Brokers' safety nets by autumn

PUBLISHED : Monday, 12 March, 2012, 12:00am
UPDATED : Monday, 12 March, 2012, 12:00am


The big stockbrokers will pay a combined HK$4.7 billion to establish new safety nets against the risk of a broker collapse as the stock exchange implements controversial new margin and guarantee fund requirements from as early as September.

Charles Li Xiaojia, chief executive of Hong Kong Exchanges and Clearing said that although some medium-sized brokers still oppose the reform, most accepted the change so the exchange would move the plan ahead in the third quarter, most likely in September.

'Our market has grown substantially in the past two decades but our risk management has not changed accordingly. We are lagging behind the other markets and we need to catch up,' Li said yesterday as he announced implementation of the reform after a three-month consultation showed 70 per cent of 626 respondents support the measures.

'The new margin requirement and guarantee funds will make some brokers unhappy as they need to pay more money. But Hong Kong needs to impose the same requirements to catch up with the international practice.'

Li added that the new requirement matched international IOSCO standards set in 2004 which require all stock markets to have risk management measures against extremely volatile markets and a big broker collapse. Britain and the United States also require brokers to pay the margin fund or guarantee funds.

At present, Hong Kong only requires futures brokers to pay margin funds to the stock exchange, but not stockbrokers.

The present guarantee fund against broker collapse stands at only HK$240 million, which is considered inadequate in light of the Lehman Brothers disaster in 2008, which has already cost the fund HK$160 million.

The new regulations will require all 435 broking firms to pay daily a margin fund of at least 5 per cent of their unsettled positions at the HKEx clearing house.

The exchange will then provided a total HK$900 million to cover the first HK$5 million of all brokers, with 80 per cent of the smaller brokers exempt from paying the margin. Only the 81 largest players, or the top 20 per cent, would need to pay a combined HK$3.5 billion margin fund at present turnover.

In addition, the reform will mean brokers need to pay guarantee funds on a monthly basis according to their level of trades in the previous month, which will amount to HK$1.2 billion at present turnover.

Again, the HKEx will cover the first HK$1 million, so half of the brokers need not pay.

The largest single broker in the city, which Li did not identify, will pay HK$700 million margin fund and HK$140 million guarantee fund under the new regime.

In the case of a brokerage collapsing and being unable to settle a deal, the margin fund will be used to cover it. If the margin fund is used up, the guarantee fund will cover the losses.

Legislator Chim Pui-chung, who represents brokers, support the reform as the smallest brokers do not need to pay the combined HK$4.7 billion. 'The large brokers should pay more as they trade a higher volume, which represents a higher risk to the market if they collapse,' Chim said.

'We agree to add a safety net to the market but do not want to add too high a burden to brokers.'

Li said medium-sized brokers were the most unhappy group as they would not be exempted like the small brokers but could not afford the fund contributions as much as the biggest players.

He said these brokers would seek to lobby the Securities and Futures Commission watchdog to treat their margin or guarantee fund contributions as liquid assets required by the financial resources rules.

SFC chief executive Ashley Alder said the commission supported the reform but did not indicate if they would back the brokers' demands.