SFC concludes guidelines for securities margin financing activities
05 April 2019 Hong Kong
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Hong Kong’s Securities Futures and Commission (SFC) has finalised their consultation conclusions on the proposed guidelines for securities margin financing activities.
The majority of respondents agreed that securities margin financing brokers should control their total margin loans and limit the total amount to a certain multiple of their capital. Most respondents suggested a multiple of five.
The two-month consultation was launched from August to October last year and invited public comments on proposed guidelines for securities margin financing activities.
SFC noted that the guidelines aim to clarify, codify and standardise the risk management practices expected of brokers conducting securities margin financing activities.
Key proposals include requiring securities margin financing brokers to put in place prudent controls to prevent excessive leverage and over concentration both in terms of securities collateral and individual margin clients.
Some respondents suggested that factors, such as the client’s financial background and the quality of the underlying collateral, should also be taken into consideration in formulating total margin loans controls.
Meanwhile, a few respondents made suggestions on loans to clients for the subscription of securities in initial public offerings prior to the commencement of trading of the securities on the exchange on which they are listed.
They proposed that they should not be treated as margin loans for the purposes of the guidelines.
SFC maintains the view that SMF brokers should control their total margin loans based on the size of their capital, given that high leverage may pose significant financial risks to them if securities margin financing risks are not properly managed.
In the worst case scenario, the interests of clients may be threatened if an SMF broker experiences a liquidity squeeze or becomes insolvent, SFC added.
Additionally, the SFC considers that a maximum total margin loans-to-capital multiple of five is acceptable.
This is provided that the securities margin financing broker complies with all other applicable provisions in the guidelines and has high-quality margin loan portfolio.
It was noted that securities margin financing brokers with lower quality margin loan portfolio or weak securities margin financing risk controls should adopt a lower multiple.
Looking forward, the SFC cited: “The SFC will proceed to implement the guidelines with the revisions set out in appendix b of this paper, and the Guidelines will become effective six months from the gazettal date.”
The majority of respondents agreed that securities margin financing brokers should control their total margin loans and limit the total amount to a certain multiple of their capital. Most respondents suggested a multiple of five.
The two-month consultation was launched from August to October last year and invited public comments on proposed guidelines for securities margin financing activities.
SFC noted that the guidelines aim to clarify, codify and standardise the risk management practices expected of brokers conducting securities margin financing activities.
Key proposals include requiring securities margin financing brokers to put in place prudent controls to prevent excessive leverage and over concentration both in terms of securities collateral and individual margin clients.
Some respondents suggested that factors, such as the client’s financial background and the quality of the underlying collateral, should also be taken into consideration in formulating total margin loans controls.
Meanwhile, a few respondents made suggestions on loans to clients for the subscription of securities in initial public offerings prior to the commencement of trading of the securities on the exchange on which they are listed.
They proposed that they should not be treated as margin loans for the purposes of the guidelines.
SFC maintains the view that SMF brokers should control their total margin loans based on the size of their capital, given that high leverage may pose significant financial risks to them if securities margin financing risks are not properly managed.
In the worst case scenario, the interests of clients may be threatened if an SMF broker experiences a liquidity squeeze or becomes insolvent, SFC added.
Additionally, the SFC considers that a maximum total margin loans-to-capital multiple of five is acceptable.
This is provided that the securities margin financing broker complies with all other applicable provisions in the guidelines and has high-quality margin loan portfolio.
It was noted that securities margin financing brokers with lower quality margin loan portfolio or weak securities margin financing risk controls should adopt a lower multiple.
Looking forward, the SFC cited: “The SFC will proceed to implement the guidelines with the revisions set out in appendix b of this paper, and the Guidelines will become effective six months from the gazettal date.”
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