Hong Kong’s SFC drowning from too much money due to stock rally turnover
Brokers and stock exchange executives are popping champagne corks to the record high turnover in the rallying market. But this is turning out to be a pain for the Securities and Futures Commission (SFC).
The turnover hit about HK$200 billion daily in April, which is almost three times the ‘normal’ daily turnover which the regulator estimated when it was finalising its budget in February. This means it is poised to again miss its budget target and face a re-run of the problem it had in 2007 -- excessive income and a huge reserve that will likely go even higher.
This prompted Hong Kong lawmakers to grill its executives on how it plans to spend the excess money and why the government and the SFC should rethink the funding model of the regulator.
The SFC budget for the financial year starting from April 1 expected an annual income of HK$1.33 billion based on the average securities market turnover of HK$78 billion per day. Some 80 per cent of this income came from a levy paid by investors on 0.0027 per cent on the value of their stock transaction.
The SFC estimate was proven wrong right off in the first month of its financial year. The average daily turnover soared to in April to a record HK$200.097 billion, surpassing the previous record at HK$166.06 billion in October 2007.
On average, the SFC is collecting a daily levy income of HK$5.4 million, or a total of HK$102.6 million in April. If the momentum continues, the SFC is set to collect much more that.
The SFC now estimates its reserve will stand at HK$6.67 billion at the end of March next year, which is enough for four years of operations without any further income coming in. The local law requires the SFC to consider cutting its levy when its reserve can support two years of operation. But the SFC sees no need to consider cutting the levy again after a 10 per cent cut last year.
This is the time for the SFC to think about how to spend all that money.
It could buy its own office to save on rent payment. But then this would not help trim the reserve since paying less for rent means its expenditures will go down and the reserve would keep going up.
To solve the problem, the government should change the funding model of the SFC. The SFC income in fact should not rely on the levy from the stock market turnover as that changes all the time and is out of the control of the SFC.
Charging a fixed fee from the stock exchange or listed companies may be a more ideal option to provide a stable source of income for the SFC and prevent the regulator from becoming too rich. Without any change, we will likely see more pain for the SFC due to surging turnover in Hong Kong’s searing market rally.