives contracts (note 20);
• Cash prepayments for A shares (note 19); and
• Corporate Funds (note 22).

19. Cash and Cash Equivalents

Accounting Policy
Cash and cash equivalents comprise cash on hand, bank balances and other short-term highly
liquid investments that are readily convertible into known amounts of cash and are subject to
an insignificant risk of changes in value (mainly reverse repurchase investments and time
deposits), with original maturities of three months or less.

At 31 Dec 2017
Cash
prepayments Margin Clearing
for A shares Corporate Funds House Funds
(notes (a) Funds (notes (b) (notes (b)
and (b)) (note 22) and 29) and 32) Total
$m $m $m $m $m

Cash on hand and balances

and deposits with banks 1,689 12,540 42,410 8,413 65,052
Reverse repurchase investments – 1,006 80,434 9,168 90,608

1,689 13,546 122,844 17,581 155,660

128 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

19. Cash and Cash Equivalents (continued)

OVERVIEW
At 31 Dec 2016
Cash
prepayments Margin Clearing
for A shares Corporate Funds House Funds
(notes (a) Funds (notes (b) (notes (b)
and (b)) (note 22) and 29) and 32) Total
$m $m $m $m $m

Cash on hand and balances

and deposits with banks 263 8,079 31,142 4,969 44,453

ORGANISATION
Reverse repurchase investments – 1,207 65,556 4,507 71,270

263 9,286 96,698 9,476 115,723

(a) Cash prepayments for A shares represent cash received by HKSCC from its Clearing
Participants for releasing their allocated A shares for same day settlement. Such prepayments
will be used to settle HKSCC’s Continuous Net Settlement (CNS) obligations payable on the
next business day.

MD & A
(b) The cash and cash equivalents of Margin Funds, Clearing House Funds and cash prepayments
for A shares are held for specific purposes and cannot be used by the Group to finance other
activities. These balances are not included in cash and cash equivalents of the Group for cash
flow purpose in the consolidated statement of cash flows.

20. Financial Assets Measured at Fair Value through Profit or Loss

GOVERNANCE
Accounting Policy
Classification
Investments and other financial assets are classified under financial assets measured at fair
value through profit or loss if they do not meet the conditions to be measured at amortised
cost (note 21). Derivative financial instruments (see below) are classified as financial assets
measured at fair value through profit or loss when their fair values are positive.
Recognition and measurement

FINANCIALS
Purchases and sales of financial assets measured at fair value through profit or loss are
recognised on the trade date. They are initially recognised at fair value with transaction costs
recognised as expenses in the consolidated income statement and subsequently carried at
fair value. Gains and losses arising from changes in fair value are included in the consolidated
income statement in the period in which they arise.
Interest income is included in net fair value gains/(losses) from these financial assets.
Fair values of quoted investments are based on the most representative prices within the
OTHERS

bid-ask spreads which are currently considered as the bid-prices. The collective investment
schemes are valued based on the latest available transaction price or redemption price for
each fund, as determined by the fund’s administrator. For unlisted securities or financial
assets without an active market, the Group establishes the fair value by using valuation
techniques including the use of recent arm’s length transactions, reference to other
instruments that are substantially the same and discounted cash flow analysis.
Derivative financial instruments
Derivative financial instruments include outstanding derivatives contracts of LME Clear,
GLOSSARY

which acts as a central counterparty to the base and precious metals futures and options
contracts traded on the LME, and forward foreign exchange contracts. Derivatives are initially
recognised at fair value on trade date and subsequently remeasured at their fair values.
Except where outstanding derivatives contracts are held in the capacity as a central
counterparty, derivatives are categorised as held for trading with changes in fair value
recognised in the consolidated income statement.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 129
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20. Financial Assets Measured at Fair Value through Profit or Loss (continued)
At 31 Dec 2017
Metals
Corporate Margin derivatives
Funds Funds contracts
(note 22) (note 29) (note (a)) Total
$m $m $m $m

Mandatorily measured at fair value

Collective investment schemes:
– listed outside Hong Kong 1,841 – – 1,841
– unlisted 4,802 – – 4,802
6,643 – – 6,643
Unlisted debt securities – 3,059 – 3,059
Derivative financial instruments:
– base and precious metals futures
and options contracts cleared
through LME Clear (note (a)) – – 85,335 85,335

6,643 3,059 85,335 95,037

At 31 Dec 2016
Metals
Corporate Margin derivatives
Funds Funds contracts
(note 22) (note 29) (note (a)) Total
$m $m $m $m

Mandatorily measured at fair value

Collective investment schemes:
– listed outside Hong Kong 2,225 – – 2,225
– unlisted 2,886 – – 2,886
5,111 – – 5,111
Unlisted debt securities – 3,323 – 3,323
Derivative financial instruments:
– base and precious metals futures
and options contracts cleared
through LME Clear (note (a)) – – 61,618 61,618
– forward foreign exchange contracts
(note 48(b)) 14 – – 14
14 – 61,618 61,632

5,125 3,323 61,618 70,066

(a) Metals derivatives contracts represent the fair value of the outstanding base and precious
metals futures and options contracts cleared through LME Clear that do not qualify for
netting under HKAS 32: Financial Instruments: Presentation, where LME Clear is acting in its
capacity as a central counterparty to the contracts traded on the LME.

130 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21. Financial Assets Measured at Amortised Cost

OVERVIEW
Accounting Policy
Classification
Investments are classified under financial assets measured at amortised cost if they satisfy
both of the following conditions:
• the assets are held within a business model whose objective is to hold assets in order to
collect contractual cash flows; and

ORGANISATION
• the contractual terms of the financial assets give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount outstanding.
The nature of any derivatives embedded in the financial assets is considered in determining
whether the cash flows are solely payment of principal and interest on the principal
outstanding and are not accounted for separately. If the combined cash flow of the
derivatives embedded in the financial assets are considered not satisfying the “solely
payment of principal and interest” condition, the financial assets are classified as financial

MD & A
assets measured at fair value through profit or loss (note 20).
Accounts receivable and other deposits are also classified under this category (note 23).
Recognition and measurement
Financial assets measured at amortised cost are initially recognised at fair value plus
transaction costs and subsequently carried at amortised cost using the effective interest
method less any impairment.
Impairment

GOVERNANCE
The Group assesses at the end of each reporting period whether there is objective evidence
that a financial asset or a group of financial assets is impaired. Impairment losses are incurred
when there is objective evidence of impairment that, as a result of one or more loss events
that have occurred after the initial recognition of the financial assets, the estimated future
cash flows of the financial assets have been affected. Objective evidence of impairment could
include:
• significant financial difficulty of the debtor or obligor;

FINANCIALS
• fees receivable that have been outstanding for over 180 days;
• it is becoming probable that the debtor or obligor will enter into bankruptcy or other
financial reorganisation;
• the disappearance of an active market for that financial asset because of financial
difficulties; or
• observable data indicating that there is a measurable decrease in the estimated future
OTHERS

cash flows from a group of financial assets since the initial recognition of those assets,
although the decrease cannot yet be identified with the individual financial assets in the
group.
The Group first assesses whether objective evidence of impairment exists individually for
financial assets that are individually significant, and individually or collectively for financial
assets that are not individually significant.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the
GLOSSARY

basis of similar credit risk characteristics relevant to the estimation of future cash flows.
These financial assets are collectively assessed based on historical loss experience on each
type of assets and management judgement of the current economic and credit environment.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 131
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21. Financial Assets Measured at Amortised Cost (continued)

Accounting Policy (continued)

Impairment (continued)
If there is objective evidence that an impairment loss has been incurred, the loss is measured
as the difference between the assets’ carrying amounts and the present values of estimated
future cash flows discounted at the financial assets’ original effective interest rates.
The carrying amounts of the assets are reduced through the use of a doubtful debt allowance
account and the amount of the loss is recognised in the consolidated income statement.
If, in a subsequent period, the amount of impairment loss decreases and the decrease can be
shown to relate objectively to an event occurring after the impairment was recognised, the
previously recognised impairment loss is reversed by adjusting the doubtful debt allowance
account. The amount of reversal is recognised in the consolidated income statement.

At 31 Dec 2017
Corporate Margin Clearing
Funds Funds House Funds
(note 22) (note 29) (note 32) Total
$m $m $m $m

Debt securities listed outside Hong Kong 627 – – 627

Time deposits with original maturities
over three months 588 29,481 61 30,130
Other financial assets 60 – – 60

1,275 29,481 61 30,817

The expected recovery dates of the

financial assets are analysed as follows:
Within twelve months 1,215 29,481 61 30,757
More than twelve months 60 – – 60

1,275 29,481 61 30,817

At 31 Dec 2016
Corporate Margin Clearing
Funds Funds House Funds
(note 22) (note 29) (note 32) Total
$m $m $m $m

Debt securities listed outside Hong Kong 312 – – 312

Time deposits with original maturities
over three months 2,873 25,782 126 28,781
Other financial assets 74 – – 74

3,259 25,782 126 29,167

The expected recovery dates of the

financial assets are analysed as follows:
Within twelve months 3,185 25,782 126 29,093
More than twelve months 74 – – 74

3,259 25,782 126 29,167

(a) The fair values of financial assets maturing after twelve months are disclosed in note 48(d)(ii).

132 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22. Corporate Funds

OVERVIEW
At At
31 Dec 2017 31 Dec 2016
$m $m

Corporate Funds comprised the following instruments:

Cash and cash equivalents (note 19) 13,546 9,286
Financial assets measured at fair value through profit or loss (note 20) 6,643 5,125
Financial assets measured at amortised cost (note 21) 1,275 3,259

ORGANISATION
21,464 17,670

Financial assets held by the Group which are funded by share capital and funds generated from
operations are classified as Corporate Funds (ie, other than financial assets of Margin Funds,
Clearing House Funds, cash prepayments for A shares and base and precious metals derivatives
contracts).

MD & A
23. Accounts Receivable, Prepayments and Deposits

Accounting Policy
Accounts receivable and other deposits are financial assets measured at amortised cost less
impairment. The accounting policy for financial assets measured at amortised cost is
disclosed in note 21.

GOVERNANCE
At At
31 Dec 2017 31 Dec 2016
$m $m

Receivable from ChinaClear, Exchange and Clearing Participants:

– CNS money obligations receivable (note (a)) 12,515 10,052
– transaction levy, stamp duty and fees receivable 676 469
– Settlement Reserve Fund and Settlement Guarantee Fund
held by ChinaClear (note 29) 2,421 1,032

FINANCIALS
– others 12 14
Payment in advance for collective investment schemes traded on 1 Jan 2017 – 600
Other receivables, prepayments and deposits 970 785
Less: Provision for impairment losses of receivables (note (b)) (9) (3)

16,585 12,949
OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 133
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

23. Accounts Receivable, Prepayments and Deposits (continued)

(a) Upon acceptance of Stock Exchange trades for settlement in CCASS under the CNS basis,
HKSCC interposes itself between the HKSCC Clearing Participants as the settlement
counterparty to the trades through novation. The CNS money obligations due by/to HKSCC
Clearing Participants on the Stock Exchange trades are recognised as receivables and
payables (note 30) when they are confirmed and accepted on the day after the trade day.

For a trade in A shares transacted for Stock Exchange Participants, the rights and obligations
of the parties to the trade will be transferred to ChinaClear, and a market contract between
HKSCC and the relevant HKSCC Clearing Participant is created through novation. The CNS
money obligations due by/to HKSCC Clearing Participants and ChinaClear are recognised as
receivables and payables (note 30) when they are confirmed on the trade day.

(b) The movements in provision for impairment losses of receivables were as follows:

2017 2016
$m $m

At 1 Jan 3 4
Provision for/(reversal of provision for) impairment losses
of receivables under other operating expenses 6 (1)

At 31 Dec 9 3

(c) CNS money obligations receivable mature within two days after the trade date. The majority
of the remaining accounts receivable, prepayments and deposits were due within three
months.

24. Principal Subsidiaries and Controlled Structured Entity

Accounting Policy
Subsidiaries are entities (including structured entities (note (b))) over which the Group has
control. The Group controls an entity when the Group is exposed to, or has the rights to,
variable returns from its involvement with the entity and has the ability to affect those
returns through its power over the entity.
A structured entity is an entity that has been designed so that voting or similar rights are not
the dominant factor in deciding who controls the entity, such as when any voting rights relate
to administrative tasks only and the relevant activities are directed by means of contractual
arrangements.
The Group considers all of its investments in collective investment schemes to be
investments in unconsolidated structured entities, which are classified as financial assets
measured at fair value through profit or loss (note 20).

134 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

24. Principal Subsidiaries and Controlled Structured Entity (continued)

OVERVIEW
(a) Principal Subsidiaries

HKEX had direct or indirect interests in the following principal subsidiaries:

Interest held by
Place of Issued and fully the Group
incorporation paid up share/ At At
Company and operation registered capital Principal activities 31 Dec 2017 31 Dec 2016

ORGANISATION
Direct principal subsidiaries:
The Stock Exchange of Hong Kong 929 ordinary shares Operates the single Stock Exchange in 100% 100%
Hong Kong Limited ($929) Hong Kong
Hong Kong Futures Exchange Hong Kong 230 ordinary shares Operates a futures and options exchange 100% 100%
Limited ($28,750,000)
Hong Kong Securities Clearing Hong Kong 2 ordinary shares ($2) Operates a clearing house for securities 100% 100%
Company Limited traded on the Stock Exchange in Hong
Kong, Shanghai Stock Exchange and

MD & A
Shenzhen Stock Exchange in Mainland
China through Stock Connect and the
central securities depository, and
provides custody and nominee
services for eligible securities listed in
Hong Kong and Mainland China
OTC Clearing Hong Kong Hong Kong 4,860 ordinary shares Operates a clearing house for 75% 75%
Limited (OTC Clear) (note (i)) ($614,600,001) over-the-counter derivatives
1,620 non-voting

GOVERNANCE
ordinary shares
($340,200,000)
The SEHK Options Clearing Hong Kong 1,000,000 ordinary Operates a clearing house for stock 100% 100%
House Limited (SEOCH) shares ($1,000,000) options contracts traded on the Stock
Exchange in Hong Kong
HKFE Clearing Corporation Hong Kong 1,000,000 ordinary Operates a clearing house for derivatives 100% 100%
Limited (HKCC) shares ($1,000,000) contracts traded on the Futures
Exchange

FINANCIALS
Indirect principal subsidiaries:
The London Metal Exchange United Kingdom 100 ordinary shares Operates an exchange for the trading of 100% 100%
of £1 each base and precious metals futures and
options contracts
LME Clear Limited United Kingdom 107,500,001 ordinary Operates a clearing house for base and 100% 100%
shares of £1 each precious metals futures and options
contracts
Qianhai Mercantile Exchange Mainland China RMB400,000,000 Developing a commodity trading 90.01% 100%
Co., Ltd. (QME) (note (i)) platform in Mainland China
OTHERS

The above table lists the subsidiaries of the Group which, in the opinion of its directors,
principally affect the results or assets of the Group.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 135
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

24. Principal Subsidiaries and Controlled Structured Entity (continued)

(a) Principal Subsidiaries (continued)

(i) Subsidiaries with non-controlling interests

At 31 December 2017, the Group held 75 per cent (31 December 2016: 75 per cent)
interest in OTC Clear, while the remaining 25 per cent (31 December 2016: 25 per cent)
interest was held by non-controlling interests. The non-controlling interests do not have
voting rights at general meetings of OTC Clear.

QME (formerly known as Gangrong Trading Services (Shenzhen) Limited) is a limited

company established in Mainland China. At 31 December 2017, the Group held
90.01 per cent (31 December 2016: 100 per cent) interest in QME, while the remaining
9.99 per cent (31 December 2016: Nil) interest was held by non-controlling interests.

Set out below is the financial information related to the non-controlling interests of
each subsidiary:

OTC Clear QME

2017 2016 2017 2016
$m $m $m $m

Loss allocated to non-controlling interests 27 28 22 –

At At At At
31 Dec 2017 31 Dec 2016 31 Dec 2017 31 Dec 2016
$m $m $m $m

Accumulated non-controlling interests 91 118 11 –

No summarised financial information of OTC Clear and QME is presented as the

non-controlling interests are not material to the Group.

(ii) Significant restrictions

Cash and savings deposits are held by subsidiaries in Mainland China and are subject to
exchange control restrictions. The carrying amount of these restricted assets in the
consolidated financial statements at 31 December 2017 was $148 million
(31 December 2016: $218 million).

(b) Controlled structured entity

HKEX controls a structured entity which operates in Hong Kong, particulars of which are as
follows:

Structured entity Principal activities

The HKEx Employees’ Share Award Scheme Purchases, administers and holds HKEX shares for the
(HKEX Employee Share Trust) Share Award Scheme for the benefit of eligible HKEX
employees (note 37)

HKEX has the power to direct the relevant activities of the HKEX Employee Share Trust and it
has the ability to use its power over the HKEX Employee Share Trust to affect its exposure to
returns. Therefore, the assets and liabilities of HKEX Employee Share Trust are included in
HKEX’s statement of financial position and the HKEX shares it held are presented as a
deduction in equity as Shares held for Share Award Scheme.

136 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. Interests in Joint Ventures

OVERVIEW
Accounting Policy
Interests in joint ventures are accounted for in the consolidated financial statements under
the equity method. The entire carrying amount of the investment is tested for impairment in
accordance with the accounting policy stated in note 2(d).

ORGANISATION
At At
31 Dec 2017 31 Dec 2016
$m $m
Share of net assets of joint ventures 61 59

(a) Details of the joint ventures were as follows:

Place of % of ownership interest

business and

MD & A
country of Principal At At
Name incorporation activities 31 Dec 2017 31 Dec 2016

China Exchanges Services Hong Kong Development of index-linked and 33.33% 33.33%
Company Limited (CESC) equity derivatives products
Bond Connect Company Hong Kong Provision of support services 40% N/A
Limited (BCCL) related to Bond Connect

In 2012, HKEX, the Shanghai Stock Exchange and the Shenzhen Stock Exchange established a

GOVERNANCE
joint venture, CESC, with an aim of developing financial products and related services. CESC is
a strategic investment for the Group and it is expected to enhance the competitiveness of
Hong Kong, help promote the development of Mainland China’s capital markets and the
internationalisation of the Group.

In 2017, HKEX and China Foreign Exchange Trade System (CFETS) established a joint venture,
BCCL, which provides support services related to Bond Connect. BCCL is a strategic
investment of the Group as it provides services to facilitate the trading of Bond Connect,

FINANCIALS
which enhances HKEX’s position in the fixed income market and expands the mutual market
programme from equity into a new asset class.

Set out below is the measurement method and the carrying amounts of the two joint
ventures:

Carrying amount
At At
31 Dec 2017 31 Dec 2016
OTHERS

Name Measurement method $m $m

CESC Equity 51 59
BCCL Equity 10 –

61 59

The two joint ventures are private companies and no quoted market prices are available for
their shares.
GLOSSARY

No summarised financial information of CESC and BCCL is presented as the joint ventures are
not material to the Group.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 137
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. Goodwill and Other Intangible Assets

Accounting Policy
Goodwill
Goodwill arising on the acquisition of subsidiaries is carried at cost as established at the date
of acquisition less accumulated impairment losses, if any.
For the purpose of impairment testing, goodwill acquired in a business combination is
allocated to each CGU, or group of CGUs, that is expected to benefit from the synergies of
the combination. Each CGU or group of CGUs to which the goodwill is allocated represents
the lowest level within the entity at which the goodwill is monitored for internal management
purposes (ie, operating segment level).
Goodwill is not amortised but impairment reviews are undertaken annually or more
frequently if events or changes in circumstances indicate a potential impairment. The
carrying value of goodwill is compared to the recoverable amount, which is the higher of
value-in-use and the fair value less costs to sell. Any impairment is recognised immediately in
the consolidated income statement and is not subsequently reversed.
Tradenames
Tradenames acquired in a business combination are recognised at fair value at the acquisition
date. The fair value is based on the discounted estimated royalty payments that are expected
to be avoided as a result of the tradenames being owned.
Tradenames arising from the acquisition of the LME Group have indefinite useful lives and
are carried at cost less accumulated impairment losses, if any.
Tradenames are reviewed annually to determine whether events and circumstances continue
to support the indefinite useful life assessment.
Customer relationships
Customer relationships acquired in a business combination are recognised initially at fair
value at the acquisition date. The fair value is determined using the multi-period excess
earnings method, whereby the asset is valued after deducting a fair return on all other assets
that are part of creating the related cash flows. Subsequently, the customer relationships are
carried at cost (ie, the initial fair value) less accumulated amortisation and impairment losses,
if any. Amortisation is calculated using the straight-line method over the expected lives of the
customer relationships, which are determined to be 20 to 25 years.

138 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. Goodwill and Other Intangible Assets (continued)

OVERVIEW
Accounting Policy (continued)
Computer software systems
Development costs that are directly attributable to the design and testing of identifiable and
unique software products controlled by the Group are recognised as intangible assets if the
related software does not form an integral part of the hardware on which it operates

ORGANISATION
(ie, system software without which the related hardware can still operate) and when the
following criteria are met:
• It is technically feasible to complete the software so that it will be available for use;
• Management intends to complete the software and use it;
• There is an ability to use the software;
• It can be demonstrated how the software will generate probable future economic
benefits;

MD & A
• Adequate technical, financial and other resources to complete the development and to
use the software are available; and
• The expenditure attributable to the software during its development can be reliably
measured.
Other development expenditures that do not meet these criteria are recognised in the
consolidated income statement as incurred. Development costs previously recognised in the

GOVERNANCE
consolidated income statement are not recognised as an asset in a subsequent period.
Qualifying software system development expenditure and related directly attributable costs
capitalised as intangible assets are amortised when they are available for use. They are
amortised at rates sufficient to write off their costs net of residual values over their estimated
useful lives of three to five years on a straight-line basis. The residual values and useful lives
are reviewed, and adjusted if appropriate, at the end of each reporting period, with the effect
of any changes in estimate accounted for on a prospective basis.

FINANCIALS
Costs associated with maintaining computer systems and software programmes are
recognised in the consolidated income statement as incurred.
The Group’s accounting policy for impairment is described in note 2(d).

OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 139
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. Goodwill and Other Intangible Assets (continued)

Other Intangible Assets
Customer Software
Goodwill Tradenames relationships systems Total
$m $m $m $m $m

Cost:
At 1 Jan 2016 13,162 890 3,109 1,876 19,037
Exchange differences 5 1 2 – 8
Additions – – – 422 422
Disposals – – – (6) (6)

At 31 Dec 2016 13,167 891 3,111 2,292 19,461

At 1 Jan 2017 13,167 891 3,111 2,292 19,461

Exchange differences 110 7 25 15 157
Additions – – – 537 537
Disposals – – – (11) (11)

At 31 Dec 2017 13,277 898 3,136 2,833 20,144

Accumulated amortisation:
At 1 Jan 2016 – – 397 768 1,165
Exchange differences – – 1 – 1
Amortisation – – 129 360 489
Disposals – – – (6) (6)

At 31 Dec 2016 – – 527 1,122 1,649

At 1 Jan 2017 – – 527 1,122 1,649

Exchange differences – – 4 8 12
Amortisation – – 130 439 569
Disposals – – – (11) (11)

At 31 Dec 2017 – – 661 1,558 2,219

Net book value:

At 31 Dec 2017 13,277 898 2,475 1,275 17,925

At 31 Dec 2016 13,167 891 2,584 1,170 17,812

Cost of software systems under

development included above:
At 31 Dec 2017 – – – 547 547

At 31 Dec 2016 – – – 560 560

Amortisation of $569 million (2016: $489 million) is included in “depreciation and amortisation”
in the consolidated income statement.

Tradenames are regarded as having indefinite useful lives and there is no foreseeable limit to the
period over which they are expected to generate cash flows for the Group as it is expected that their
values will not be reduced through usage and there are no legal or similar limits on the period for
their use.

140 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. Goodwill and Other Intangible Assets (continued)

OVERVIEW
Impairment tests for CGUs containing goodwill and intangible assets with indefinite useful lives

Goodwill and tradenames that arose on the acquisition of the LME Group in 2012 are allocated to
and monitored by management at the operating segment level, which comprises CGUs, or groups
of CGUs that are expected to benefit from synergies of combination with the acquired businesses.
A summary of the allocation of goodwill and tradenames to these operating segments is as follows:

ORGANISATION
At 31 Dec 2017 At 31 Dec 2016
Goodwill Tradenames Goodwill Tradenames
$m $m $m $m

Commodities segment 10,396 703 10,310 698

Clearing segment 2,881 195 2,857 193

13,277 898 13,167 891

MD & A
The Commodities segment comprises the commodities trading platform in the UK (LME
commodities CGU) and the development of the commodities trading platform in Mainland China
(China commodities CGU). As the China commodities CGU is still at an early stage of development,
its valuation has not been taken into account in determining the recoverable amount of the
Commodities segment at 31 December 2017.

The recoverable amount of each CGU is determined based on value-in-use calculations. These
calculations use cash flow projections based on financial forecasts approved by management

GOVERNANCE
covering a five-year period. Cash flows beyond the five-year period are extrapolated using the
estimated terminal growth rates stated below. The key assumptions, EBITDA margins, growth rates
and discount rates used for value-in-use calculations are as follows:

At 31 Dec 2017 At 31 Dec 2016

Commodities Clearing Commodities Clearing
segment segment segment segment

EBITDA margin (average of next five years) 61% 50% 57% 63%

FINANCIALS
Growth rate 3% 3% 3% 3%
Discount rate 9% 9% 9-11% 9%

For the LME commodities CGU and the Clearing segment, management determined the EBITDA
margins based on past performance and expectations regarding market development. The growth
rates do not exceed the long-term average growth rate for the business in the markets in which
each of the CGUs currently operates. The discount rates used are pre-tax and reflect specific risks
relating to each CGU.
OTHERS

The recoverable amounts of the operating segments (including goodwill and tradenames) based on
the estimated value-in-use calculations were higher than their carrying amounts at 31 December
2017 and 31 December 2016. Accordingly, no provision for impairment loss for goodwill or
tradenames is considered necessary.

If the LME trading fee in the forecast period was 10 per cent lower than forecast, or the discount
rate increased to 10 per cent, the recoverable amount of the Commodities segment would be
GLOSSARY

approximately equal to its carrying amount. Except for this, any reasonably possible changes in the
key assumptions used in the value-in-use assessment would not affect management’s view on
impairment at 31 December 2017.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 141
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27. Fixed Assets

Accounting Policy
Tangible fixed assets are stated at historical cost less accumulated depreciation and
impairment losses. Historical cost includes expenditure that is directly attributable to the
acquisition of the assets.
Tangible fixed assets are depreciated when they are available for use. They are depreciated at
rates sufficient to write off their costs net of expected residual values over their estimated
useful lives on a straight-line basis. The residual values and useful lives are reviewed at the
end of each reporting period, with the effect of any changes in estimate accounted for on a
prospective basis.
The useful lives of major categories of fixed assets are as follows:
Leasehold buildings Up to 35 years or remaining lives
of the leases if shorter
Leasehold improvements Over the remaining lives of the
leases but not exceeding 10 years
Computer trading and clearing systems
– hardware and software 3 to 5 years
Other computer hardware and software 3 years
Furniture, equipment and motor vehicles 3 to 5 years
Data centre facilities and equipment 3 to 20 years
Expenditure incurred in the construction of leasehold buildings and other directly
attributable costs are capitalised when it is probable that future economic benefits
associated with the expenditure will flow to the Group and the costs can be measured
reliably.
Qualifying software expenditure and related directly attributable costs are capitalised and
recognised as a fixed asset if the software forms an integral part of the hardware on which it
operates (ie, operating system software without which the related hardware cannot operate).
Subsequent costs and qualifying development expenditure incurred after the completion of a
system are included in the asset’s carrying amount or recognised as a separate asset only
when it is probable that future economic benefits associated with that item will flow to the
Group and the cost of the item can be measured reliably. All other repairs and maintenance
costs and other subsequent expenditure are charged to the consolidated income statement
when incurred.
The Group’s accounting policy for impairment is described in note 2(d).

142 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27. Fixed Assets (continued)

OVERVIEW
Leasehold
Computer improvements,
trading and Other computer Data centre furniture,
Leasehold clearing hardware and facilities and equipment and
buildings systems software equipment motor vehicles Total
$m $m $m $m $m $m

Cost:
At 1 Jan 2016 708 1,411 512 406 794 3,831

ORGANISATION
Exchange differences – (1) – – (2) (3)
Additions – 56 34 4 130 224
Disposals – (118) (23) – (34) (175)

At 31 Dec 2016 708 1,348 523 410 888 3,877

At 1 Jan 2017 708 1,348 523 410 888 3,877

Exchange differences – 5 2 – 5 12
Additions – 75 29 6 141 251

MD & A
Disposals – (7) (8) – (37) (52)

At 31 Dec 2017 708 1,421 546 416 997 4,088

Accumulated depreciation:
At 1 Jan 2016 93 1,256 389 86 447 2,271
Depreciation 28 49 72 26 107 282
Disposals – (118) (23) – (34) (175)

GOVERNANCE
At 31 Dec 2016 121 1,187 438 112 520 2,378

At 1 Jan 2017 121 1,187 438 112 520 2,378

Exchange differences – 2 1 – 1 4
Depreciation 28 55 44 27 135 289
Disposals – (7) (8) – (37) (52)

At 31 Dec 2017 149 1,237 475 139 619 2,619

FINANCIALS
Net book value:
At 31 Dec 2017 559 184 71 277 378 1,469

At 31 Dec 2016 587 161 85 298 368 1,499

Cost of fixed assets in the

course of construction
included above:
OTHERS

At 31 Dec 2017 – 110 14 1 103 228

At 31 Dec 2016 – 71 10 1 72 154

GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 143
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28. Financial Liabilities at Fair Value through Profit or Loss

Accounting Policy
Financial liabilities at fair value through profit or loss are initially recognised at fair value on
trade date and subsequently remeasured at their fair values. Changes in fair value of the
liabilities are recognised in the consolidated income statement. Derivative financial
instruments (note 20) outstanding on the reporting date are classified as financial liabilities
at fair value through profit or loss when their fair values are negative.

At At
31 Dec 2017 31 Dec 2016
$m $m

Held by LME Clear in its capacity as a central counterparty

Derivative financial instruments:
– base and precious metals futures and options contracts cleared
through LME Clear (note (a)) 85,335 61,618
Held for trading
Derivative financial instruments:
– forward foreign exchange contracts (note 48(b)) – 9

85,335 61,627

(a) The amount represents the fair value of outstanding base and precious metals futures and
options contracts cleared through LME Clear that do not qualify for netting under HKAS 32:
Financial Instruments: Presentation, where LME Clear is acting in its capacity as a central
counterparty to the contracts traded on the LME.

29. Margin Deposits, Mainland Security and Settlement Deposits, and Cash
Collateral from Clearing Participants

Accounting Policy
The obligation to refund the Margin deposits, Mainland security and settlement deposits,
and cash collateral from Clearing Participants is disclosed under current liabilities.
Non-cash collateral received from Clearing Participants is not recognised on the consolidated
statement of financial position.

Margin Funds are established by cash received or receivable from Clearing Participants in respect of
margin deposits, Mainland security and settlement deposits, and cash collateral of the five clearing
houses to cover their open positions. Part of the Mainland security and settlement deposits is used
by HKSCC to satisfy its obligations as a clearing participant of ChinaClear in respect of trades
transacted through Stock Connect. These funds are held in segregated accounts of the respective
clearing houses for this specified purpose and cannot be used by the Group to finance any other
activities.

144 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

29. Margin Deposits, Mainland Security and Settlement Deposits, and Cash

OVERVIEW
Collateral from Clearing Participants (continued)
At At
31 Dec 2017 31 Dec 2016
$m $m

Margin deposits, Mainland security and settlement deposits, and cash collateral
from Clearing Participants comprised:
SEOCH Clearing Participants’ margin deposits 14,571 5,389
HKCC Clearing Participants’ margin deposits 49,245 46,974

ORGANISATION
HKSCC Clearing Participants’ margin deposits, Mainland security
and settlement deposits, and cash collateral 8,553 5,484
OTC Clear Clearing Participants’ margin deposits 1,730 296
LME Clear Clearing Participants’ margin deposits 83,715 68,703

157,814 126,846

The margin deposits, Mainland security and settlement deposits, and cash collateral

MD & A
were invested in the following instruments for managing the obligations of the
Margin Funds (note 18):
Cash and cash equivalents (note 19) 122,844 96,698
Financial assets measured at fair value through profit or loss (note 20) 3,059 3,323
Financial assets measured at amortised cost (note 21) 29,481 25,782
Settlement Reserve Fund and Settlement Guarantee Fund held by ChinaClear (note 23) 2,421 1,032
Margin receivable from Clearing Participants 9 11

GOVERNANCE
157,814 126,846

30. Accounts Payable, Accruals and Other Liabilities

Accounting Policy
Financial liabilities, other than financial liabilities at fair value through profit or loss (note 28)
and financial guarantee contracts (note 31), are initially recognised at fair value and

FINANCIALS
subsequently carried at amortised cost (which is same as the initial fair value due to their
short-term nature).

At At
31 Dec 2017 31 Dec 2016
$m $m

Payable to ChinaClear, Exchange and Clearing Participants:

OTHERS

– CNS money obligations payable (note 23(a)) 14,204 10,315

– others 212 174
Transaction levy payable to the SFC 120 79
Unclaimed dividends (note (a)) 269 257
Stamp duty payable to the Collector of Stamp Revenue 416 258
Payables for collective investment schemes traded before 31 Dec 2016 – 300
Other payables, accruals and deposits received 989 893
GLOSSARY

16,210 12,276

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 145
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30. Accounts Payable, Accruals and Other Liabilities (continued)

(a) Unclaimed dividends represent dividends declared by listed companies which were held by
HKSCC Nominees Limited (HKSN) but not yet claimed by shareholders of the companies
concerned, and dividends declared by HKEX but not yet claimed by its shareholders. During
the year, cash dividends held by HKSN which had remained unclaimed for a period of more
than seven years amounting to $7 million (2016: $14 million) were forfeited and recognised
as sundry income (note 7) and dividends declared by HKEX which were unclaimed over a
period of six years from the date of payment amounting to $26 million (2016: $22 million)
were forfeited and transferred to retained earnings in accordance with HKEX’s Articles of
Association (note 40).

(b) CNS money obligations payable mature within two days after the trade date. The majority of
the remaining accounts payable, accruals and other liabilities would mature within three
months.

31. Other Financial Liabilities

Accounting Policy
Financial guarantee contracts are initially recognised at fair value. Subsequently, such
contracts are measured at the higher of the best estimate of the amount required to settle
the guarantee and the amount initially recognised less, where appropriate, cumulative
amortisation over the life of the guarantee on a straight-line basis.

At At
31 Dec 2017 31 Dec 2016
$m $m

Financial liabilities of Clearing House Funds (note 32) 38 17

Financial liabilities of Corporate Funds:
Financial guarantee contract (note (a)) 20 20

58 37

(a) The amount represents the carrying value of a financial guarantee provided by the Group to
the Collector of Stamp Revenue, details of which are disclosed in note 43(b).

146 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

32. Clearing House Funds

OVERVIEW
Accounting Policy
Clearing Participants’ cash contributions to Clearing House Funds are included under current
liabilities. Non-cash collateral received from Clearing Participants is not recognised on the
consolidated statement of financial position.

ORGANISATION
Clearing House Funds are established under the Clearing House Rules. Assets contributed by the
Clearing Participants and the Group are held by the respective clearing houses (together with the
accumulated income less related expenses for the clearing houses in Hong Kong) expressly for the
purpose of ensuring that the respective clearing houses are able to fulfil their counterparty
obligations in the event that one or more of the Clearing Participants fail to meet their obligations
to the clearing houses. The HKSCC Guarantee Fund also provides resources to enable HKSCC to
discharge its liabilities and obligations if defaulting Clearing Participants deposit defective
securities into CCASS. The amounts earmarked for contribution to the Rates and FX Guarantee

MD & A
Resources of OTC Clear and its accumulated investment income was also included in Clearing
House Funds for presentation purpose. These funds are held in segregated accounts of the
respective clearing houses for this specified purpose and cannot be used by the Group to finance
any other activities.

At At
31 Dec 2017 31 Dec 2016
$m $m

The Clearing House Funds comprised:

GOVERNANCE
Clearing Participants’ cash contributions 16,626 8,656
Contribution to OTC Clear Rates and FX Guarantee Resources 156 156
Designated reserves (notes (a) and 39) 822 773

17,604 9,585

The Clearing House Funds were invested in the following instruments for
managing the obligations of the Funds (note 18):

FINANCIALS
Cash and cash equivalents (note 19) 17,581 9,476
Financial assets measured at amortised cost (note 21) 61 126

17,642 9,602
Less: Other financial liabilities of Clearing House Funds (note 31) (38) (17)

17,604 9,585

The Clearing House Funds comprised the following Funds:

OTHERS

HKSCC Guarantee Fund 2,712 2,219

SEOCH Reserve Fund 2,454 724
HKCC Reserve Fund 1,887 1,316
OTC Clear Rates and FX Guarantee Fund 1,222 659
OTC Clear Rates and FX Guarantee Resources 161 160
LME Clear Default Fund 9,168 4,507

17,604 9,585
GLOSSARY

(a) Designated reserves comprise contributions from the clearing houses and accumulated
income net of expenses of the Clearing House Funds appropriated from retained earnings.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 147
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

33. Borrowings

Accounting Policy
Borrowings are recognised initially at fair value of proceeds received, net of transaction costs
incurred (net proceeds). The difference between the net proceeds and the redemption value
is amortised and recognised in the consolidated income statement as interest expense over
the period of the borrowings using the effective interest method and added to borrowings.
The borrowings are subsequently carried at amortised cost (ie, net proceeds plus the
cumulative amortisation using the effective interest method less payments).
Borrowings are classified as current liabilities unless the Group has an unconditional right to
defer settlement of the liability for at least twelve months after the end of the reporting
period.

At At
31 Dec 2017 31 Dec 2016
$m $m

Bank borrowings (note (a)) – 1,586

Notes (note (b)) 1,533 1,519
Written put options to non-controlling interests (note (c)) 327 317

Total borrowings 1,860 3,422

Analysed as:
Non-current liabilities 833 3,422
Current liabilities 1,027 –

1,860 3,422

The borrowings were repayable as follows:

Bank borrowings Other borrowings

At At At At
31 Dec 2017 31 Dec 2016 31 Dec 2017 31 Dec 2016
$m $m $m $m

Within one year – – 1,027 –

After one year but within two years – – 751 1,012
After two years but within five years – 1,586 82 824

– 1,586 1,860 1,836

(a) Bank borrowings

In 2017, the bank borrowings were fully repaid. Prior to the repayment in 2017, the bank
borrowings bore average coupons of 2.2 per cent (2016: 1.7 per cent) per annum, and the
average effective interest rate was 2.5 per cent (2016: 1.8 per cent) per annum.

(b) Notes

In December 2013 and January 2014, HKEX issued US$100 million (HK$775 million) and
US$95 million (HK$737 million) of fixed rate senior notes which will be due in December 2018
and January 2019 respectively. The average effective interest rate of the senior notes was
2.9 per cent (2016: 2.9 per cent) per annum.

148 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

33. Borrowings (continued)

OVERVIEW
(c) Written put options to non-controlling interests

Accounting Policy
The potential cash payments related to put options issued by HKEX for the non-voting
ordinary shares of a subsidiary held by non-controlling interests are accounted for as
financial liabilities, which are initially recognised at fair value with a corresponding

ORGANISATION
charge directly to equity under “reserve relating to written put options to
non-controlling interests”.
The written put option financial liabilities are subsequently measured at amortised cost
(ie, the initial fair value plus cumulative amortisation of the difference between the
initial fair value and the cash payments related to put options using the effective
interest method). The interest charge arising is recorded under finance costs in the
consolidated income statement.

MD & A
2017 2016
$m $m

At 1 Jan 317 308

Interest expenses (note (ii)) 10 9

At 31 Dec 327 317

GOVERNANCE
(i) OTC Clear issued non-voting ordinary shares to certain third party shareholders at a
total consideration of $340 million. As part of the arrangement, put options were
written by HKEX to the non-controlling interests to sell part or all of their non-voting
ordinary shares in OTC Clear to HKEX at the initial subscription price of $210,000
per share less accumulated dividends received by the non-controlling interests.
The put options are exercisable by the non-controlling interests at any time following
the date falling five years after the shares were issued if the non-controlling interests
can demonstrate to HKEX that they have used reasonable endeavours for at least three

FINANCIALS
months to find a suitable purchaser for their shares at a price equal to or more than
their fair market values. The carrying amount of written put options represents the
present value of the amount payable by HKEX to acquire the shares held by
non-controlling interests at the date at which the written put options first become
exercisable.

$245 million of the written put options will become exercisable in October 2018 and
the remaining $82 million will become exercisable in August 2020.
OTHERS

(ii) The effective interest rate of the liabilities was 3.0 per cent (2016: 3.0 per cent)
per annum.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 149
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

34. Provisions

Accounting Policy
Provisions are recognised when the Group has a present legal or constructive obligation as a
result of past events, it is probable that an outflow of resources will be required to settle the
obligation, and a reliable estimate of the amount can be made. The amount recognised as a
provision is the best estimate of the consideration required to settle the present obligation
at the end of the reporting period.

Reinstatement Employee
costs benefit costs Total
$m $m $m

At 1 Jan 2017 90 69 159

Exchange differences 2 – 2
(Reversal of provision for)/provision for the year (3) 94 91
Amount used during the year – (84) (84)
Amount paid during the year (8) (7) (15)

At 31 Dec 2017 81 72 153

(a) The provision for reinstatement costs represents the estimated costs of restoring the leased
office premises to their original state upon the expiry of the leases. The leases are expected to
expire within 13 years.

(b) The provision for employee benefit costs represents unused annual leave that has been
accumulated at the end of the reporting period. It is expected to be fully utilised in the coming
twelve months.

35. Deferred Taxation

Accounting Policy
Deferred tax is recognised, using the liability method, on temporary differences arising
between the tax bases of assets and liabilities and their carrying amounts in the financial
statements, except that deferred tax liabilities are not recognised if they arise from the initial
recognition of goodwill. Deferred tax is determined using tax rates that have been enacted or
substantively enacted by the end of the reporting period and are expected to apply when the
related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit
will be available against which the temporary differences or the current tax losses can be
utilised.

(a) The movements on the net deferred tax liabilities account were as follows:

2017 2016
$m $m

At 1 Jan 691 739

Exchange differences 4 –
Credited to the consolidated income statement (note 15(a)) (13) (49)
(Credited)/charged directly to retained earnings (1) 1

At 31 Dec (note (d)) 681 691

150 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

35. Deferred Taxation (continued)

OVERVIEW
(b) The Group had unrecognised tax losses of $1,068 million at 31 December 2017
(31 December 2016: $764 million) that may be carried forward for offsetting against future
taxable income. Tax losses of a PRC entity amounting to $340 million will expire 5 years after
it commences operations, and the remaining tax losses can be carried forward indefinitely and
have no expiry date.

(c) The movements on the net deferred tax liabilities/(assets) were as follows:

ORGANISATION
Accelerated tax Intangible Financial Employee
depreciation assets 1 assets Tax losses benefits Total
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
$m $m $m $m $m $m $m $m $m $m $m $m

At 1 Jan 161 168 599 655 2 – (52) (64) (19) (20) 691 739
Exchange differences – – 4 – – – – – – – 4 –
Charged/(credited) to the
consolidated income statement 13 (7) (25) (56) (2) 2 1 12 – – (13) (49)

MD & A
(Credited)/charged directly
to retained earnings – – – – – – – – (1) 1 (1) 1

At 31 Dec 174 161 578 599 – 2 (51) (52) (20) (19) 681 691

1 Intangible assets include customer relationships and tradenames.

(d) Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off

GOVERNANCE
current tax assets against current tax liabilities and when the deferred taxes relate to tax
levied by the same taxation authority on the same taxable entity or different taxable entities
where there is an intention to settle the balances on a net basis. The following amounts,
determined after appropriate offsetting, are shown in the consolidated statement of financial
position:

At At
31 Dec 2017 31 Dec 2016
$m $m

FINANCIALS
Deferred tax assets (30) (22)
Deferred tax liabilities 711 713

681 691

(e) The analysis of deferred tax (assets)/liabilities is as follows:

At At
OTHERS

31 Dec 2017 31 Dec 2016

$m $m

Deferred tax assets

Amounts to be recovered after more than 12 months (24) (17)
Amounts to be recovered within 12 months (6) (5)

(30) (22)

Deferred tax liabilities

GLOSSARY

Amounts to be recovered or settled after more than 12 months 695 699

Amounts to be recovered or settled within 12 months 16 14

711 713

Net deferred tax liabilities 681 691

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 151
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

36. Share Capital and Shares Held for Share Award Scheme

Accounting Policy
Shares
Ordinary shares are classified as equity.
Shares held for Share Award Scheme
Where HKEX shares are acquired by the Share Award Scheme from the market or by electing
for scrip in lieu of cash dividends, the total consideration of shares acquired from the market
(including any directly attributable incremental costs) or under the scrip dividend scheme is
presented as Shares held for Share Award Scheme and deducted from total equity.
Upon vesting, the related costs of the vested Awarded Shares purchased from the market
and shares acquired under the scrip dividend scheme (dividend shares) are credited to Shares
held for Share Award Scheme, with a corresponding decrease in employee share-based
compensation reserve for Awarded Shares, and decrease in retained earnings for dividend
shares.

Issued and fully paid – ordinary shares with no par:

Number of Shares held

shares held for for
Number of Share Award Share Share Award
shares Scheme 1 capital Scheme Total
’000 ’000 $m $m $m

At 1 Jan 2016 1,208,536 (3,259) 19,285 (590) 18,695

Shares issued in lieu of cash
dividends (note (a)) 15,786 (92) 2,798 (16) 2,782
Shares purchased for Share Award
Scheme (note (b)) – (992) – (188) (188)
Vesting of shares of Share Award
Scheme (note (c)) – 1,126 2 195 197

At 31 Dec 2016 1,224,322 (3,217) 22,085 (599) 21,486

At 1 Jan 2017 1,224,322 (3,217) 22,085 (599) 21,486

Shares issued in lieu of cash
dividends (note (a)) 15,487 (74) 3,052 (15) 3,037
Shares purchased for Share Award
Scheme (note (b)) – (1,000) – (228) (228)
Vesting of shares of Share Award
Scheme (note (c)) – 1,297 4 236 240

At 31 Dec 2017 1,239,809 (2,994) 25,141 (606) 24,535

1 Excluding shares vested but not yet transferred to awardees of 29,005 shares at 31 December 2017 (31 December 2016: 2,750 shares)

152 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

36. Share Capital and Shares Held for Share Award Scheme (continued)

OVERVIEW
(a) During the year, the following shares were issued to shareholders who elected to receive
HKEX shares in lieu of cash dividends pursuant to the scrip dividend scheme:

2017
Shares
held for
Number of Scrip Share Share Award
shares price capital Scheme Total

ORGANISATION
$ $m $m $m

Issued as 2016 final scrip dividends:

– total 7,275,254 186.05 1,354 – 1,354
– to Share Award Scheme (34,906) 186.05 – (7) (7)
Issued as 2017 interim scrip dividends:
– total 8,211,651 206.77 1,698 – 1,698
– to Share Award Scheme (39,379) 206.77 – (8) (8)

MD & A
15,412,620 3,052 (15) 3,037

2016
Shares
held for
Number of Scrip Share Share Award
shares price capital Scheme Total
$ $m $m $m

Issued as 2015 final scrip dividends:

GOVERNANCE
– total 8,862,992 172.81 1,531 – 1,531
– to Share Award Scheme (53,390) 172.81 – (9) (9)
Issued as 2016 interim scrip dividends:
– total 6,923,255 183.01 1,267 – 1,267
– to Share Award Scheme (38,754) 183.01 – (7) (7)

15,694,103 2,798 (16) 2,782

FINANCIALS
(b) During the year, the Share Award Scheme (note 37) acquired 999,700 HKEX shares
(2016: 991,700 shares) through purchases on the open market. The total amount paid to
acquire the shares during the year was $228 million (2016: $188 million).

(c) During the year, a total of 1,296,700 HKEX shares (2016: 1,125,802 shares) were vested. The
total cost of the vested shares was $236 million (2016: $195 million). In 2017, $4 million
(2016: $2 million) was credited to share capital in respect of vesting of certain shares whose
fair values were higher than the costs.
OTHERS
GLOSSARY

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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

37. Employee Share-based Arrangements

Accounting Policy
The Group operates the Share Award Scheme (the Scheme), which is an equity-settled
shared-based compensation plan under which Awarded Shares are granted to employees of
the Group (including the Executive Director) as part of their remuneration package.
The amount to be expensed as share-based compensation expenses is determined by
reference to the fair value of the Awarded Shares granted, taking into account all non-vesting
conditions associated with the grants on grant date. The total expense is recognised on a
straight-line basis over the relevant vesting periods (or on the grant date if the shares vest
immediately), with a corresponding credit to an employee share-based compensation reserve
under equity.
For those Awarded Shares which are amortised over the vesting periods, the Group revises its
estimates of the number of Awarded Shares that are expected to ultimately vest based on the
vesting conditions at the end of each reporting period. Any resulting adjustment to the
cumulative fair value recognised in prior years is charged/credited to employee share-based
compensation expense in the current year, with a corresponding adjustment to the employee
share-based compensation reserve.

The movements of employee share-based compensation reserve were as follows:

2017 2016
$m $m

At 1 Jan 226 199

Employee share-based compensation benefits (note 8) 220 213
Vesting of shares of Share Award Scheme (224) (186)

At 31 Dec 222 226

The Scheme allows shares to be granted to employees under the following two categories of
awards:
(i) Employee Share Awards – for all employees of the Group (including the Executive Director); and
(ii) Senior Executive Awards – for selected senior executives of the Group (including the Executive
Director).

Following the Board’s decision to award an award sum for the purchase of Awarded Shares to
eligible employees and/or selected senior executives, the Awarded Shares are either purchased
from the market or are awarded by regranting the forfeited or unallocated shares held by the
Scheme. Before vesting, the Awarded Shares are held in a trust set up by the Scheme.

Further shares are derived from dividends payable on the Awarded Shares held in the Scheme from
scrip shares received under the scrip dividend scheme (dividend shares), and are allocated to the
awardees on a pro rata basis and have the same vesting periods as the related Awarded Shares.

154 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

37. Employee Share-based Arrangements (continued)

OVERVIEW
(a) Employee Share Awards

Employee Share Awards vest progressively over the vesting period after the awards are
granted, provided that the relevant awardee (i) remains employed by the Group (ii) is made
redundant or (iii) is deemed to be a “good leaver”, and Employee Share Awards vest
immediately if the relevant awardee retires on reaching normal retirement age or suffers from
permanent disability. Unless otherwise determined by the Board, the Remuneration

ORGANISATION
Committee or the Chief Executive, the vesting period of Employee Share Awards granted is
three years, and the shares will be vested in two equal tranches from the second to the third
year after the shares are granted.

For awardees who do not meet the vesting criteria, the unvested shares are forfeited. The
forfeited shares are held by the trustee of the Scheme who may award such shares to the
other awardees, taking into consideration recommendations of the Board.

MD & A
Details of Employee Share Awards awarded during 2016 and 2017

Number of
Awarded Average
Shares fair value
Date of award awarded per share Vesting period
$

12 Aug 2016 11,648 197.45 6 Jul 2018 – 6 Jul 2019

12 Aug 2016 4,051 197.45 1 Feb 2017 – 25 Jul 2019

GOVERNANCE
25 Aug 2016 4,700 189.45 3 May 2018 – 3 May 2019
30 Dec 2016 1,083,456 1,2 190.33 7 Dec 2018 – 7 Dec 2019
1 Mar 2017 24,939 193.76 1 May 2017 – 1 May 2019
1 Mar 2017 25,960 193.76 1 Mar 2017 – 13 Jan 2020
15 May 2017 1,100 197.23 13 Jan 2018 – 13 Jan 2019
23 Jun 2017 2,900 200.82 3 Apr 2018 – 18 Mar 2019
12 Sep 2017 600 213.29 23 Jun 2019 – 23 Jun 2020
29 Dec 2017 1,017,886 1,2 229.99 8 Dec 2019 – 8 Dec 2020

FINANCIALS
1 63,210 and 58,853 shares were awarded to HKEX’s Chief Executive on 30 December 2016 and 29 December 2017 respectively.

2 179,706 and 135,970 shares were awarded by re-granting the forfeited or unallocated shares held by the Scheme on 30 December
2016 and 29 December 2017 respectively.

Details of Employee Share Awards vested during 2016 and 2017

During the year, 1,175,914 HKEX shares (2016: 1,046,334 shares) were vested at an aggregate
OTHERS

fair value of $218 million (2016: $183 million), of which 74,387 shares (2016: 68,513 shares)
were for HKEX’s Chief Executive.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 155
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

37. Employee Share-based Arrangements (continued)

(b) Senior Executive Awards

The actual number of shares to be transferred to the awardees under the Senior Executive
Awards is conditional on the satisfaction of performance conditions set by the Board. The
Board has full discretion to determine the actual amount of award to be paid at the end of a
performance assessment period (which shall normally be a period of at least three financial
years) in accordance with these criteria.

The vesting of Senior Executive Awards is not affected by the awardees ceasing employment
with the Group before the end of the performance assessment period. The Senior Executive
Awards are considered to be vested immediately upon grant and the performance conditions
are considered as non-vesting conditions.

Details of Senior Executive Awards awarded during 2016 and 2017

Number of
Awarded Average
Shares fair value Total Performance
Date of award awarded per share fair value period
$ $m

30 Dec 2016 67,400 142.25 10 2017 – 2019

29 Dec 2017 62,123 172.49 11 2018 – 2020

All of the Senior Executive Awards were awarded to HKEX’s Chief Executive. The fair value per
share is determined by taking into account various factors including the probability of the
performance conditions being satisfied.

Details of Senior Executive Awards vested during 2016 and 2017

In 2017, 42,720 HKEX shares (2016: 23,021 shares) granted under the Senior Executive
Awards were vested at a fair value of $6 million (2016: $3 million). An additional $1 million
(2016: $1 million) was charged to retained earnings in respect of the vesting as the cost of
Awarded Shares vested was higher than the fair value of shares previously charged to the
consolidated income statement.

156 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

37. Employee Share-based Arrangements (continued)

OVERVIEW
(c) Summary of Awarded shares awarded and dividend shares

Movements in number of Awarded Shares awarded and dividend shares

2017 2016

Number of Awarded Shares and dividend shares:

Outstanding at 1 Jan 3,217,209 3,248,284

ORGANISATION
Awarded 3 1,135,508 1,171,255
Forfeited (132,444) (160,473)
Vested (1,218,634) (1,069,355)
Dividend shares:
– allocated to awardees 71,305 89,211
– allocated to awardees but subsequently forfeited (4,690) (5,266)
– vested 4
(78,066) (56,447)

MD & A
Outstanding at 31 Dec 2,990,188 3,217,209

3 Average fair value per share was $225.11 (2016: $187.66).

4 In 2017, 78,066 dividend shares (2016: 56,447 shares), including 7,509 shares (2016: 4,388 shares) for HKEX’s Chief Executive, at a
cost of $15 million (2016: $10 million) were vested.

Remaining vesting periods or performance period of Awarded Shares awarded and dividend
shares outstanding at 31 December

GOVERNANCE
At 31 Dec 2017 At 31 Dec 2016
Remaining Number of Remaining Number of
vesting Awarded Shares vesting Awarded Shares
or and or and
performance dividend shares performance dividend shares
period outstanding period outstanding

Shares awarded in
2014 N/A – 0.00 year to 0.05 year 50,754

FINANCIALS
2015 0.00 year to 1.00 year 687,790 0.05 year to 2.00 years 1,917,691
2016 0.34 year to 2.00 years 1,124,409 0.09 year to 3.00 years 1,171,255
2017 0.04 year to 3.00 years 1,111,931 N/A –
Dividend shares 0.00 year to 2.48 years 66,058 0.02 year to 2.56 years 77,509

2,990,188 3,217,209

(d) Total number of shares held by Share Award Scheme

OTHERS

At At
31 Dec 2017 31 Dec 2016

Number of Awarded Shares and dividend shares (note (c)) 2,990,188 3,217,209
Forfeited or unallocated shares 5
4,456 150

Number of shares held by Share Award Scheme 6 (note 36) 2,994,644 3,217,359
GLOSSARY

5 These shares will be regranted to eligible employees in future.

6 Excluding shares vested but not yet transferred to awardees of 29,005 shares (31 December 2016: 2,750 shares)

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 157
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

38. Hedging Reserve

Accounting Policy
The Group designates certain bank balances as hedges of foreign exchange risks associated
with the cash flows of highly probable forecast transactions (cash flow hedges).
The Group documents at the inception of the transaction the relationship between hedging
instruments and hedged items, as well as its risk management objectives and strategies for
undertaking various hedge transactions. The Group also documents its assessment, both at
hedge inception and on an ongoing basis, of whether the hedging instruments have been and
will continue to be highly effective in offsetting changes in cash flows of hedged items.
The changes in the fair value relating to the effective portion of hedging instruments that are
designated and qualify as cash flow hedges is recognised in other comprehensive income and
accumulated in hedging reserve in equity. The gains or losses relating to the ineffective
portion are recognised immediately in the consolidated income statement.
Amounts accumulated in hedging reserve are reclassified to the consolidated income
statement in the periods when the hedged item affects the consolidated income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria
for hedge accounting, any cumulative gain or loss existing in hedging reserve at that time
remains in hedging reserve and is recognised when the forecast transaction is ultimately
recognised in the consolidated income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was retained in hedging reserve is
immediately reclassified to the consolidated income statement.

The movements of hedging reserve were as follows:

2017
$m

At 1 Jan –
Cash flow hedges:
– net fair value gains of hedging instruments 8
–transfer to the consolidated income statement as staff costs and related expenses (6)
– transfer to the consolidated income statement as information technology and
computer maintenance expenses (1)

At 31 Dec 1

Fair value of hedging instruments at 31 Dec 2017 86

The functional currency of the LME Group is United States Dollars (USD). To hedge the foreign
currency exposure of its operating expenses, the LME Group has designated bank balances of
Pound sterling (GBP) 31 million as cash flow hedges in 2017 for hedging the foreign exchange risk
of its staff costs and related expenses, and information technology and computer maintenance
expenses of GBP 31 million from August 2017 to March 2018. At 31 December 2017, GBP 8 million
of the bank balances was outstanding.

The amounts arising from ineffective cash flow hedges credited to the consolidated income
statement of the Group during the year amounted to $Nil.

158 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

39. Designated Reserves

OVERVIEW
Clearing House Funds reserves (note 32(a))

OTC Clear OTC Clear

HKSCC SEOCH HKCC Rates and FX Rates and FX
Guarantee Reserve Reserve Guarantee Guarantee
Fund Fund Fund Fund Resources
reserve reserve reserve reserve reserve Total
$m $m $m $m $m $m

ORGANISATION
At 1 Jan 2016 318 104 351 3 2 778
(Deficit)/surplus of net investment
income net of expenses of Clearing
House Funds transferred (to)/from
retained earnings (note 40) (7) – (1) 1 2 (5)

At 31 Dec 2016 311 104 350 4 4 773

At 1 Jan 2017 311 104 350 4 4 773

MD & A
Post-liquidation interest arising
from a Participant’s default on
market contracts (note 5(c)(ii)) 55 – – – – 55
(Deficit)/surplus of net investment
income net of expenses of
Clearing House Funds (9) 1 (1) 2 1 (6)
Transfer from/(to) retained
earnings (note 40) 46 1 (1) 2 1 49

GOVERNANCE
At 31 Dec 2017 357 105 349 6 5 822

40. Retained Earnings

2017 2016
$m $m

At 1 Jan 10,334 10,691

Profit attributable to shareholders 7,404 5,769

FINANCIALS
Transfer (to)/from Clearing House Funds reserves (note 39) (49) 5
Dividends:
2016/2015 final dividend (2,491) (3,459)
2017/2016 interim dividend (3,133) (2,683)
Unclaimed HKEX dividends forfeited (note 30(a)) 26 22
Vesting of shares of Share Award Scheme (16) (11)
Tax credit relating to Share Award Scheme 3 –
OTHERS

Changes in ownership interests in a subsidiary (note 44) 12 –

At 31 Dec 12,090 10,334

GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 159
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

41. Notes to the Consolidated Statement of Cash Flows

(a) Reconciliation of profit before taxation to net cash inflow from principal operating activities

2017 2016
$m $m

Profit before taxation 8,610 6,799

Adjustments for:
Net interest income (912) (614)
Net fair value gains including interest income on financial assets and financial
liabilities mandatorily measured at fair value through profit or loss (682) (98)
Finance costs 134 82
Depreciation and amortisation 858 771
Employee share-based compensation benefits 220 213
Provision for/(reversal of provision for) impairment losses of receivables 6 (1)
Other non-cash adjustments 37 (6)
Net increase in financial assets of Margin Funds (30,964) (11,636)
Net increase in financial liabilities of Margin Funds 30,968 11,633
Net increase in Clearing House Fund financial assets (8,040) (1,172)
Net increase in Clearing House Fund financial liabilities 7,991 1,177
Increase in cash prepayments for A shares (1,426) (134)
Net decrease/(increase) in financial assets measured at fair value through
profit or loss less financial liabilities at fair value through profit or loss 5 (380)
(Increase)/decrease in accounts receivable, prepayments and deposits (2,833) 3,432
Increase/(decrease) in other liabilities 4,245 (3,241)

Net cash inflow from principal operations 8,217 6,825

Dividends received – 7
Interest received from financial assets measured at amortised cost and
cash and cash equivalents 1,484 744
Interest received from financial assets measured at fair value through profit or loss – 120
Interest paid to Participants (572) (130)
Income tax paid (1,116) (1,402)

Net cash inflow from principal operating activities 8,013 6,164

(b) Reconciliation of liabilities arising from financing activities

Borrowings Borrowings
due within due after
one year one year
$m $m

At 1 Jan 2017 – 3,422

Borrowings becoming due within one year in 2017 1,025 (1,025)
Interest on borrowings (note 12(a)) 2 78
Cash flows
– Repayment of bank borrowings – (1,603)
– Payments of interest on borrowings – (66)
Exchange differences – 27

At 31 Dec 2017 1,027 833

160 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

42. Commitments

OVERVIEW
(a) Commitments in respect of capital expenditures

At At
31 Dec 2017 31 Dec 2016
$m $m

Contracted but not provided for:

– fixed assets 13 66

ORGANISATION
– intangible assets 65 57
Authorised but not contracted for:
– fixed assets 400 273
– intangible assets 955 585

1,433 981

(b) Commitments for total future minimum lease payments under non-cancellable operating

MD & A
leases

Accounting Policy
Leases where substantially all the rewards and risks of ownership of assets remain with
the lessor are accounted for as operating leases. Rentals under such operating leases
net of any incentives received from the lessor are charged to the consolidated income
statement on a straight-line basis over the lease term.

GOVERNANCE
At At
31 Dec 2017 31 Dec 2016
$m $m

Land and buildings

– within one year 321 230
– in the second to fifth years 1,008 490
– after the fifth year 1,026 155

FINANCIALS
2,355 875

Computer systems, software and equipment

– within one year 58 18
– in the second to fifth years 216 54

274 72
OTHERS

2,629 947

At 31 December 2017 and 31 December 2016, the Group did not have any purchase options in
respect of computer systems, software and equipment.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 161
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

42. Commitments (continued)

(c) Commitments in respect of financial contributions to Financial Reporting Council

The Financial Reporting Council (FRC) is an independent statutory body established to

receive and investigate complaints concerning irregularities of auditors and reporting
accountants of listed companies and non-compliances with accounting requirements in the
financial reports of listed companies. Since the establishment of the FRC in 2006, the Group
has been contributing to the funding of the FRC’s operations.

Under a memorandum of understanding signed in November 2014, the Group has agreed to
make recurrent contributions to the FRC as follows:
• 2015 – 2016: $7 million per annum
• 2017 – 2019: $8 million per annum

43. Contingent Liabilities

Accounting Policy
A contingent liability is a possible obligation that arises from past events and whose
existence will only be confirmed by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the Group. It can also be a present
obligation arising from past events that is not recognised because it is not probable that
outflow of economic resources will be required or the amount of obligation cannot be
measured reliably.
A contingent liability is not recognised but is disclosed in the consolidated financial
statements. When a change in the probability of an outflow occurs so that outflow is
probable or when the amount of obligation becomes reliably measurable, it will then be
recognised as a provision.

At 31 December 2017, the Group’s material contingent liabilities were as follows:

(a) The Group had a contingent liability in respect of potential calls to be made by the SFC to
replenish all or part of compensation less recoveries paid by the Unified Exchange
Compensation Fund established under the repealed Securities Ordinance up to an amount
not exceeding $71 million (31 December 2016: $71 million). Up to 31 December 2017,
no calls had been made by the SFC in this connection.

(b) The Group had undertaken to indemnify the Collector of Stamp Revenue against any
underpayment of stamp duty by its Participants of up to $200,000 for each Participant
(note 31(a)). In the unlikely event that all of its 622 trading Participants (31 December 2016:
556) covered by the indemnity at 31 December 2017 defaulted, the maximum contingent
liability of the Group under the indemnity would amount to $124 million (31 December 2016:
$111 million).

(c) HKEX has given an undertaking in favour of HKSCC to contribute up to $50 million in the
event of HKSCC being wound up while it is a wholly-owned subsidiary of HKEX or within one
year after HKSCC ceases to be a wholly-owned subsidiary of HKEX, for payment of the
liabilities of HKSCC contracted before HKSCC ceases to be a wholly-owned subsidiary of
HKEX, and for the costs of winding up.

162 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

44. Transactions with Non-Controlling Interests

OVERVIEW
Accounting Policy
Transactions with non-controlling interests that do not result in loss of control are accounted
for as equity transactions. The difference between the fair value of any consideration paid/
received and the relevant share of the carrying value of net assets of the subsidiary acquired/
disposed of is recorded in retained earnings.

ORGANISATION
(a) Disposal of interest in a subsidiary without loss of control

In 2017, the Group entered into an agreement to sell a 9.99 per cent stake in QME to an
independent third party at a consideration of RMB25 million. After the sale, the Group’s
interest in QME dropped to 90.01 per cent. The effect of the partial disposal of QME on equity
attributable to HKEX’s shareholders is summarised as follows:

MD & A
$m

Consideration received from non-controlling interests 28

Less: carrying amount of non-controlling interests disposed of (16)

Gain on disposal credited to retained earnings (note 40) 12

(b) Subsequent to the disposal (note (a)), RMB135 million and RMB15 million were further
injected by the Group and the non-controlling interests into QME respectively as its registered

GOVERNANCE
capital in 2017 in proportion to their interests.

45. Connected Transactions and Material Related Party Transactions

(a) Connected transactions and related party transactions

Certain Directors of HKEX may be directors and/or shareholders of (i) Exchange Participants
of the Stock Exchange, Futures Exchange and the LME (Exchange Participants) and Clearing

FINANCIALS
Participants of HKSCC, HKCC, SEOCH, LME Clear and OTC Clear (Clearing Participants);
(ii) companies listed on the Stock Exchange; and (iii) Exchange Participants for buying shares
on behalf of HKSCC. Securities and derivatives contracts traded by, and fees levied on,
these Exchange Participants and Clearing Participants, fees levied on these listed companies
and fees paid to these Exchange Participants for buying shares on behalf of HKSCC are all
undertaken in the ordinary course of business of the Group on the standard terms and
conditions applicable to all other Exchange Participants, Clearing Participants, listed
companies and Exchange Participants for buying shares on behalf of HKSCC.
OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 163
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

45. Connected Transactions and Material Related Party Transactions (continued)

(b) Material related party transactions

In addition to the above and those disclosed elsewhere in these consolidated financial
statements, the Group entered into the following material related party transactions:

(i) Key management personnel compensation

2017 2016
$m $m

Salaries and other short-term employee benefits 173 157

Employee share-based compensation benefits 77 76
Retirement benefit costs 8 8

258 241

(ii) Post-retirement benefit plans

The Group has sponsored an ORSO Plan and the LME Pension Scheme as its
post-retirement benefit plans (note 8(a)).

(iii) Save as aforesaid, the Group has entered into other transactions in the ordinary course
of business with companies that are related parties but the amounts were immaterial.

46. Pledges of Assets

LME Clear receives securities, gold bullion and warrants as collateral for margins posted by its
Clearing Participants. The total fair value of this collateral was US$1,319 million
(HK$10,311 million) at 31 December 2017 (31 December 2016: US$1,781 million (HK$13,808 million)).
LME Clear is obliged to return this non-cash collateral upon request when the Clearing Participants’
collateral obligations have been substituted with cash collateral or otherwise discharged.

LME Clear also holds securities as collateral in respect of its investments in overnight triparty
reverse repurchase agreements under which it is obliged to return equivalent securities to the
counterparties at maturity of the reverse repurchase agreements. The fair value of this collateral
was US$11,462 million (HK$89,602 million) at 31 December 2017 (31 December 2016:
US$9,418 million (HK$73,022 million)).

The above non-cash collateral, which LME Clear is permitted to sell or repledge in the absence of
default by the counterparties, was not recorded on the consolidated statement of financial position
of the Group at 31 December 2017. Such non-cash collateral, together with certain financial assets
amounting to US$471 million (HK$3,686 million) at 31 December 2017 (31 December 2016:
US$430 million (HK$3,334 million)), have been repledged to LME Clear’s investment agent and
custodian banks under first floating charge and security arrangements for the settlement and
depository services they provide in respect of the collateral and investments held. The floating
charge could convert to a fixed charge in the event of contract termination, or default or insolvency
of LME Clear.

164 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

47. Capital Management

OVERVIEW
The Group’s objectives when managing capital are:

• To safeguard the Group’s ability to continue as a going concern, so that it continues to provide
returns for shareholders and benefits for other stakeholders;

• To support the Group’s stability and growth;

• To provide capital for the purpose of strengthening the Group’s risk management capability;

ORGANISATION
and

• To ensure that the Group’s regulated entities comply with their respective regulatory capital
requirements.

The Group actively and regularly reviews and manages its capital structure to ensure an optimal
capital structure and shareholder returns. The Group takes into consideration the expected capital
requirements and capital efficiency, regulatory capital requirements of its regulated entities,

MD & A
prevailing and projected profitability, projected operating cash flows, projected capital expenditures
and projected strategic investment opportunities.

The Group has a number of regulated entities that are subject to capital requirements set by the
respective regulators. The regulatory capital requirements of the Group’s subsidiaries at
31 December 2017 are summarised as follows:

Subsidiaries Regulatory Regulatory capital requirements

GOVERNANCE
authority

Stock Exchange, SFC, Hong Kong Maintain at all times net current assets funded by equity sufficient
Futures Exchange to cover each subsidiary’s projected total operating expenses for at
least the following six months (approximately $1,116 million), and
net current assets funded by equity or long-term loans from HKEX
sufficient to cover its projected total operating expenses for at
least the following twelve months (approximately $2,232 million).

FINANCIALS
HKSCC, HKCC, SFC, Hong Kong Maintain at all times liquid net assets funded by equity (ie, liquid
SEOCH, OTC Clear assets of Corporate Funds minus non-current liabilities) sufficient
to cover each subsidiary’s projected total operating expenses for at
least the following six months (approximately $522 million), and
net current assets funded by equity or long-term loans from HKEX
sufficient to cover its projected total operating expenses for at
least the following twelve months (approximately $1,049 million).

LME Financial Conduct Maintain at all times liquid financial assets amounting to at least
OTHERS

Authority, UK six months’ operating costs plus a risk based capital charge
(approximately US$58.9 million (HK$460 million)), and net capital
of at least this amount.

LME Clear Bank of England, Maintain cash or highly liquid financial instruments with minimal
UK market and credit risk, amounting to US$81.3 million (HK$636
million), plus 10 per cent minimum reporting threshold of US$8.1
million (HK$63 million) and US$20.3 million (HK$159 million)
financial resources available to set off losses in the event of
GLOSSARY

default. Capital resources must be in the form of share capital,

retained earnings and reserves, reduced by intangible assets and
retained losses.

At 31 December 2017, the Group had set aside $4,000 million (31 December 2016: $4,000 million)
of shareholders’ funds for the purpose of supporting the risk management regime of the clearing
houses in their roles as central counterparties.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 165
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

47. Capital Management (continued)

All regulated entities of the Group had adequate capital to meet their regulatory requirements at
31 December 2017 and 31 December 2016.

The Group adopts a dividend policy of providing shareholders with regular dividends with a normal
target payout ratio of 90 per cent of the Group’s profit of the year and it also offers a scrip dividend
alternative to shareholders. The consideration of share capital issued under the scrip dividend
scheme, together with the 10 per cent of the profit not declared as dividends, are retained as capital
of the Group for future use.

The Group monitors capital on the basis of its gross gearing ratio (ie, gross debt divided by adjusted
capital) and net gearing ratio (ie, net debt divided by adjusted capital). For this purpose, the Group
defines gross debt as total borrowings, net debt as total borrowings less cash and cash equivalents
of Corporate Funds, and adjusted capital as all components of equity attributable to shareholders
of HKEX other than designated reserves. The Group’s strategy is to maintain the ratios at less than
50 per cent.

At At
31 Dec 2017 31 Dec 2016
$m $m

Total borrowings 1,860 3,422

Less: cash and cash equivalents of Corporate Funds (note 19) (13,546) (9,286)

Net debt (note (a)) – –

Equity attributable to shareholders of HKEX 37,273 32,266

Less: designated reserves (822) (773)

Adjusted capital 36,451 31,493

Gross gearing ratio 5% 11%

Net gearing ratio 0% 0%

(a) Net debt is zero when the amount of cash and cash equivalents of Corporate Funds is higher
than total borrowings.

48. Financial Risk Management

The Group’s activities expose it to a variety of financial risks: market risk (including foreign
exchange risk, price risk and interest rate risk), liquidity risk and credit risk. The Group’s overall risk
management programme focuses on the unpredictability of financial markets and seeks to
minimise potential adverse effects on the Group’s performance.

(a) Market risk

Nature of risk

Market risk is the risk of loss arising from movements in observable market variables such as
foreign exchange rates, equity prices and interest rates. The Group is exposed to market risk
primarily through its financial assets and financial liabilities (including borrowings).

166 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(a) Market risk (continued)

Risk management

The Group’s investment policy is to prudently invest all funds managed by the Group in a
manner which will satisfy liquidity requirements, safeguard financial assets and manage risks
while optimising return on investments.

ORGANISATION
Investment and fund management by HKEX and the Group’s subsidiaries is governed by the
HKEX Investment Policy, Restrictions and Guidelines (Investment Guidelines), which is
approved by the Board and reviewed regularly. Investment restrictions and guidelines form an
integral part of risk control. Fund-specific restrictions and guidelines are set according to the
investment objectives of each fund (ie, Corporate Funds, Clearing House Funds, Margin Funds
and cash prepayments for A shares). Specific limits are set for each fund to control risks (eg,
permissible asset type, asset allocation, liquidity, credit requirement, counterparty

MD & A
concentration, maturity, foreign exchange exposures and interest rate risks) of the
investments.

From the fourth quarter of 2016 onwards, part of the Corporate Funds is invested in collective
investment schemes (External Portfolio) under the External Investment Guidelines (the
Investment Policy, Restrictions and Guidelines for externally-managed Corporate Funds)
approved by the Board. The guidelines include an asset allocation policy which aims to
preserve and enhance the return of the External Portfolio by investing in a diverse mix of

GOVERNANCE
asset classes whose returns are not highly correlated to each other over time to mitigate
portfolio volatility and asset class concentration risk. The guidelines also define the risk-return
parameters for the External Portfolio and restrictions to be observed, and the governance
structure on selection and monitoring of fund managers. The fund managers of the collective
investment schemes are selected based on their performance track records and areas of
expertise, and each should be financially strong and stable, and their selection are approved
by the Investment Advisory Committee as delegated by the Board. Specific risk management
limits are set for the External Portfolio (eg, permissible asset type, asset allocation, liquidity

FINANCIALS
and foreign exchange exposures).

The Investment Advisory Committee, comprised of Non-executive Directors of HKEX, advises

the Board on portfolio management and monitors the risk and performance of HKEX’s
investments. A Treasury team in the Finance Division is dedicated to the day-to-day
management and investment of the internally-managed funds and execute the subscription
for and redemption of the External Portfolio based on the selection by the Investment
Advisory Committee, and monitor its performance.
OTHERS
GLOSSARY

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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(a) Market risk (continued)

(i) Foreign exchange risk

Nature of risk

Foreign exchange risk is the risk that the value or cash flows of an asset, liability or
forecast transaction denominated in foreign currency (ie, a currency other than the
functional currency of the entity to which the transactions relate) will fluctuate because
of changes in foreign exchange rates. The functional currency of the Hong Kong and
PRC entities are HKD and Renminbi (RMB) respectively and the functional currency of
LME entities is USD. Foreign exchange risks arise mainly from the Group’s investment
and bank deposits in currencies other than HKD and USD and its GBP expenditure for
the LME entities.

Risk management

Forward foreign exchange contracts and foreign currency bank deposits may be used to
hedge the currency exposure of the Group’s non-HKD and non-USD assets and liabilities
and highly probable forecast transactions to mitigate risks arising from fluctuations in
exchange rates.

Under the Investment Guidelines, investment in non-HKD financial instruments is

subject to the following restrictions:

• Under the External Investment Guidelines, up to 50 per cent of the External

Portfolio may be invested in non-HKD or non-USD investments not hedged back
to HKD or USD.

• For internally-managed Corporate Funds, Clearing House Funds, Margin Funds and
cash prepayments for A shares, unhedged investments in currencies other than
HKD or USD must fully match the respective liabilities or forecast payments for
the funds. Unhedged investments in USD may not exceed 20 per cent of the
respective funds. Holdings in RMB are permitted if the currencies have been
received in connection with the trading, clearing, settlement or services in respect
of the Group’s RMB products (including products traded through Stock Connect).

The Group’s non-HKD borrowings by the Hong Kong entities are denominated in USD,
which is pegged against HKD, and are therefore not subject to significant foreign
currency risks.

For LME Clear, investments of the Margin Fund and Default Fund will generally be in the
currency in which cash was received.

In 2017, the LME Group designated bank balances of GBP 31 million as cash flow hedges
for hedging the foreign exchange risk of certain operating expenses from August 2017
to March 2018.

168 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(a) Market risk (continued)

(i) Foreign exchange risk (continued)

Exposure

The following table details the Group’s financial assets and financial liabilities

ORGANISATION
denominated in a currency other than the functional currency of the entity to which
they relate and the net open foreign currency positions (ie, gross positions less forward
foreign exchange contracts and other offsetting exposures (hedges)), at 31 December
presented in HKD equivalents.

At 31 Dec 2017 At 31 Dec 2016

Gross Net Gross Net
open open open open
Foreign position Hedges position position Hedges position

MD & A
currency $m $m $m $m $m $m

Financial assets 1 EUR 5,471 (5,465) 6 5,161 (5,158) 3

GBP 9,125 (8,775) 350 7,926 (7,490) 436
JPY 232 (231) 1 1,058 (1,057) 1
RMB 6,514 (6,502) 12 5,470 (5,453) 17
USD 2,847 (445) 2,402 3,401 (2,102) 1,299
Others 1 – 1 – – –

GOVERNANCE
Financial liabilites 2 EUR (5,465) 5,465 – (5,158) 5,158 –
GBP (8,942) 8,775 (167) (7,668) 7,490 (178)
JPY (231) 231 – (1,057) 1,057 –
RMB (6,505) 6,502 (3) (5,456) 5,453 (3)
USD (2,012) 445 (1,567) (5,555) 2,107 (3,448)

Total net open EUR 6 3

FINANCIALS
positions for GBP 183 258
the Group JPY 1 1
RMB 9 14
USD 835 2,149
Others 1 –

1,035 2,425

1 Financial assets comprised cash and cash equivalents, financial assets measured at fair value through profit or loss
OTHERS

(excluding collective investment schemes), financial assets measured at amortised cost, and accounts receivable and
deposits.

2 Financial liabilities comprised margin deposits, Mainland security and settlement deposits, and cash collateral from
Clearing Participants, financial liabilities at fair value through profit or loss, borrowings and accounts payable and other
liabilities.

(ii) Equity and commodity price risk

Nature of risk
GLOSSARY

The Group is exposed to equity price risk as collective investment schemes are held as
part of the External Portfolio. The movements of fair value of base and precious metals
futures and options contracts cleared through LME Clear would not have any financial
impact on the Group’s results as the assets and liabilities will move by the same amount
and fully offset each other.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 169
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(a) Market risk (continued)

(ii) Equity and commodity price risk (continued)

Risk management

The Group sets prudent investment limits and restrictions to control investment in
collective investment schemes. The Group selects fund managers after an extensive
assessment of the underlying funds, their strategy and the overall quality of the fund
managers, and the performance of the funds is monitored on a monthly basis.

(iii) Interest rate risk

Nature of risk

There are two types of interest rate risk:

• Fair value interest rate risk – the risk that the value of a financial instrument will
fluctuate because of changes in market interest rates; and

• Cash flow interest rate risk – the risk that the future cash flows of a financial
instrument will fluctuate because of changes in market interest rates.

The Group is exposed to both fair value and cash flow interest rate risks as the Group
has significant assets and liabilities (including borrowings) which are interest-bearing.

Risk management

The Group manages its interest rate risks by setting limits on the residual maturity of
the investments and on the fixed and floating rate mismatches of its assets and
liabilities.

Exposure

The following tables present the carrying value and highest and lowest contractual
interest rates of the financial assets held by the Group (excluding bank deposits held at
savings and current accounts) at 31 December:

Fixed rate financial assets Floating rate financial assets

At At At At
31 Dec 2017 31 Dec 2016 31 Dec 2017 31 Dec 2016

Carrying value ($m) 70,863 62,707 94,365 73,818

Highest contractual interest rates 3.80% 10.50% 1.93% 1.99%
Lowest contractual interest rates 1 0.00% 0.00% –4.00% –7.25%

1 The contractual interest rates for certain reverse repurchase investments denominated in GBP and Euro held by LME Clear
were below 0 per cent.

The contractual interest rates of the borrowings are disclosed in note 33 to the
consolidated financial statements.

170 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(a) Market risk (continued)

(iv) Sensitivity analysis

Investments other than collective investment schemes

The Group uses Value-at-Risk (VaR) and portfolio stress testing to identify, measure,

ORGANISATION
monitor and control foreign exchange risk and interest rate risks of the Group’s
investments other than collective investment schemes.

VaR measures the expected maximum loss over a given time interval (a holding period
of 10 trading days is used by the Group) at a given confidence level (95 per cent
confidence interval is adopted by the Group) based on historical data (one year is used
by the Group). VaR is monitored on a weekly basis and the Board sets a limit on total
VaR for the Group.

MD & A
VaR is a statistical measure of risks and has limitations associated with the assumptions
employed. The calculation is based on historical simulation and therefore vulnerable to
sudden changes in market behaviour. The use of a 10-day holding period may be
insufficient at times of severe illiquidity. Also, VaR does not necessarily reflect all aspects
of risks that affect the price of financial instruments and may underestimate real market
risk exposure. In addition, VaR does not factor in the possibility of catastrophic risks but
the use of stress testing for abnormal market conditions can mitigate this limitation.

GOVERNANCE
The VaR for each risk factor and the total VaR of the investments other than collective
investment schemes and related hedges of the Group at 31 December were as follows:

At At
31 Dec 2017 31 Dec 2016
$m $m

Foreign exchange risk 10 16

FINANCIALS
Interest rate risk 7 11
Total VaR 12 21

VaR for each risk factor is the independently derived largest potential loss due to
fluctuations solely in that risk factor. The individual VaRs did not add up to the total VaR
as there was diversification effect due to correlation amongst the risk factors.
OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 171
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(a) Market risk (continued)

(iv) Sensitivity analysis (continued)

Collective investment schemes

At 31 December, the fair value of the Group’s collective investment schemes (Funds) by
strategy employed was as follows:

At At
31 Dec 2017 31 Dec 2016
Strategy $m $m

Low Volatility Equities 2,225 1,798

Credit 644 602
Absolute Return 1,245 904
Multi-Asset Fixed Income 1,278 601
US Government Bonds and Mortgage-backed Securities 1,251 1,206

Total 6,643 5,111

Number of Funds 15 11

The Group monitors the market value sensitivity of the Funds through a high-level
simulation of the Funds’ 1-year Value at Risk (simplified 1-year VaR) using the Funds’
returns and volatilities. The simplified 1-year VaR helps to determine the potential
changes in the market values of the Funds over a 1-year period. At 31 December 2017,
the simplified 1-year VaR calculated at a 95 per cent confidence level was 0.2 per cent
(31 December 2016: 3.8 per cent), implying that the market value of the Group’s Funds
during the year ended 31 December 2017 could potentially change by approximately
$13 million (2016: $193 million). At 31 December 2017 and 31 December 2016,
the maximum exposure to loss from the Funds was equal to their carrying amounts.

The simplified 1-year VaR is computed using historical monthly returns of the Funds
with the following steps:

1. Compute blended monthly returns of the Group’s Funds using monthly historical
returns of the respective Funds, from the period January 2015 to December 2017
(2016: January 2015 to December 2016), and their corresponding portfolio
weights, assuming monthly rebalancing to the intended portfolio weights of the
respective Funds;

2. Compute the average monthly return and standard deviation of the Funds’ returns
and derive the annualised amounts; and

3. Compute the simplified 1-year VaR, at a 95 per cent confidence level, by

subtracting 1.65 times of the annualised standard deviation from the annualised
average return.

The simplified 1-year VaR is a statistical measure of the historical risks and has
limitations associated with the assumptions employed. Historical simulation assumes
that actual observed historical changes in the respective Funds’ monthly performance
reflect possible future changes. This implies that the approach is vulnerable to sudden
changes in market behaviour. In addition, it does not cover stressed market events, nor
does it represent the Group’s forecast of the Funds’ future returns.

172 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(b) Liquidity risk

Nature of risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities that are settled by delivering cash or another financial
asset, and it results from amount and maturity mismatches of assets and liabilities.

ORGANISATION
Risk management

The Group employs projected cash flow analysis to manage liquidity risk by forecasting the
amount of cash required and monitoring the working capital of the Group to ensure that all
liabilities due and known funding requirements could be met.

Investments are kept sufficiently liquid to meet operational needs and regulatory

MD & A
requirements, and possible liquidity requirements of the Clearing House Funds and Margin
Funds. The Group sets minimum levels of highly liquid assets for Corporate Funds, Clearing
House Funds and Margin Funds.

Apart from the borrowings used to fund the acquisition of the LME Group, banking facilities
have been put in place for contingency purposes. At 31 December 2017, the Group’s total
available banking facilities for its daily operations amounted to $18,963 million (31 December
2016: $18,947 million), which included $11,954 million (31 December 2016: $11,938 million)

GOVERNANCE
of committed banking facilities and $7,000 million (31 December 2016: $7,000 million) of
repurchase facilities.

The Group also put in place foreign exchange facilities for its daily clearing operations and for
the RMB Equity Trading Support Facility to support the trading of RMB stocks listed on the
Stock Exchange. At 31 December 2017, the total amount of such facilities was
RMB21,500 million (HK$25,809 million) (31 December 2016: RMB21,500 million
(HK$23,927 million)).

FINANCIALS
In addition, the Group has arranged contingency banking facilities amounting to
RMB13,000 million (HK$15,606 million) (31 December 2016: RMB13,000 million
(HK$14,468 million)) for settling payment obligations to ChinaClear should there be events
that disrupt normal settlement arrangements for Stock Connect.
OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 173
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(b) Liquidity risk (continued)

Exposure

The Group is not exposed to liquidity risk on the outstanding base and precious metals
futures and options contracts cleared through LME Clear. Accordingly, they are not included in
the analyses for financial assets and financial liabilities in the tables below.

The tables below analyse the Group’s financial assets into the relevant maturity buckets
based on the following criteria:

• Investments held under the collective investment schemes are allocated taking into
account the redemption notice periods, lock-up periods and redemption restrictions;

• the expected amounts, subject to costs to liquidate that are expected to be immaterial,
that could be realised from the investments (other than collective investment schemes),
bank deposits and cash and cash equivalents within one month to meet cash outflows
on financial liabilities if required are allocated to the up to 1 month bucket; and

• other financial assets are allocated based on their contractual maturity dates or the
expected dates of disposal.

At 31 Dec 2017
>1 month
Up to to >3 months >1 year
1 month 3 months to 1 year to 5 years >5 years Total
$m $m $m $m $m $m

Cash and cash equivalents 155,660 – – – – 155,660

Financial assets measured at fair
value through profit or loss 9,047 334 321 – – 9,702
Financial assets measured at
amortised cost 30,757 – – 9 51 30,817
Accounts receivable and deposits 1 16,420 32 29 – – 16,481

211,884 366 350 9 51 212,660

At 31 Dec 2016
>1 month
Up to to >3 months >1 year
1 month 3 months to 1 year to 5 years >5 years Total
$m $m $m $m $m $m

Cash and cash equivalents 115,723 – – – – 115,723

Financial assets measured at fair
value through profit or loss 8,448 – – – – 8,448
Financial assets measured at
amortised cost 29,093 – – 74 – 29,167
Accounts receivable and deposits 1 12,814 35 7 – – 12,856

166,078 35 7 74 – 166,194

1 Amounts excluded prepayments of $104 million (31 December 2016: $93 million).

174 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(b) Liquidity risk (continued)

Exposure (continued)

The table below analyses the Group’s financial liabilities (excluding forward foreign exchange
contracts) at 31 December into relevant maturity buckets based on their contractual maturity
dates. The amounts disclosed in the tables are the contractual undiscounted cash flows.

ORGANISATION
At 31 Dec 2017
>1 month
Up to to >3 months >1 year
1 month 3 months to 1 year to 5 years Total
$m $m $m $m $m

Margin deposits, Mainland security and settlement

deposits, and cash collateral from Clearing
Participants 157,814 – – – 157,814

MD & A
Accounts payable, accruals and other liabilities 2
16,037 11 111 – 16,159
Other financial liabilities:
Other financial liabilities of Clearing House Funds 38 – – – 38
Other financial liabilities of Corporate Funds:
Financial guarantee contract (maximum amount
guaranteed) (note 43(b)) 124 – – – 124
Participants’ contributions to Clearing House Funds 16,122 453 51 – 16,626
Borrowings:

GOVERNANCE
Notes 11 – 813 753 1,577
Written put options to non-controlling interests – – 252 88 340

Total 190,146 464 1,227 841 192,678

At 31 Dec 2016
>1 month
Up to to >3 months >1 year
1 month 3 months to 1 year to 5 years Total

FINANCIALS
$m $m $m $m $m

Margin deposits, Mainland security and settlement

deposits, and cash collateral from Clearing
Participants 126,846 – – – 126,846
Accounts payable, accruals and other liabilities 2
12,135 8 103 – 12,246
Other financial liabilities:
Other financial liabilities of Clearing House Funds 17 – – – 17
Other financial liabilities of Corporate Funds:
OTHERS

Financial guarantee contract (maximum amount

guaranteed) (note 43(b)) 111 – – – 111
Participants’ contributions to Clearing House Funds 7,815 793 48 – 8,656
Borrowings:
Bank borrowings 3 5 24 1,686 1,718
Notes 11 – 31 1,564 1,606
Written put options to non-controlling interests – – – 340 340
GLOSSARY

Total 146,938 806 206 3,590 151,540

2 Amounts excluded non-financial liabilities of $51 million (31 December 2016: $30 million).

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 175
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(b) Liquidity risk (continued)

Exposure (continued)

The table below analyses the Group’s outstanding forward foreign exchange contracts at
31 December (which include all contracts regardless of whether they had gains or losses at
the year end) that would be settled on a gross basis into relevant maturity buckets based on
their contractual maturity dates. The amounts disclosed in the table are contractual
undiscounted cash flows, which are different from the carrying amounts (ie, fair values) in the
consolidated statement of financial position.

At 31 Dec 2017 At 31 Dec 2016

>1 month >1 month
Up to to Up to to
1 month 3 months Total 1 month 3 months Total
$m $m $m $m $m $m

Forward foreign exchange contracts

– outflows – – – 1,323 201 1,524
– inflows – – – 1,328 201 1,529

(c) Credit risk

Nature of risk

The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay
amounts in full when due. It arises primarily from the Group’s investments and accounts
receivable. Impairment provisions are made for losses that have been incurred at the end of
the reporting period.

The Group is also exposed to clearing and settlement risk, as the clearing houses of the Group
act as the counterparties to eligible trades concluded on the Stock Exchange, the Futures
Exchange, the over-the-counter market and the LME through the novation of the obligations
of the buyers and sellers. HKSCC is also responsible for the good title to the securities
deposited and accepted in the CCASS depository. As a result, the Group has considerable
market risk and credit risk since the Participants’ ability to honour their obligations in respect
of their trades and securities deposited may be adversely impacted by economic conditions.
If the Participants default on their obligations on settlement or there are defects in the title of
securities deposited and accepted in the CCASS depository, the Group could be exposed to
potential risks not otherwise accounted for in these consolidated financial statements.

176 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(c) Credit risk (continued)

Risk management – Investment and accounts receivable risk

The Group limits its exposure to credit risk by rigorously selecting the counterparties
(ie, deposit-takers, bond issuers, debtors and fund managers) and by diversification.
At 31 December 2017, the investment in debt securities held by the Group (excluding those

ORGANISATION
held by the collective investment schemes) were of investment grade and had a weighted
average credit rating of Aaa (Moody) (31 December 2016: A1 (Moody)). External fund
managers are financially strong and stable and their selection are approved by the Investment
Advisory Committee as delegated by the Board. Deposits are placed only with the investment
grade banks (licensed banks and restricted licence banks regulated by the Hong Kong
Monetary Authority, and banks regulated by local banking regulators in the countries where
the Group’s subsidiaries operate). All investments are subject to a maximum concentration
limit per counterparty and investments in debt securities are subject to a minimum

MD & A
investment grade rating. The LME Group invests a significant portion of cash in reverse
repurchase investments, where high quality assets are held against such investments as
collateral.

The Group mitigates its exposure to risks relating to accounts receivable from its Participants
by requiring the Participants to meet the Group’s established financial requirements and
criteria for admission as Participants.

GOVERNANCE
Risk management – Clearing and settlement risk

The Group mitigates its exposure to clearing and settlement-related risks by requiring the
Participants to meet the Group’s established financial requirements and criteria for admission
as Participants, monitoring compliance with risk management measures such as imposing
position limits and requiring Clearing Participants to deposit margins, Mainland security and
settlement deposits, and cash collateral and contribute to the Clearing House Funds set up by
the Group’s five clearing houses. HKSCC also retains recourse against those Participants

FINANCIALS
whose securities are deposited and accepted in the CCASS depository.

Under the HKSCC Margining and Guarantee Fund arrangements, each HKSCC Clearing
Participant is allowed by HKSCC a Margin Credit of $5 million and a Dynamic Contribution
Credit of $1 million. If a Clearing Participant defaults and any loss arises, HKSCC will absorb
the default loss up to the Margin Credit and Dynamic Contribution Credit utilised by the
defaulting Clearing Participant, after deducting its collateral and Guarantee Fund
contribution kept by HKSCC. After the initial losses, HKSCC is required to absorb further
OTHERS

losses after the HKSCC Guarantee Fund reserve and the Guarantee Fund contribution
(excluding the Dynamic Contribution portion) of non-defaulting Clearing Participants are
depleted. The amount of losses borne by HKSCC will be calculated on a pro rata basis with
reference to the non-defaulting Clearing Participants’ Dynamic Contributions and Dynamic
Contribution Credits granted by HKSCC. At 31 December 2017, HKSCC has 605 Clearing
Participants (31 December 2016: 542) and the total amounts of Margin Credit and Dynamic
Contribution Credit granted to Clearing Participants amounted to $1,017 million
(31 December 2016: $865 million).
GLOSSARY

The HKSCC Margin Credit and Dynamic Contribution Credit are supported by the
$4,000 million of shareholders’ funds set aside by the HKEX Group for risk management
purpose.

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 177
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(c) Credit risk (continued)

Exposure

At 31 December, the maximum exposure to credit risk of the financial assets of the Group was
equal to their carrying amounts. The maximum exposure to credit risk of the financial
guarantee contract issued by the Group was as follows:

At 31 Dec 2017 At 31 Dec 2016

Carrying Carrying
amount in amount in
consolidated Maximum consolidated Maximum
statement of exposure statement of exposure
financial to credit financial to credit
position risk position risk
$m $m $m $m

Financial guarantee contract

Undertaking to indemnify the Collector of
Stamp Revenue (note 43(b)) (20) 124 (20) 111

Collateral held for mitigating credit risk

Certain securities, cash deposits and non-cash collateral are being held by the Group to
mitigate the Group’s exposure to credit risk. The financial effect of the collateral, which is
capped by the amount receivable from each counterparty, was as follows:

At 31 Dec 2017 At 31 Dec 2016

Carrying Carrying
amount in amount in
consolidated Collateral consolidated Collateral
statement of held for statement of held for
financial mitigating financial mitigating
position credit risk position credit risk
$m $m $m $m

Accounts receivable and deposits 1 16,481 3,424 12,856 3,536

Fair value of base and precious metals futures and
options contracts cleared through LME Clear 85,335 85,335 61,618 61,618
Reverse repurchase investments 90,608 90,608 71,270 71,270

1 Amounts excluded prepayments of $104 million (31 December 2016: $93 million).

Financial assets that were not impaired

At 31 December 2017, accounts receivable and deposits of $15,914 million (31 December
2016: $12,415 million) were neither past due nor impaired. They relate to a wide range of
customers for whom there was no recent history of default.

At 31 December 2017, the age analysis of the financial assets (which mainly relate to
receivables from Participants and listed companies) of the Group that were determined to be
not impaired according to the period past due was as follows:

At At
31 Dec 2017 31 Dec 2016
$m $m

Up to six months 567 441

178 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(c) Credit risk (continued)

Financial assets that were impaired at the end of the reporting period

At 31 December 2017, receivables of the Group amounting to $9 million (31 December 2016:
$3 million) were determined to be impaired and full provision had been made. These
receivables were outstanding for over 180 days at the end of the reporting period or

ORGANISATION
were due from companies with financial difficulties. The factors the Group considered in
determining whether the financial assets were impaired are disclosed in note 21.

(d) Fair values of financial assets and financial liabilities

(i) Financial assets and financial liabilities carried at fair value

At 31 December 2017 and 31 December 2016, no non-financial assets or liabilities were

MD & A
carried at fair values.

The following tables present the carrying value of financial assets and financial liabilities
measured at fair value according to the levels of the fair value hierarchy defined in
HKFRS 13: Fair Value Measurement, with the fair value of each financial asset and
financial liability categorised based on the lowest level of input that is significant to that
fair value measurement. The levels are defined as follows:

GOVERNANCE
• Level 1: fair values measured using quoted prices (unadjusted) in active markets
for identical assets or liabilities.

• Level 2: fair values measured using valuation techniques in which all significant
inputs other than quoted prices included within Level 1 are directly or indirectly
based on observable market data.

• Level 3: fair values measured using valuation techniques in which any significant

FINANCIALS
input is not based on observable market data.

OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 179
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(d) Fair values of financial assets and financial liabilities (continued)

(i) Financial assets and financial liabilities carried at fair value (continued)

At 31 Dec 2017 At 31 Dec 2016

Level 1 Level 2 Total Level 1 Level 2 Total
Recurring fair value measurements: $m $m $m $m $m $m

Financial assets
Financial assets measured at fair value
through profit or loss:
– collective investment schemes 1,841 4,802 6,643 2,225 2,886 5,111
– debt securities 3,059 – 3,059 3,022 301 3,323
– base and precious metals futures
and options contracts cleared
through LME Clear – 85,335 85,335 – 61,618 61,618
– forward foreign exchange contracts – – – – 14 14

4,900 90,137 95,037 5,247 64,819 70,066

Financial liabilities
Financial liabilities at fair value through
profit or loss:
– base and precious metals futures
and options contracts cleared
through LME Clear – 85,335 85,335 – 61,618 61,618
– forward foreign exchange contracts – – – – 9 9

– 85,335 85,335 – 61,627 61,627

During 2017 and 2016, there were no transfers of instruments between Level 1 and
Level 2.

Level 2 fair values of debt securities, forward foreign exchange contracts, base and
precious metals futures and options contracts and collective investment schemes have
been determined based on quotes from market makers, funds administrators or
alternative pricing sources supported by observable inputs. The most significant input
are market interest rates, market prices of metals, net asset values and latest
redemption prices or transaction prices of the respective collective investment schemes.

The Group’s policy is to recognise transfers into and out of fair value hierarchy levels as
of the date of the event or change in circumstances that caused the transfer.

180 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(d) Fair values of financial assets and financial liabilities (continued)

(ii) Fair values of financial assets and financial liabilities not reported at fair values

Summarised in the following table are the carrying amounts and fair values of financial
assets and financial liabilities not presented in the consolidated statement of financial
position at their fair values. These assets and liabilities were classified under Level 2 in

ORGANISATION
the fair value hierarchy.

At 31 Dec 2017 At 31 Dec 2016

Carrying Carrying
amount in amount in
consolidated consolidated
statement of statement of
financial Fair financial Fair
position value position value
$m $m $m $m

MD & A
Assets
Financial assets measured at amortised cost:
– other financial assets maturing
over one year 1 60 54 74 66
Liabilities
Borrowings:
– notes 2 1,533 1,537 1,519 1,542
– written put options to non-controlling

GOVERNANCE
interests 2 327 329 317 320
Financial guarantee to the Collector of
Stamp Revenue 3 20 90 20 76

1 The fair values are based on cash flows discounted using Hong Kong Government bond rates of a tenor similar to the
contractual maturity of the respective assets, adjusted by an estimated credit spread. The discount rates used ranged from
1.84 per cent to 2.56 per cent at 31 December 2017 (31 December 2016: 2.62 per cent to 3.72 per cent).

2 The fair values are based on cash flows discounted using the prevailing market interest rates for loans with similar credit

FINANCIALS
rating and similar tenor of the respective loans. The discount rates used ranged from 2.26 per cent to 2.75 per cent at
31 December 2017 (31 December 2016: 2.09 per cent to 2.95 per cent).

3 The fair values are based on the fees charged by financial institutions for granting such guarantees discounted using a
ten-year Hong Kong Government bond rate to perpetuity but capped at the maximum exposure of the financial guarantee.
The discount rate used was 1.74 per cent at 31 December 2017 (31 December 2016: 1.83 per cent).

The carrying amounts of bank borrowings with floating interest rates, short-term
receivables (eg, accounts receivable, financial assets measured at amortised cost and
cash and cash equivalents) and short-term payables (eg, accounts payable and other
OTHERS

liabilities) approximated their fair values, and accordingly no disclosure of the fair values
of these items is presented.
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 181
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(e) Offsetting financial assets and financial liabilities

Accounting Policy
Financial assets and liabilities are offset and the net amount reported in the
consolidated statement of financial position when there is a legally enforceable right to
offset the recognised amounts and there is an intention to settle on a net basis or
realise the asset and settle the liability simultaneously. The legally enforceable right
must not be contingent on future events and must be enforceable in the normal course
of business and in the event of default, insolvency or bankruptcy of the company or the
counterparty.
For base and precious metals futures and options contracts cleared through LME Clear,
the asset and liability positions of LME Clear arising through its activities as a central
counterparty are matched. Therefore, the same amounts are recorded for both assets
and liabilities with the fair value gains and losses recognised, but offset, in the
consolidated income statement.

The disclosures set out in the tables below include financial assets and financial liabilities that:

• are offset in the Group’s consolidated statement of financial position; or

• are subject to an enforceable master netting arrangement or similar agreement that

covers similar financial instruments, irrespective of whether they are offset in the
consolidated statement of financial position.

182 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(e) Offsetting financial assets and financial liabilities (continued)

(i) Financial assets and financial liabilities subject to offsetting, enforceable master netting
arrangements or similar agreements

At 31 Dec 2017
Related amounts not offset
Net

ORGANISATION
in the
Gross amount
consolidated statement
amount presented
of financial position
offset in the in the
consolidated consolidated Amounts
statement of statement of subject to
Gross financial financial master netting Cash Net
Type of financial amount position position 3 arrangements collateral amount
instruments $m $m $m $m $m $m

Financial assets:
CNS money obligations receivable 1 141,775 (129,260) 12,515 (2,042) (3,006) 7,467

MD & A
Base and precious metals futures and
options contracts cleared through
LME Clear 2 1,572,390 (1,487,055) 85,335 (43,037) (42,298) –
Other accounts receivable from
Participants, ChinaClear, information
vendors and hosting services
customers, net of provision for
impairment losses 2,888 – 2,888 (171) (203) 2,514

GOVERNANCE
Total 1,717,053 (1,616,315) 100,738 (45,250) (45,507) 9,981

Financial liabilities:
CNS money obligations payable 1 143,464 (129,260) 14,204 (2,213) – 11,991
Base and precious metals futures and
options contracts cleared through
LME Clear 2 1,572,390 (1,487,055) 85,335 (43,037) – 42,298

FINANCIALS
Total 1,715,854 (1,616,315) 99,539 (45,250) – 54,289

OTHERS
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 183
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

(e) Offsetting financial assets and financial liabilities (continued)

(i) Financial assets and financial liabilities subject to offsetting, enforceable master netting
arrangements or similar agreements (continued)

At 31 Dec 2016
Related amounts not offset
Net
in the
Gross amount
consolidated statement
amount presented
of financial position
offset in the in the
consolidated consolidated Amounts
statement of statement of subject to
Gross financial financial master netting Cash Net
Type of financial amount position position 3 arrangements collateral amount
instruments $m $m $m $m $m $m

Financial assets:
CNS money obligations receivable 1 82,814 (72,762) 10,052 (455) (3,298) 6,299
Base and precious metals futures and
options contracts cleared through
LME Clear 2 1,122,855 (1,061,237) 61,618 (38,427) (23,191) –
Other accounts receivable from
Participants, ChinaClear, information
vendors and hosting services
customers, net of provision for
impairment losses 1,353 – 1,353 – (89) 1,264

Total 1,207,022 (1,133,999) 73,023 (38,882) (26,578) 7,563

Financial liabilities:
CNS money obligations payable 1 83,077 (72,762) 10,315 (455) – 9,860
Base and precious metals futures and
options contracts cleared through
LME Clear 2 1,122,855 (1,061,237) 61,618 (38,427) – 23,191

Total 1,205,932 (1,133,999) 71,933 (38,882) – 33,051

1 HKSCC currently has a legally enforceable right to set off certain CNS money obligations receivable and payable relating to
the same Clearing Participant and it intends to settle on a net basis.

2 LME Clear has a legally enforceable right to set off open positions of certain contracts within an individual member’s
account for those contracts settling on the same date and it intends to settle on a net basis.

3 For the net amounts of CNS money obligations receivable or payable and net fair value of base and precious metals futures
and options contracts (ie, after set-off) and other accounts receivable due from customers, they do not meet the criteria for
offsetting in the consolidated statement of financial position since the right of set-off of the recognised amounts is only
enforceable following an event of default of the customers. In addition, the Group does not intend to settle the balances on
a net basis.

184 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48. Financial Risk Management (continued)

OVERVIEW
(e) Offsetting financial assets and financial liabilities (continued)

(ii) The tables below reconcile the “net amounts of financial assets and financial liabilities
presented in the consolidated statement of financial position”, as set out above, to the
“accounts receivable, prepayments and deposits”, “accounts payable, accruals and other
liabilities”, “financial assets measured at fair value through profit or loss” and “financial
liabilities at fair value through profit or loss” presented in the consolidated statement of

ORGANISATION
financial position.

Financial assets measured

Accounts receivable, at fair value
prepayments and deposits through profit or loss
At At At At
31 Dec 2017 31 Dec 2016 31 Dec 2017 31 Dec 2016
$m $m $m $m

Net amount of financial assets after

MD & A
offsetting as stated above:
– CNS money obligations receivable 12,515 10,052 – –
– Other accounts receivable from
Participants, ChinaClear, information
vendors and hosting services customers,
net of provision for impairment losses 2,888 1,353 – –
– Base and precious metals futures and
options contracts cleared through
LME Clear – – 85,335 61,618

GOVERNANCE
Financial assets not in scope of offsetting
disclosures 1,078 1,451 9,702 8,448
Prepayments 104 93 – –

Amounts presented in the consolidated

statement of financial position 16,585 12,949 95,037 70,066

Accounts payable, Financial liabilities

FINANCIALS
accruals and other at fair value
liabilities through profit or loss
At At At At
31 Dec 2017 31 Dec 2016 31 Dec 2017 31 Dec 2016
$m $m $m $m

Net amount of financial liabilities after

offsetting as stated above:
– CNS money obligations payable 14,204 10,315 – –
– Base and precious metals futures and
OTHERS

options contracts cleared through

LME Clear – – 85,335 61,618
Financial liabilities not in scope of
offsetting disclosures 1,955 1,931 – 9
Non-financial liabilities 51 30 – –

Amounts presented in the consolidated

statement of financial position 16,210 12,276 85,335 61,627
GLOSSARY

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 185
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

49. Statement of Financial Position and Reserve Movement of HKEX

Accounting Policy
In HKEX’s statement of financial position, investments in subsidiaries are stated at cost less
impairment losses. Provision for impairment in a subsidiary is made when the recoverable
amount of the subsidiary is lower than HKEX’s respective cost of investment. The results of
subsidiaries are accounted for by HKEX on the basis of dividends received and receivable.
Impairment testing of the investment in a subsidiary is required upon receiving a dividend
from that subsidiary if the dividend exceeds the total comprehensive income of the
subsidiary concerned in the period the dividend is declared or if the carrying amount of the
subsidiary in HKEX’s statement of financial position exceeds the carrying amount of the
subsidiary’s net assets including goodwill in the consolidated statement of financial position.
Written put options to non-controlling interests initially recognised at fair value are
accounted for as an investment in subsidiaries with a corresponding credit to financial
liabilities at fair value through profit or loss under other financial liabilities. Subsequent
changes in fair value of the financial liabilities are recognised in HKEX’s income statement.
Financial guarantee contracts issued by HKEX to guarantee borrowings of subsidiaries are
eliminated on consolidation.

186 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

49. Statement of Financial Position and Reserve Movement of HKEX (continued)

OVERVIEW
Statement of Financial Position of HKEX

At 31 Dec 2017 At 31 Dec 2016

Non- Non-
Current current Total Current current Total
$m $m $m $m $m $m

ASSETS

ORGANISATION
Cash and cash equivalents 5,715 – 5,715 4,357 – 4,357
Financial assets measured at fair value through
profit or loss 6,643 – 6,643 5,125 – 5,125
Financial assets measured at amortised cost 1 1 2 980 1 981
Accounts receivable, prepayments and deposits 45 21 66 633 21 654
Amounts due from subsidiaries 1,123 12,908 14,031 2,097 16,708 18,805
Interests in joint ventures – 114 114 – 100 100
Intangible assets – 129 129 – 109 109

MD & A
Fixed assets – 250 250 – 193 193
Investments in subsidiaries – 12,115 12,115 – 7,349 7,349

Total assets 13,527 25,538 39,065 13,192 24,481 37,673

LIABILITIES AND EQUITY

Liabilities
Financial liabilities at fair value through profit or loss 278 – 278 230 – 230
Accounts payable, accruals and other liabilities 389 – 389 668 – 668

GOVERNANCE
Amounts due to subsidiaries 422 – 422 1,882 – 1,882
Taxation payable 5 – 5 41 – 41
Other financial liabilities 11 – 11 11 – 11
Borrowings 782 751 1,533 – 3,105 3,105
Provisions 67 1 68 66 1 67
Deferred tax liabilities – 18 18 – 14 14

Total liabilities 1,954 770 2,724 2,898 3,120 6,018

FINANCIALS
Equity
Share capital 25,141 22,085
Shares held for Share Award Scheme (606) (599)
Employee share-based compensation reserve 222 226
Merger reserve 694 694
Retained earnings 10,890 9,249
Equity attributable to shareholders of HKEX 36,341 31,655
OTHERS

Total liabilities and equity 39,065 37,673

Net current assets 11,573 10,294

Approved by the Board of Directors on 28 February 2018

GLOSSARY

CHOW Chung Kong LI Xiaojia, Charles

Director Director

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 187
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

49. Statement of Financial Position and Reserve Movement of HKEX (continued)

(a) Reserve movement of HKEX

Employee
share-based
compensation Merger Retained
reserve reserve earnings
$m $m $m

At 1 Jan 2016 199 694 8,783

Profit attributable to shareholders – – 6,597
2015 final dividend at $2.87 per share – – (3,459)
2016 interim dividend at $2.21 per share – – (2,683)
Unclaimed HKEX dividends forfeited – – 22
Vesting of shares of Share Award Scheme (186) – (11)
Employee share-based compensation benefits 213 – –

At 31 Dec 2016 226 694 9,249

At 1 Jan 2017 226 694 9,249

Profit attributable to shareholders – – 7,255
2016 final dividend at $2.04 per share – – (2,491)
2017 interim dividend at $2.55 per share – – (3,133)
Unclaimed HKEX dividends forfeited – – 26
Vesting of shares of Share Award Scheme (224) – (16)
Employee share-based compensation benefits 220 – –

At 31 Dec 2017 222 694 10,890

188 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
SHAREHOLDER INFORMATION

Financial Calendar 2018

OVERVIEW
Announce 2017 final results 28 February For Shareholders to attend and vote at 2018 AGM
2018 AGM 25 April Latest time to lodge transfer At 4:30 pm
Ex-dividend date for final dividend 27 April documents for registration on 19 April 2018
with HKEX’s registrar
Despatch scrip dividend circular and On or about 9 May
election form Closure of HKEX’s 20 to 25 April 2018
Announce scrip share subscription price On or about 15 May Register of Members (both dates inclusive)

Despatch dividend warrants/ 1 June Record date 25 April 2018

ORGANISATION
definitive share certificates
Announce 2018 first quarter results May
Announce 2018 interim results August
Announce 2018 third quarter results November

2017 Dividends

MD & A
Interim dividend $2.55 per share For Shareholders to be entitled to 2017 final dividend
Proposed final dividend $2.85 per share Latest time to lodge transfer At 4:30 pm
Dividend payout ratio 90 per cent documents for registration on 30 April 2018
with HKEX’s registrar
Subject to Shareholders’ approval at the 2018 Closure of HKEX’s 2 to 3 May 2018
AGM of the proposed final dividend and a general Register of Members (both dates inclusive)
mandate to issue shares, the final dividend will be Record date 3 May 2018

GOVERNANCE
payable in cash with a scrip alternative where a
3 per cent discount on the subscription price will
be offered to Shareholders who elect to subscribe
for shares. The scrip dividend alternative is also
conditional upon the SFC’s granting the listing of,
and permission to deal in, new shares of HKEX to
be issued pursuant thereto. Details of the scrip
dividend alternative will be set out in a circular to

FINANCIALS
Shareholders.
Further information about HKEX’s scrip dividend
scheme and dividend history is available on the
HKEX Group website IR.

Share Information
OTHERS

HKEX shares are listed on the Stock Exchange.

Stock Codes
HKEX is currently a constituent stock of the HSI
and a number of sustainability indices as disclosed Stock Exchange 388
on the HKEX Group website CG . Reuters 0388.HK
Bloomberg 388 HK Equity
SEDOL1 6267359 HK
ISIN HK0388045442
Listing
GLOSSARY

As at 31 December 2017
– Number of issued shares 1,239,809,477 shares American Depositary Receipts

– Market capitalisation $297.3 billion Ticker Symbol HKXCY

Board lot size 100 shares CUSIP 43858F109

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 189
 SHAREHOLDER INFORMATION
SHAREHOLDER INFORMATION

HKEX share price performance vs HSI in 2017

$ HSI

260 31,000

250 30,000

29,000
240
28,000
230
27,000
220
26,000
210
25,000
200
24,000

190 23,000 Closing price of HKEX shares

180 22,000 HSI
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Shareholding Distribution as at 31 December 2017 (based on HKEX’s Register of Members)

Number of % of Number of % of HKEX 1

Size of shareholding Shareholders Shareholders shares held (’000) shares in issue

1 – 1,000 2,591 47.3 1,195 0.1

1,001 – 5,000 1,783 32.5 4,405 0.4
5,001 – 10,000 439 8.0 3,348 0.3
10,001 – 100,000 543 9.9 16,098 1.3
100,001 and above 127 2.3 1,214,763 98.0
Total 5,483 100.0 1,239,809 100.0

1 Percentage is for reference only, and may not add up to the total due to rounding.

Details about HKEX’s major Shareholder are disclosed in the Corporate Governance Report contained in
this Annual Report.

Electronic Communication
HKEX’s Registrar – Hong Kong Registrars Limited
This Annual Report is printed in English and
Chinese, and is available in the Investor Relations For corporate communications:
(Regulatory Disclosure) section of the By post: 17M Floor, Hopewell Centre
183 Queen’s Road East
HKEX Group website IR. Wan Chai, Hong Kong

Shareholders are encouraged to access HKEX’s By email: hkex.ecom@computershare.com.hk

corporate communications electronically via the For transfer of shares:

HKEX Group website to help protect the Address: Shops 1712-1716, 17th Floor
environment. Shareholders may at any time Hopewell Centre
change their choice of language or means of 183 Queen’s Road East
Wan Chai, Hong Kong
receiving HKEX’s corporate communications free
of charge by giving not less than seven days’ notice Tel: (852) 2862 8555
in writing to HKEX’s registrar. Fax: (852) 2865 0990 / (852) 2529 6087

Registration for News Alerts

Shareholders who would like to be notified when HKEX publishes its corporate communications on the
HKEXnews website can register for the News Alerts service in the Market Data section of the HKEX
Market website (www.hkex.com.hk). Further information about Shareholder communications can be
found in the Corporate Governance Report contained in this Annual Report.

Feedback on Annual Report

HKEX values feedback on this Annual Report as well as its reporting of the Group’s financial and
governance performance. Shareholders may give their comments via the online form at
www.hkexgroup.com/Investor-Relations/Regulatory-Disclosure/Regulatory-Reports or email at
ssd@hkex.com.hk.

190 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
GLOSSARY

2017 AGM AGM held on 26 April 2017 at 4:30 pm at the Exchange Auditorium in the

OVERVIEW
Exchange Exhibition Hall, One and Two Exchange Square, Central, Hong Kong
2018 AGM AGM to be held on 25 April 2018
ADT Average daily turnover value
ADV Average daily volume (in number of contracts/lots)
AGM(s) HKEX’s annual general meeting(s)
AHFT After-Hours Futures Trading
Awarded Shares Shares awarded under the Share Award Scheme
BBS Bronze Bauhinia Star
BCCL Bond Connect Company Limited

ORGANISATION
Board HKEX’s board of directors
Bond Connect A mutual bond market access programme between Hong Kong and
Mainland China, under which Northbound trading enables overseas
investors to invest in the China Interbank Bond Market, and Southbound
trading will be explored at a later stage
Cash Market HKEX’s securities related business excluding stock options
CBBCs Callable Bull/Bear Contracts
CCASS Central Clearing and Settlement System
CCP Central counterparty

MD & A
CFETS China Foreign Exchange Trade System (National Interbank Funding Center)
ChinaClear China Securities Depository and Clearing Corporation Limited
CNH Offshore RMB traded outside Mainland China
CNS Continuous Net Settlement
Corporate Governance Code and Refer to Appendix 14 to the Main Board Listing Rules
Corporate Governance Report
CP(s) Clearing Participant(s)
CSR Corporate Social Responsibility
Derivatives Market HKEX’s derivatives related business including stock options

GOVERNANCE
Director(s) HKEX’s director(s)
DWs Derivative warrants
Elected Directors Directors elected by the Shareholders at general meetings
EP(s) Exchange Participant(s)
ESG Environmental, Social and Governance
ETF(s) Exchange Traded Fund(s)
Euro The official currency of the Eurozone
Exchange or SEHK or Stock Exchange The Stock Exchange of Hong Kong Limited

FINANCIALS
FCA Financial Conduct Authority
FIC Fixed income and currency
Financial Secretary Financial Secretary of the HKSAR
Futures Exchange or HKFE Hong Kong Futures Exchange Limited
GBS Gold Bauhinia Star
GEM Formerly known as “Growth Enterprise Market”
GEM Listing Rules Rules Governing the Listing of Securities on GEM of The Stock Exchange
of Hong Kong Limited
Government HKSAR Government
OTHERS

Government Appointed Director(s) Director(s) appointed by the Financial Secretary pursuant to Section 77 of
the SFO
Group or HKEX Group HKEX and its subsidiaries
HKCC HKFE Clearing Corporation Limited
HKEX or the Company Hong Kong Exchanges and Clearing Limited
HKEX’s Articles HKEX’s Articles of Association
HKFRS(s) Hong Kong Financial Reporting Standard(s)
HKICPA Hong Kong Institute of Certified Public Accountants
HKSAR Hong Kong Special Administrative Region of the People’s Republic of China
GLOSSARY

HKSCC Hong Kong Securities Clearing Company Limited

HSCEI Hang Seng China Enterprises Index
HSI Hang Seng Index
INED(s) Independent Non-executive Director(s) of HKEX
IPO(s) Initial Public Offering(s)

HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT 191
 GLOSSARY

Iron Ore Futures TSI Iron Ore Fines 62 per cent Fe CFR China Futures
IT Information Technology
January 2003 MOU Memorandum of Understanding Governing Listing Matters between
the SFC and SEHK, dated 28 January 2003
JP Justice of the Peace
Lehman Lehman Brothers Securities Asia Limited
LCH LCH.Clearnet Group Limited
Listing Committees Listing Committee and GEM Listing Committee
Listing Rule(s) Main Board Listing Rules and GEM Listing Rules
LME The London Metal Exchange
LME Clear LME Clear Limited
LME Group HKEX Investment (UK) Limited, LMEH, the LME and LME Clear
LMEH LME Holdings Limited
LMEmercury LME Clear’s clearing system which enables its Members to view their risk
positions in real time
London Metal Mini Futures London Aluminium/Zinc/Copper/Nickel/Tin/Lead Mini Futures
Main Board Listing Rules Rules Governing the Listing of Securities on The Stock Exchange of
Hong Kong Limited
Model Code Model Code for Securities Transactions by Directors of Listed Issuers,
Appendix 10 to the Main Board Listing Rules
MSCI MSCI Inc.
Northbound Trading Hong Kong and overseas investors trading in eligible securities that are
listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange
through Stock Connect
OTC Over-the-counter
OTC Clear OTC Clearing Hong Kong Limited
PFMI “Principles for financial market infrastructures” published by the
Committee on Payment and Settlement Systems (now known as the
Committee on Payments and Market Infrastructures) and the
International Organization of Securities Commissions
QME Qianhai Mercantile Exchange Co., Ltd.
RMB Renminbi
SBS Silver Bauhinia Star
Senior Management The Group’s senior executives, and the list of Senior Management as at
the date of this Annual Report is set out in the Board of Directors and
Senior Management section of this Annual Report
SEOCH The SEHK Options Clearing House Limited
SFC Securities and Futures Commission
SFO Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
Shanghai-Hong Kong Stock Connect or A mutual market access programme that links the stock markets in
Shanghai Connect Shanghai and Hong Kong, enabling investors in Hong Kong and Mainland
China to trade and settle shares listed on the other market via the
exchange and clearing house in their home market
Shareholder(s) HKEX’s shareholder(s)
Share Award Scheme or the Scheme The Employees’ Share Award Scheme adopted by the Board on
14 September 2005 which was subsequently amended on 16 August 2006,
13 May 2010, 17 December 2013 and 17 June 2015
Shenzhen-Hong Kong Stock Connect or A mutual market access programme that links the stock markets in
Shenzhen Connect Shenzhen and Hong Kong, enabling investors in Hong Kong and Mainland
China to trade and settle shares listed on the other market via the
exchange and clearing house in their home market
Southbound Trading Mainland investors trading in eligible securities that are listed on the
Stock Exchange through Stock Connect
Stock Connect Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect
UK United Kingdom
US United States of America
US$/USD United States dollar
$/HK$/HKD Hong Kong dollar
$bn/bn Hong Kong dollar in billion/billion
$m Hong Kong dollar in million
£/GBP Pound sterling

192 HONG KONG EXCHANGES AND CLEARING LIMITED 2017 ANNUAL REPORT
 Stock Code: 388

ANNUAL REPORT 2017

ANNUAL REPORT

2017

Hong Kong Exchanges and Clearing Limited

12/F, One International Finance Centre
1 Harbour View Street, Central, Hong Kong

info@hkex.com.hk
t: +852 2522 1122 f: +852 2295 3106
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