Deacons
  November 30, 2004 - Hong Kong

Hong Kong: Tightening Securities Margin Financing in Hong Kong

In order to reduce the risks imposed on investors and the market by the excessive re-pledging and imprudent lending of securities margin financing (SMF) providers, the Securities and Futures Commission (SFC) has issued a Consultation Paper on the Proposed Measures to Address Risks Arising from Securities Margin Financing. The paper proposes the following two main methods to reduce the risks arising from excessive pooling and re-pledging of margin clients’ collateral: • A limit fixed between 130% and 150% per firm be imposed on the amount of client collateral that an SMF provider can re-pledge to secure bank loans on an aggregate basis; and • The haircut percentage rates in the Financial Resources Rules be adjusted so that client collateral may be more realistically reflected in the business capital of the SMF provider. It should be noted that the proposed changes to the haircut percentage rates extends well beyond listed warrants and “illiquid collateral” which are regarded as producing higher risks in margin financing. The existing haircut percentage rates for shares listed on a recognised stock market are also proposed to be increased so that generally less margin client receivables may be recognised as part of an SMF provider’s liquid assets. It is believed that this will help curb lending practices of SMF providers. Apart from the two methods mentioned above, the paper also proposes that the current grace period governing cash client receivables be reduced from five business days to two business days; and a mandatory written notice be given to margin clients to invite them to read the risk disclosure statement regarding the provision of authority to re-pledge securities collateral, and to inform them of their rights to close their margin trading accounts and change to cash accounts when margin trading facilities are no longer needed. More vigorous notification requirements are also proposed, so that an SMF provider would be compelled to notify the SFC when, for a continuous period of two weeks, • the aggregate outstanding margin loans receivable from its top 20 margin clients that are secured against “illiquid collateral” have exceeded 50% of the sum of its shareholders’ funds and approved subordinated loans (if any); or • it has utilised 80% or more of its available credit lines. The SFC has specifically asked for comments on, among other things: • the most appropriate level of re-pledging limit; • whether the proposed haircut percentage rates are appropriate; • the length of the transitional period for existing firms to comply with the proposed changes. Although the proposed changes do not prohibit re-pledging of the assets of clients who are not indebted to the SMF provider, the SFC is resolute that such a prohibition is forthcoming and will be enforced when Hong Kong has the appropriate infrastructure for implementation.


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