Shorting me, shorting you
15 March 2016
A world-class financial centre is getting better, although a certain Stock Connect is disappointing securities lending participants. Mark Dugdale reports
Image: Shutterstock
Hong Kong’s position as the fee-generating securities lending jurisdiction of Asia was cemented in 2015 after another positive year, despite the volatility that struck Asia’s economies.
According to DataLend, fees to borrow Hong Kong equities averaged a very warm 182 basis points (bps) for the year, hitting a high of 284 bps in early April. The jurisdiction was only eclipsed by South Korea in this regard.
The jurisdiction has also made moves to modernise its securities lending capabilities, as risk-averse foreign investors rely more and more on the the ‘developed’ financial services centre that is Hong Kong. Indeed, HSBC, caught between a rock and a hard place in January 2016, had to decide whether to keep its headquarters in London or move to Hong Kong, which it put on a par with the UK capital, describing them both as “world-class financial centres with high quality regulatory regimes capable of hosting a global systemically important bank such as HSBC”. HSBC opted to stay in London, but the fact that Hong Kong was a viable alternative is impressive in itself.
In terms of securities lending, Hong Kong’s Securities and Futures Commission (SFC) proposed expanding the scope of short position reporting to all securities eligible for short selling on the Hong Kong Stock Exchange in November 2015, in a bid to increase transparency.
Under the proposed changes, which were put out for consultation and not finalised at the time of writing, short position reporting will be extended to all 889 designated for short selling, which currently accounts for 44 percent of activity in Hong Kong.
At the time of writing, 127 stocks were subject to short position reporting. The SFC anticipates that expanding coverage to all designated securities will reveal aggregated short positions of more than HKD $100 billion (USD $12.9 billion).
Ashley Alder, CEO of the SFC, commented at the time: “We have seen growth in short selling since the short position reporting regime was introduced in 2012. The expanded regime will help improve monitoring and enhance market transparency, and this will be conducive to the long-term development of the industry.”
This bid for increased transparency can perhaps be traced back to securities lending’s reputation in Asia, where it continues to suffer, according to some market participants. Many stocks in Hong Kong cannot be short sold at all, which can limit the utilisation rate of a long portfolio.
Also disappointing as far as Hong Kong is concerned is the progress of the Hong Kong-Shanghai Stock Connect, which, despite launching to much fanfare, still lacks an active securities lending market and any short selling.
A spokesperson for Hong Kong Exchanges and Clearing (HKEX), in response to the assertion that the framework for securities lending via Stock Connect is too restrictive, comments: “One of the principles of Stock Connect is ‘home rules apply’ so mainland short selling rules apply to northbound trading through Stock Connect. HKEX has reflected the views of its market participants to its relevant mainland counterparts and will continue to do so.”
Hopes remain high for Stock Connect, not least because it could open up China to foreign borrowers and lenders keen to cash in on the country’s stellar, although stuttering, growth. Until then, Hong Kong will continue to be seen as a proxy for China.
According to DataLend, fees to borrow Hong Kong equities averaged a very warm 182 basis points (bps) for the year, hitting a high of 284 bps in early April. The jurisdiction was only eclipsed by South Korea in this regard.
The jurisdiction has also made moves to modernise its securities lending capabilities, as risk-averse foreign investors rely more and more on the the ‘developed’ financial services centre that is Hong Kong. Indeed, HSBC, caught between a rock and a hard place in January 2016, had to decide whether to keep its headquarters in London or move to Hong Kong, which it put on a par with the UK capital, describing them both as “world-class financial centres with high quality regulatory regimes capable of hosting a global systemically important bank such as HSBC”. HSBC opted to stay in London, but the fact that Hong Kong was a viable alternative is impressive in itself.
In terms of securities lending, Hong Kong’s Securities and Futures Commission (SFC) proposed expanding the scope of short position reporting to all securities eligible for short selling on the Hong Kong Stock Exchange in November 2015, in a bid to increase transparency.
Under the proposed changes, which were put out for consultation and not finalised at the time of writing, short position reporting will be extended to all 889 designated for short selling, which currently accounts for 44 percent of activity in Hong Kong.
At the time of writing, 127 stocks were subject to short position reporting. The SFC anticipates that expanding coverage to all designated securities will reveal aggregated short positions of more than HKD $100 billion (USD $12.9 billion).
Ashley Alder, CEO of the SFC, commented at the time: “We have seen growth in short selling since the short position reporting regime was introduced in 2012. The expanded regime will help improve monitoring and enhance market transparency, and this will be conducive to the long-term development of the industry.”
This bid for increased transparency can perhaps be traced back to securities lending’s reputation in Asia, where it continues to suffer, according to some market participants. Many stocks in Hong Kong cannot be short sold at all, which can limit the utilisation rate of a long portfolio.
Also disappointing as far as Hong Kong is concerned is the progress of the Hong Kong-Shanghai Stock Connect, which, despite launching to much fanfare, still lacks an active securities lending market and any short selling.
A spokesperson for Hong Kong Exchanges and Clearing (HKEX), in response to the assertion that the framework for securities lending via Stock Connect is too restrictive, comments: “One of the principles of Stock Connect is ‘home rules apply’ so mainland short selling rules apply to northbound trading through Stock Connect. HKEX has reflected the views of its market participants to its relevant mainland counterparts and will continue to do so.”
Hopes remain high for Stock Connect, not least because it could open up China to foreign borrowers and lenders keen to cash in on the country’s stellar, although stuttering, growth. Until then, Hong Kong will continue to be seen as a proxy for China.
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