SFC's collateral damage control
Curb on stockbrokers will enhance investor protection and prevent a repeat of the collapse of CA Pacific Securities
Stockbrokers will face curbs on the amount of customer share collateral they may repledge as security on their own borrowings and will also be forced to make more disclosure on such activity from October.
The changes to margin financing measures were announced yesterday by the Securities and Futures Commission, in an attempt to enhance investor protection and prevent a repeat of the collapse of CA Pacific Securities eight years ago.
However, the watchdog will also relax some financial resources rules on those stockbrokers who do not repledge clients' shares.
Unveiling the long-awaited and widely expected measures, SFC executive director Alexa Lam said they would strengthen Hong Kong's reputation as an international financial centre.
'The market has been doing well in the last two years,' Mrs Lam said. 'Brokers have generally benefited from the significant increases in market capitalisation and daily trading volume.
'On the other hand, factors such as increased market volatility and recent reported cases of misappropriation may give rise to additional risks to investors and the industry.
'Therefore, the SFC considers that this is the right time to proceed with the proposed measures to give investors better protection.'
The SFC found that 81 of Hong Kong's 447 brokers repledged client share collateral to secure bank loans with which to provide margin financing for their customers to trade stocks; 150 provided such financing without repledging their shares; while the remaining 216 brokers did not offer share margin financing services.
The new measures will affect the first group the hardest as they will face a repledging limit of 180 per cent on margin loans they make to clients from October 1, to be tightened to 140 per cent a year later.
Under the 180 per cent limit, a broker that lends $1 million to all its margin financing clients to trade stocks would only be allowed to repledge $1.8 million worth of the share collateral of its clients to banks.
The second limit of 140 per cent to be introduced from October 1 next year will mean the brokers lending $1 million to clients can only repledge $1.4 million worth of clients' share collaterals to banks.
The SFC also requires brokers to inform the clients of the risks of current pooling practices under which client collateral is pooled together to borrow bank loans.
This means the collateral of clients who trade blue chips is exposed to the risks of those trading low-priced stocks.
'This helps clients consider whether to maintain a margin account,' Mrs Lam said.
The SFC also said the 366 brokers who did not repledge client shares collateral would be allowed to follow more relaxed financial resources rules than the 81 who repledged collateral.
Tony Espina, the chairman of the Hong Kong Stockbrokers Association, welcomed the adoption of different approaches for different brokers.
'The brokers who do not offer share margin financing or repledge shares will save operation cost after the SFC relaxes some of the financial resources rules for them,' Mr Espina said.
Watchdog's pledge
From October 1, a cap on client share collateral that brokers can repledge to raise their own borrowings
Incentive for brokers who do not repledge client shares
Better disclosure about the risks of pooling and repledging
