Brokers chase margin calls to cut risk in volatile market
Hong Kong brokers have been more active in chasing margin calls from clients in recent days while the local bourse has increased its margin for futures contacts in order to reduce risks in a volatile market.
Market operator Hong Kong Exchanges and Clearing has increased the margin for the various types of futures and options contracts over the past two weeks, with the initial margin for Hang Seng Index futures increased to HK$121,900 from Friday, up from HK$101,000 previously.
The initial margin for H-share index futures was increased to HK$75,050 from HK$60,050.
The Securities and Futures Commission has conducted more intensive stress tests on the 500 local brokers recently.
Brokers have to act more carefully these days as the risks have increased recently
“We are conducting intensive stress tests on and have been in contact with brokerages to ensure they maintain sufficient liquid capital to continue to operate normally,” an SFC spokesman said.
Hong Kong Securities Association chairman Jeffrey Chan Lap-tak said many brokers had asked clients to pay for shortfalls in their margin trading accounts in the past fortnight.
“Brokers have to act more carefully these days as the risks have increased recently,” he said. “Luckily, so far we have not heard of any serious default cases.”
Brokerage firms have been on a roller-coaster ride in the past week, with the Hang Seng Index losing all its gains this year last Wednesday, when it recorded its largest ever intra-day fall of 2,138 points.
The Hong Kong market has bounced back since Thursday after Beijing introduced a range of measures to prop up mainland markets, including a crackdown on illegal short selling.
The Hang Seng Index closed at 25,120.91 on Tuesday, still 12 per cent down from its seven-year high of 28,588.52 points on April 27.
“The volatile market has discouraged investors from trading,” Chan said. “This has hurt stock brokers’ commission income.”
Turnover on Tuesday stood at HK$127.36 billion, down from the average daily turnover of HK$200 billion in the record-breaking month of April, when the market rally began after Beijing allowed mainland mutual funds to invest in the city.
Average daily turnover last year was HK$68.79 billion.
Joseph Tong Tang, executive director of Sun Hung Kai Financial, said brokerage firms had taken a cautious approach ahead of last month’s political reform vote in Hong Kong.
“Many brokerage firms cut down margin lending to clients and stepped up measures to safeguard their positions,” he said. “This helped local firms defend themselves from the tumble last week.”
Chan said the central government’s recent rescue measures to prop up the mainland markets might lead to more foreign investors investing in H shares – mainland companies listed in Hong Kong – rather than their A-share counterparts on the mainland.
“The many measures carried by the mainland authorities may prop up the markets in Shanghai and Shenzhen,” he said. “However, they sent a negative message internationally that the mainland markets are still under the control of the government instead of letting market forces work.”
