HK SFC reveals ‘expected standards’ for short selling and SBL market
11 June 2019 Hong Kong
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The Hong Kong Securities and Futures Commission (SFC) has listed its “expected standards” for short selling and securities borrowing and lending (SBL) in a new report.
In the report, the Hong Kong SFC said that effective controls should be in place to ensure compliance with the short selling requirements under the SFO and its subsidiary legislation.
It also notes that pre-trade controls over both agency and principal short selling should be established to ensure that assurance, or cover, has been obtained for any short selling orders.
Other expected standards include putting post-trade controls over both agency and principal short selling to review and reconcile orders with relevant documentary assurance to ensure that flagging errors and instances of uncovered short selling are identified in a timely manner.
The SFC explained that controls over securities borrowing and lending inventory management should be in place, such as applying haircuts on SBL inventory sources where appropriate, to avoid over-lending securities.
The report also noted the measures taken by prime brokers and their SBL desks to avoid over-lending, which include the formation, application and monitoring of haircuts to provide a “buffer” against unstable securities, exclusion of securities from lenders with out-of-date data feeds, and creation of limits to trigger alerts in the event of low SBL inventory.
The Hong Kong SFC concluded by reminding market participants to “continuously assess how regulatory changes would affect the regulated activities they carry out in Hong Kong, especially in the provision of prime services where the business processes could be spread across various jurisdictions or managed on a regional or global basis.”
In the report, the Hong Kong SFC said that effective controls should be in place to ensure compliance with the short selling requirements under the SFO and its subsidiary legislation.
It also notes that pre-trade controls over both agency and principal short selling should be established to ensure that assurance, or cover, has been obtained for any short selling orders.
Other expected standards include putting post-trade controls over both agency and principal short selling to review and reconcile orders with relevant documentary assurance to ensure that flagging errors and instances of uncovered short selling are identified in a timely manner.
The SFC explained that controls over securities borrowing and lending inventory management should be in place, such as applying haircuts on SBL inventory sources where appropriate, to avoid over-lending securities.
The report also noted the measures taken by prime brokers and their SBL desks to avoid over-lending, which include the formation, application and monitoring of haircuts to provide a “buffer” against unstable securities, exclusion of securities from lenders with out-of-date data feeds, and creation of limits to trigger alerts in the event of low SBL inventory.
The Hong Kong SFC concluded by reminding market participants to “continuously assess how regulatory changes would affect the regulated activities they carry out in Hong Kong, especially in the provision of prime services where the business processes could be spread across various jurisdictions or managed on a regional or global basis.”
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