Short selling of stocks likely to land the unwary in jail from July
The Securities (Amendment) Ordinance, which makes illegal short selling a criminal offence, comes into force on July 3, despite strong opposition from market participants.
The Securities and Futures Commission yesterday said the ordinance was enacted last Friday and would increase the penalties for naked short selling and introduce new criminal offences for not reporting short selling.
Under the ordinance, naked short selling carries a maximum penalty of HK$100,000 - 10 times the present one and maximum imprisonment of two years - four times the present maximum jail term. Naked short selling involves an investor who sells stocks he does not hold, or stocks for which he has not entered into any borrowing arrangement.
The new law will also make it illegal for investors not to report short selling, even with transactions covered by borrowed securities.
Such an infraction could incur a maximum of a year in jail and a HK$50,000 fine.
The law will also require stock lenders to keep records of their activities. The ordinance, considered to be among the toughest in the world, has spurred strong opposition from market participants.
In February, a group of 14 international institutions warned the new law would hit hard at the local stocks and derivatives markets.
Custodian organisation Pan Asia Securities Lending Association said it 'may cause securities lenders not to participate in the market'. Local brokers and bankers had similar complaints.
The Hong Kong Association of Banks said such heavy criminal penalties should not be 'imposed in breach of a highly technical restriction'.
The new law is one of the Government's 30 measures, announced in September 1998, to strengthen financial markets.
The measures followed the Government's intervention in the stock and futures markets in August as it defended the local currency's peg to the US dollar against speculators.
The speculators attacked the system at that time by selling the market heavily.
An SFC source said the new law would be targeted primarily at local stocks listed in Hong Kong rather than at the seven Nasdaq stocks which start trading today.