On 19 October 1987, following three days of decline in the New York stock market, the Hong Kong market dropped 10.5 per cent after a rise of 89 per cent in the previous 12 months. October 19 was Black Monday for New York, which triggered a worldwide stock crash. In US dollars terms, eight global stock markets declined by 20 to 29 per cent, three by 30 to 39 per cent, and three (Hong Kong, Australia and Singapore) by more than 40 per cent. The total losses were estimated at $1.7 trillion or just under 10 per cent of world GDP in 1987. The following Tuesday, the Chairman of the Stock Exchange of Hong Kong (SEHK) informed the Financial Secretary that the SEHK would suspend trading for the rest of the week, with the Hong Kong Futures Exchange (HKFE) following suit.

There was fear of panic selling, disorderly markets and inability to settle as clients were not meeting their commitments. The global meltdown was halted by the Fed stepping in to provide liquidity, since everyone remembered the October 1929 Great Crash, which marked the beginning of the Great Depression of the 1930s. In Hong Kong, $4 billion worth of liquidity loans were provided, half by the Exchange Fund and balance by the leading banks. On 16 November 1987, the Governor appointed the Securities Review Committee (SRC) to review the constitution, management and operations of the two Exchanges and their regulators. The SRC Chairman was Ian Hay Davison, who was formerly Managing Partner at Arthur Andersen, the leading US/UK firm of chartered accountants, also Chief Executive of Lloyds, the London insurance market.

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The people who participated in the Hay Davison Report included a who’s who of Hong Kong and international finance, such as Philip Tose, a member of the SRC and later of Peregrine fame, Paul Tucker, seconded from the Bank of England who rose to become Deputy Governor, and Carrie Lam, later Chief Executive of Hong Kong SAR. The Davison Report essentially concluded that “the concept of selfregulation and market self-discipline had failed to develop in Hong Kong. What is equally unfortunate is that, faced with this, the supervisory bodies charged with overseeing the markets had lost effective control.” It recommended the establishment of an independent securities market regulator, which became the Securities and Futures Commission, established in May 1989, celebrating its 35th anniversary this year.

Since the 1987 crash, financial crises seemed to repeat every 10 years, with the Asian financial crisis occurring in 1997/98 and the US subprime crisis, a global financial crisis in 2007/2008. Each financial crisis ended with massive central bank intervention and regulatory reform, but the financial markets kept becoming more complex, interconnected and entangled. The 10-year crisis pattern was somewhat broken when no major financial crisis happened in 2018, mainly because central banks have learned to step in to provide massive liquidity through quantitative easing (QE) or balance sheet expansion. Stock markets, as well as real estate markets, strongly correlated with interest rates, affect overall economic confidence.

At the end of 2022, stock market capitalization was $98.6 trillion or 21 per cent of total global financial institution assets, equivalent to 97 per cent of 2022 world GDP. Curiously, in 1987, the SEHK market cap (US$54 billion) was already 106 per cent of Hong Kong GDP. It was in recognition of the interconnectedness of stock and financial markets that the SEHK, HKFE and Hong Kong Clearing were merged into the Hong Kong Exchanges (HKEx) after their demutualization and listing in March and June 2000 respectively. Since then, the landscape of global financial markets was transformed profoundly, as turnover in volume, value and speed rose with the addition of new derivatives and new technology. As exchange traded funds (ETFs) reach market value of $14 trillion and cyber-currencies are now valued at $2.2 trillion, new tech-driven market makers like Jane Street and Citadel Securities, which trade across multiple markets, are rivalling established investment banks in market power and profitability, as reported in the Financial Times.

In 2021, a US House Finance Committee expert review claimed that one single market maker could trade “approximately 26 per cent of U.S. equities volume” and “executes approximately 47 per cent of all U.S.-listed retail volume, and acts as a specialist or market-maker with respect to 99 per cent of traded volume in 3,000 U.S.-listed options names.” In China, the joint announcement by the heads of the People’s Bank of China (PBoC), the National Financial Regulatory Authority (NFRA) and China Securities Regulatory Commission (CSRC), which preceded the stock market run-up in Hong Kong and Mainland stock markets, showed how the authorities understand that banking, insurance, fund management, securities markets and real estate are deeply interrelated.

On 10 October 2024, the PBoC announced the creation of a RMB500 billion “Securities, Funds and Insurance Companies Swap Facility (SFISF)” to support qualified securities, funds and insurance companies to use bonds, stock ETFs, CSI 300 constituent stocks and other assets as collateral to exchange for high-grade liquid assets such as treasury bonds and central bank bills from the People’s Bank of China. Financial markets are complex eco-systems because they are deeply entangled with each other, with foreign markets influencing domestic markets and vice-versa. When the rise of deep technology, AI, demographics, geopolitical rivalries and natural disasters and events are added to this mix, the need to understand what is happening, act fast and address key structural issues becomes more important than ever.

The legacy of silo’ed, top-down bureaucracies and specialist agencies to manage deeply entangled financial institutions all encroaching in each other’s markets is no longer adequate to cope with the emergence of new products, markets and institutions that arbitrage new regulations faster than lawmakers can manage. Few can understand the complexity of market products or their rules and regulations. There is a bitter lesson from financial crash history. If you don’t reform early enough, financial crises force you to reform. It’s not just the instant market volatility that matters, there are deep structural forces at work which we need to understand, sometimes beyond the powers of any single national regulator. Surviving such complexity needs the humility to listen to how markets are changing by the minute.

(The writer is former Chairman of the Hong Kong Securities and Futures Commission. The views expressed are personal.)