Major Financial Centers Research Articles

Final Report of the Securities Law Subcommittee of the Task Force on Extraterritorial Jurisdiction of the International Bar Association

The International Bar Association's Securities Law Subcommittee of the Task Force on Extraterritorial Jurisdiction, comprised of a panel of academics, practitioners, senior in-house counsel at financial institutions and former regulators, has produced this report examining the need for reform of the regulation of the global securities markets. The report reviews approaches to addressing problems such as mutual recognition, regulatory convergence and disparities in enforcement intensity and makes a series of recommendations. The Subcommittee urges reform of domestic regulatory systems with a view towards its international impact and argues that such reform should be an urgent priority for legislative and regulatory bodies in major financial centers. (Full list of Subcommittee members located in the text of the report.)

Beyond greed, fear and the iron curtain

We examine 13 of the new markets of Eastern Europe from the time of their inception to the end of 2001. In six of those markets – Hungary, Poland, the Czech Republic, Slovenia, Russia and Estonia – we find behaviour consistent with investors following ‘quasi-rational’ strategies in the years following market inception. The results are robust to the suggestion that they are driven by market microstructure. The heuristically driven price behaviour diminishes as these markets mature and is replaced by an increasing association with market movements in major financial centres. We suggest that we have captured the way investors in new markets learn to invest.

Industrialización, desarrollo financiero y oferta monetaria en Barcelona a mediados del siglo XIX

The article deals with the need, inherent in any process of industrialization, to increase money supply in order to avoid deflationary tensions. We examine the case of a major financial and commercial centre: Barcelona in the mid-nineteenth century. The paper specifies the volume of different types of fiat money in circulation (bank notes, “validated” cheques, internal pay orders, short-term bonds…) and their characteristics as means of payment. The aim of the study is to show that, in a context of “free banking” without legal tender of the paper money, there was an automatic process towards a balance between supply and demand for money and that any possible oversupply was eliminated through a “crowding out” effect. In such systems, money-supply growth seems have not significant effects on prices, but instead, sudden contractions of money supply did have intense upward impacts on interest rate.

International Perspectives

Variations in disease patterns have been observed frequently in different geographic locations, in particular, between Asian and western countries. These differences can be due to dissimilarities in genetic composition or the influence of environmental, cultural, and socioeconomic factors. Hong Kong is an important gateway between mainland China and the western world. It is situated in the Guangdong province of Southeastern China and is home to 7.2 million people, who live in a very densely populated area of 1,071 square kilometers. It consists of the Hong Kong Island, Kowloon Peninsula, and New Territories. Approximately 98% of the population is ethnic Chinese, with inhabitants originating from southern provinces of China. Hong Kong was a British colony for 155 years until sovereignty was returned to China on July 1, 1997, under a governing structure of “One country, two systems.” Such historic factors have paved the way for a unique mixing of eastern and western cultures in Hong Kong. For example, traditional Chinese medicine (TCM), although not the mainstream health-care system recognized by the British Hong Kong Government, is widely practiced in the territory. Despite prosperity in past decades, Hong Kong still is perceived commonly by westerners as a “developing” city, implying that it is rather “backward and poor.” Hong Kong was, indeed, a small fishing village in the 19th century but has evolved since into one of the premier maritime hubs and metropolitan cities. In the past 10 years, shipping followed the manufacturing industry up the Pearl River Delta into mainland China during the jittery pre-handover period in the 1990s. Today, Hong Kong is a major financial center and often referred to as Asia's New York City. (1) In the past decade, market capitalization on the Hong Kong Stock Exchange has increased fivefold to just under $2 trillion, approximately one sixth the size …

International Financial Remoteness and Macroeconomic Volatility

This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for domestic financial depth, political institutions, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.

Perfluorinated compounds in the Pearl River and Yangtze River of China

A total of 14 perfluorinated compounds (PFCs) were quantified in river water samples collected from tributaries of the Pearl River (Guangzhou Province, south China) and the Yangtze River (central China). Among the PFCs analyzed, perfluorooctane sulfonate (PFOS) and perfluorooctanoic acid (PFOA) were the two compounds with the highest concentrations. PFOS concentrations ranged from 0.90 to 99 ng/l and <0.01–14 ng/l in samples from the Pearl River and Yangtze River, respectively; whereas those for PFOA ranged from 0.85 to 13 ng/l and 2.0–260 ng/l. Lower concentrations were measured for perfluorobutane sulfonate (PFBS), perfluorohexane sulfonate (PFHxS), perfluorooctanesulfoamide (PFOSA), perfluorohexanoic acid (PFHxA), perfluoroheptanoic acid (PFHpA), perfluorononaoic acid (PFNA), perfluorodecanoic acid (PFDA), and perfluoroundecanoic acid (PFUnDA). Concentrations of several perfluorocarboxylic acids, including perfluorododecanoic acid (PFDoDA), perfluorotetradecanoic acid (PFTeDA), perfluorohexadecanoic acid (PFHxDA) and perfluorooctadecanoic acid (PFOcDA) were lower than the limits of quantification in all the samples analyzed. The highest concentrations of most PFCs were observed in water samples from the Yangtze River near Shanghai, the major industrial and financial centre in China. In addition, sampling locations in the lower reaches of the Yangtze River with a reduced flow rate might serve as a final sink for contaminants from the upstream river runoffs. Generally, PFOS was the dominant PFC found in samples from the Pearl River, while PFOA was the predominant PFC in water from the Yangtze River. Specifically, a considerable amount of PFBS (22.9–26.1% of total PFC analyzed) was measured in water collected near Nanjing, which indicates the presence of potential sources of PFBS in this part of China. Completely different PFC composition profiles were observed for samples from the Pearl River and the Yangtze River. This indicates the presence of dissimilar sources in these two regions.

Commentary: Insights into planning in three East-Asian cities

The three essays under review provide interesting insights into planning praetiees in three East-Asian cities, two of which are capital cities (Beijing, Taipei) and one of which, the Hong Kong Special Administrative Region (SAR), is China's window to the world. In this brief commentary, I will focus on each city in turn, before concluding with an overall assessment of the state of planning in one of the most rapidly changing regions in Asia. Mee Kam Ng's case study is of the politics of waterfront planning in the SAR. The issue at hand is land reclamation along Hong Kong Island's northern edge facing Kowloon. Those who have visited there will remember it as a fascinating, densely built-up area, a district of spectacular architecture and great vibrancy. As a result of encroaching land uses on artificially reclaimed land, Victoria Harbour has shrunk by 60 per cent some say to the scale of a river - as this quasi city-state assumes its new role as the major financial and service centre in the South China region. Hong Kong's administrative status has allowed a more open, democratic society to evolve than is found on China's mainland. In 1995, two years before reunification, a non-governmental organization, the Society for the Protection of the Harbour Ltd, was formed to oppose further reclamation in the harbour area, and a Private Bill was introduced and passed in the Legislative Council (LegCo), further amended in 1999, that declared Victoria Harbour 'a special public asset and a natural heritage of Hong Kong people', concluding that, for this reason, 'there shall be a presumption against reclamation in the harbour'. When the planning bureaucracy nevertheless proceeded with plans for further landfills in the Central and VVanchai foreshore of Hong Kong Island, a law suit was brought that resulted in a clear judgment against the government, to the effect 'that reclamation cannot be justified unless it serves an overriding public need that is both compelling and present and cannot be accommodated by a reasonable alternative'. As a result, the plans for Wan Chai and other areas were sent back to the drawing board. Ng's essay relates the multi-stakeholder process that ensued, involving the Harbourfront Enhancement Committee (HEC). What would normally have been simply an engineering review of reclamation plans, looking for feasible alternatives that might require less encroachment upon the harbour while still accommodating bureaucratie priorities, turned into a drawn-out visioning process that included other 'imaginaries', with special attention to their impacts on local neighbourhoods. Alas, the HEC's powers, being only advisory, its recommendations were not mandatory upon the government. Ng concludes her study with thoughts on what she calls Hong Kong's two ruling rationalities the bureaucratic rationality of the Executive-led government and a formative rationality that 'comes from emerging political communities'. These two rationalities lead to very different visions of world-city formation. The first single mindedly pursues the goal of efficient economic growth, while the second seeks to promote livability and ecological sustainability as constraints on economic growth. Originating within civil society, the latter vision encompasses a greater variety of values than the first. Even so, the bureaucratic-corporate nexus remains dominant in Hong Kong and has so far failed to take the second rationality on board. Ng concludes her paper with the sage observation that the HEC experiment is a valuable one but still invites questions about the legitimacy and representativeness of the process and exposes the limits of communicative planning in a mode of governance with skewed power relationships. The story, of course, continues and, as stories are prone to do, may hold surprising twists and turns in the future. Chia-Huang Wang's paper presents us with a model for the study of world-city formation, using Taipci as its focus. …

Employing generalized audit software in the financial services sector

PurposeComputer assisted audit techniques (CAATs) encompass a range of computerized techniques that internal and external auditors use to facilitate their audit objectives. One of the most important CAATs is generalized audit software (GAS), which is a class of packaged software that allows auditors to interrogate a variety of databases, application software and other sources and then conduct analyzes and audit routines on the extracted or live data. This study seeks to evaluate the nature and extent of the utilization of CAATs in financial institutions. In particular, the study establishes the extent and nature of use of GAS by bank internal auditors and their external auditors. The study is conducted with large local and international commercial banks in Singapore, a major financial center. Given the limited research on GAS in general and in the financial services sector in particular, the study uses exploratory qualitative research.Design/methodology/approachQualitative research employing depth interviews with internal and external auditors of financial institutions.FindingThe research finds that the extent and range of use of GAS varies widely between the institutions in the sample. Internal auditors see GAS primarily as a tool for special investigations rather than as a foundation for their regular audit work. External auditors make no use of GAS, citing the inapplicability of this class of tool to the nature of testing the financial statement assertions or the extent or quality of computerized internal controls maintained by the bank.Research limitations/implicationsThis is a small sample study. While the data are rich, the findings cannot necessarily be extrapolated to broader populations.Practical implicationsThis study provides guidance on the role that CAATs play in the audit process of financial institutions that is relevant for the audit community.Originality/valueThis is the first in‐depth study of the application of CAATs to financial institutions.

Domestic Fx-Linked Debt and a Currency's Random Walk Down Sao Paulo

Since the seminal contribution by Meese and Rogoff (1983), it is a known stylized fact that hard currencies' short-run movements can be best forecast by a random walk rather than by any model based on macro fundamentals. Emerging market currencies show features that depart significantly from those presented by hard currencies. Besides they are more volatile, official intervention is more intense and more frequent than in mature markets. This working paper asks the question on how a currency walks in Sao Paulo, Brazil's major financial centre. Specifically, it assesses the influence of currency-linked, domestic debt, on the short- and medium-term ride of the Brazilian real (BRL/USD). It finds that there is a long-term relationship between the currency price and the amount outstanding of that sort of debt, especially in the floating fx regime. In the administered fx regime, domestic fx-linked debt was more neutral and may have been an effective policy instrument.

Convergence of interest rates around the Pacific Rim

This article applies the panel data unit root tests provided by Im, Pesaran and Shin (Discussion paper, 1997) to examine the interest rate convergence of small-open Asian countries with major financial centres. With monthly data from 1988:1 to 1997:6, it was found that the nominal interest rates of these countries converge to the US rates rather than to Japan's. This finding is consistent with the view that the monetary authorities of non-Japan Asian economies pegged their exchange rates overwhelmingly to the dollar rather than the yen before the financial crisis of 1997.

Investment analysts’ usage and perceived usefulness of corporate annual reports

This paper reports a study of the perceptions and beliefs of external users (investment analysts) of corporate annual reports in one of major international financial centres – Hong Kong. It was found that analyst users (1) view annual reports as having high information value particularly in terms of relevancy, (2) have a relatively high usage of annual reports and read the income statement and balance sheet most often, (3) consider the most important voluntary disclosure items to be discussions of factors affecting future financial results, future prospects of the company, main product market share, acquisition and disposal activities, and China business review, and (4) feel annual reports are somewhat useful, but the amount of information disclosed remains inadequate. Only a small percentage of users felt that the current disclosure requirements are either effective or very effective in serving investors’ needs and that much improvement is still needed. The implications of these findings for management, investors, regulatory bodies and researchers are discussed.

Preparers' perceptions of corporate reporting and disclosures

This paper reports a study of the perceptions of preparers of corporate annual reports (mainly chief finance officers (CFOs)) on the usefulness and concerns of corporate disclosures in Asia's major international financial centre — Hong Kong. From a survey of 98 preparers, it was found that preparers are more inclined to satisfy the information needs of external institutional finance suppliers than those of individual investors and financial analysts or stockbrokers. CFOs and CEOs have more influence on corporate disclosure policies and decisions than board chairmen and company directors. The stock exchange, the Company Ordinance and the local accounting standards setter are more influential external bodies than external auditors and the Securities and Futures Commission. Although only a small percentage of preparers felt that the current disclosures were either effective or very effective in serving investors' needs, only a small number of them agreed to have more financial reporting and disclosure regulations. To close the communications gap and improve market efficiency, they suggested instead an improvement in investor relationships, developing more industry-specific disclosure guidelines and more voluntary disclosures. Implications of these findings are discussed.

The Corporate (Re) Construction of a New South City: Great Banks Need Great Cities

Charlotte's emergence as a major financial center has triggered the rapid and comprehensive revitalization of its urban core. The city's sleepy Southern image and sprawling suburban development pattern made it difficult for expansionary corporate interests to attract the human capital necessary for growth. In response to this challenge local banks and government formed a unique partnership that facilitated the remaking of Charlotte's city center in order to create a new urban image more palatable to financial sector workers. In Charlotte, leading and extended corporate involvement, an absence of conventional gentrifying pioneers, incumbent resident upgrading, the production of gentrifiable space and unconventional profit motives all combine to challenge theories of revitalization developed in other systematic or regional contexts. Beyond providing an overview of Charlotte's under-researched and inadequately understood restructuring processes, this paper contributes to a broadened understanding of the New South and addresses a level and region of the urban hierarchy that has long been overlooked.

The Rationale for a Single National Financial Services Regulator

The single statutory regulator for financial services which is being established in the UK (the Financial Services Authority, FSA) will be the broadest financial regulator in the world, combining prudential, conduct of business and market conduct regulation across the full range of financial services, including banking, securities, investment management and insurance. A few other countries already have single financial services regulators, but the FSA will be the first in a major international financial centre. This paper considers the rationale for establishing a single national financial services regulator. The institutional structure of financial services regulation is important because of the impact of the efficiency and effectiveness of this regulation on the direct and indirect costs of regulation and on the success of regulation in meeting its statutory objectives. To what extent should the structure of financial regulation be driven by the functions which financial services firms undertake, reflecting market developments in the financial services industry? Is there a first-best institutional arrangement which is independent of these market developments, arising perhaps from economies of scale and scope in undertaking financial regulation, or from some underlying logic linking the structure of regulation with the objectives of regulation or with the institutional arrangements for monetary policy and for addressing systemic risk? Are there also implications here for the structure of regulation internationally, not just within national borders? Although the structure of financial regulation must depend in part on what is being regulated and why it is being regulated, this paper takes as given the rationale for financial services regulation as set out in Davies (1998a), Goodhart et al (1998) and Llewellyn (1999). This is not to deny the crucial importance of determining the rationale for intervention - and indeed the key interrelationships between this rationale and the choice of the tools of supervision - but this is too large a subject to cover within this paper.

Examining the UK's Experience in Adopting the Single Financial Regulator Model

In major markets around the world there has been a growing trend towards unification of responsibility for the regulation of banks, securities markets and insurance companies. As the first major international financial centre to adopt the single regulator model, the UK changes have attracted particular international attention. This paper makes no claim for the superiority of the single regulator model but looks at what other countries may learn from the UK's experience in adopting the structure. The extent of fundamental legal change that accompanied the UK's shift to the single regulator model stands out: unlike some other countries, which have a single regulatory agency but separate sectorally-divided legal regimes, the UK has sought to match the unitary nature of its institutional arrangements for financial regulation with an integrated legal framework. This paper sets out the historical background to the switch to the single financial regulator model in the UK and identifies key events in the transitional period between the announcement of the intended switch and the coming into effect of the new unitary regime in December 2001. It then examines some of the theoretical arguments about the suitability, efficiency, effectiveness and accountability of the single regulator model against the background of recent UK experience and considers the likely robustness of its ambitious tailor-made legislative framework that was expressly designed to help secure potential benefits, and avoid potential drawbacks, presented by the single regulator model.

Norfolk Island and Its Tax Haven

The first Pacific Islands offshore financial centre was born in 1966 on Norfolk Island. This paper analyses the historical trajectory of Norfolk Island’s tax haven in terms of its dialectical tensions with the Australian federal government — tensions between self‐determination and subordination which emerge from Norfolk’s anomalous status as a self‐governing external territory of Australia. Promoters of Norfolk Island’s tax haven have seen its potential to become a major global offshore financial centre blocked by the Australian federal government. Yet, at major critical junctures (in 1976, 1991 and 2000) the Australian federal campaigns that threatened Norfolk’s residential tax haven disintegrated in the face of concerted local opposition, although the danger has never entirely disappeared. The island’s political economy and external relations are likely to remain inextricably bound to its tax haven.

Globalization, Regionalism, and Urban Restructuring

Global-city scholars have drawn attention to urban development in places such as New York, London, and Miami, claiming that some features of that development respond more to global economic conditions than to local or national ones. Focusing on cities that are major international financial centers, researchers have paid less attention to the specifically global aspects of economic change in cities that are not financial centers. The author discusses the patterns of economic globalization in Philadelphia, using the city as a case study of how globalization plays out in a less prominent city. Tracing the simultaneous rise in the 1980s and 1990s of foreign direct investment and an organization of corporate elites dedicated to promoting a political strategy of regionalism, the author argues that globalization has had both economic and political ramifications for the city and the surrounding region.

Taxation of Financial Intermediation Activities in Hong Kong

This paper discusses issues related to the taxation of financial intermediation in Hong Kong in the context of Hong Kong's position as a major regional financial centre. It first provides some background analysis as to the definition of financial intermediation and identification of the providers of financial services. This is then followed by a discussion of the principles of taxation applicable to financial intermediation, including a comparison of income taxes to consumption taxes. Some specific issues relating to taxation of financial intermediation, such as income and cost recognition, are also canvassed. The paper continues with a description of the current taxation of financial activities in Hong Kong, and a comparison of taxation of these activities in Singapore, Malaysia and Taiwan. The paper then concludes with a discussion of tax policy options for Hong Kong, particularly with respect to income taxation of financial income, and with some reference to Stamp Duty and to VAT as it potentially could affect financial services.

The Determinants of Cross-Border Equity Flows

We apply a new approach to a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information heavily determines the pattern of international transactions. Our model integrates elements of the finance literature on portfolio composition and the international macroeconomics and asset trade literature. Gross asset flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. The resulting augmented gravity' equation has equity market capitalisation representing market size and distance proxying some informational asymmetries, as well as a variable representing openness of each economy. But other variables explicitly represent information transmission (telephone call traffic and multinational bank branches), an information asymmetry between domestic and foreign investors (degree of insider trading), and the efficiency of transactions ( financial market sophistication'). This equation accounts for almost 70% of the variance of the transaction flows. Dummy variables (adjacency, language, currency or trade bloc, and a major financial centre' effect) do not improve the results, nor does a variable representing destination country stock market returns. The key role of informational asymmetries is confirmed. Our information transmission variables also substantially improve standard gravity equations for trade in goods.

The Development of Arbitration in International Financial Transactions

IT HAS been said that bankers prefer judges to arbitrators.1 This is supported by the fact that international financial transactions are seldom the subject matter of international arbitration procedures. In recent years, however, it appears that the international financial community has been getting more and more accustomed to arbitration. With regard to financial matters, an international discussion has developed on the suitability and advisability of arbitration in this field.2 In the following article, arbitration will be briefly described and compared with the contrasting concept of judicial procedure, on the one hand, and the concept of other alternative dispute resolution (ADR) mechanisms on the other ( see II). Subsequently, arbitration will be discussed in its application to various types of conflicts in international financial transactions ( see III). Some procedural aspects of arbitration in financial matters will then briefly be discussed ( see IV) and some general conclusions drawn ( see V). ### (a) Court Procedures in Financial Matters Many contracts for international credit and bond issues contain forum clauses.3 In these clauses, banks prefer their home jurisdiction or a major financial centre such as London, New York or Frankfurt. If the clause is wisely drafted, it also reserves the right to pursue the borrower before other competent courts with jurisdiction over areas where the borrower's assets are located.4 The preference for forum clauses has sometimes been explained by the conservatism of the banking industry and its prevailing ‘herd mentality’.5 In other segments of the financial services industry, parties prefer arbitration clauses. This can be observed in project Financing and, more recently, in securities brokerage.6 In international lending, sovereign borrowers sometimes reject forum clauses that lead to another State's courts. One advantage of state court decisions is their binding effect backed by the authority of a state's jurisdiction. Another advantage lies in the fact that such …