Hong Kong Exchanges and Clearing is proposing all brokers pay into a new margin fund to cover potential losses in the event they collapse or default on settlement.
'Local stock market turnover has grown substantially in recent years and we need a new risk management measure to prepare for extreme market volatility,'' said Charles Li Xiaojia, chief executive of the HKEx.
From this Friday the bourse will start consulting the market about the new margin fund proposal, which would require each broker to pay a percentage of their stock trading volume to the clearing house.
If a brokerage collapses and cannot settle a deal, the margin fund would be used to cover the settlement. At present, local futures brokers are the only ones who pay a margin fund fee to the clearing house.
'The margin amount would be linked with the turnover of the brokers and as a general rule, the larger the volume of stocks traded by a broker, the higher margin it will need to pay,' Li said.
He said 80 per cent of local brokers had small trading volumes so they would not be too hard hit by the proposed margin, but large players would be more affected.
The HKEx also proposes all brokers contribute more to enlarge the existing guarantee fund which now stands at only HK$200 million. The guarantee fund covers any broker's unsettled stock transactions in case of any collapse or default.
Li said the existing fund was inadequate. When Lehman Brothers collapsed in September 2008 its default transactions alone were worth HK$160 million.
Joseph Tong Tang, executive director of Sun Hung Kai Financial, opposes the new margin fund. 'The Securities and Futures Commission already has tough financial requirements for brokers which have prevented them from collapsing,' he said. 'There is no need to impose additional requirements. This will add costs and there have been few broker collapses in recent years.'
Li said the exchange would hold several other consultations, including discussion on a proposal to narrow the trading spread, and the reintroduction of a closing auction system. He did not give timelines.
In late March 2009, the exchange suspended the controversial 10-minute closing-auction system after critics said the session was being manipulated following a 12 per cent plunge in HSBC Holdings shares in early March during the auction period. It then returned to the old method.
Chim Pui-chung, legislator for the financial services sector, opposes reintroducing the closing auction.
'The system was scrapped two years ago as many incidents showed it was easily manipulated. In contrast, the existing market closing method has been used for many years and has performed well,'' Chim said. 'We should not adopt a system just because other markets are using it. The HKEx should use the system which is in the best interest of the local investing public.'
The total value of shares traded in highest single-day turnover in the securities market in 2010 in Hong Kong dollars