SFC addresses risks in securities margin financing
20 August 2018 Hong Kong
Image: Shutterstock
The Securities and Futures Commission has launched a two-month consultation on proposed guidelines.
The SFC expects the guidelines to clarify, codify and standardise the risk management practices for securities margin financing (SMF).
The proposed guidelines provide qualitative guidance as well as quantitative benchmarks for margin lending policies and key risk controls to prevent SMF brokers from expanding margin loans beyond their financial capability.
Key proposals include requiring SMF brokers to put in place prudent controls to prevent excessive leverage and over concentration both in terms of securities collateral and individual margin clients.
Brokers would also be required to set and enforce specific policies for margin calls and conduct stress tests at least monthly.
In addition, the proposed guidelines set out clearer guidance for haircuts for securities acceptable as collateral.
The consultation follows a review the SFC conducted last year which showed that brokers’ margin loans increased ninefold between 2006 and 2017.
Julia Leung, deputy CEO and executive director of intermediaries at the SFC, said: "The rapid growth in total margin loans coupled with a deterioration in the quality of loan collateral in the past decade is very worrying.”
She added: “The proposed guidelines aim to standardise the risk management practices for margin lending and improve margin brokers’ resilience to stock market volatility."
The SFC expects the guidelines to clarify, codify and standardise the risk management practices for securities margin financing (SMF).
The proposed guidelines provide qualitative guidance as well as quantitative benchmarks for margin lending policies and key risk controls to prevent SMF brokers from expanding margin loans beyond their financial capability.
Key proposals include requiring SMF brokers to put in place prudent controls to prevent excessive leverage and over concentration both in terms of securities collateral and individual margin clients.
Brokers would also be required to set and enforce specific policies for margin calls and conduct stress tests at least monthly.
In addition, the proposed guidelines set out clearer guidance for haircuts for securities acceptable as collateral.
The consultation follows a review the SFC conducted last year which showed that brokers’ margin loans increased ninefold between 2006 and 2017.
Julia Leung, deputy CEO and executive director of intermediaries at the SFC, said: "The rapid growth in total margin loans coupled with a deterioration in the quality of loan collateral in the past decade is very worrying.”
She added: “The proposed guidelines aim to standardise the risk management practices for margin lending and improve margin brokers’ resilience to stock market volatility."
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
