The stock exchange has finalised proposals to strengthen the regulation of margin lending in the wake of the collapse of broker CA Pacific earlier this year. A sub-committee of the exchange had suggested prohibiting brokers from committing more than 10 per cent of their total lending to a single client or from using more than this as collateral for the purchase of a single stock, sources said. The collapse of CA Pacific was partly due to losses incurred by then Leading Spirit chairman Wong Shi-ling, to whom it had lent heavily on margin. Mr Wong was also a central figure in a liquidity crisis at Cheerful Holdings after he failed to repay margin loans collateralised by Leading Spirit (Holdings) shares, which collapsed in value before being suspended at the company's request in January. The string of difficulties prompted regulators to tighten the guidelines governing margin lending. 'The CA Pacific example showed the concentration of margin lending to a single client could be fatal to a broker if the client is unable to repay the loan,' a source in the sub-committee said. 'It is important to require brokers to diversify margin loans to different clients and different stocks in a bid to diversify risks. 'Even if the collateral is in blue chips, there is still a risk [of] lending too much on a single stock which could drop in value suddenly due to suspension of trading or other reasons,' the source said. The sub-committee earlier considered banning the pooled finance method used by many brokers, which involves brokers collecting together shares of margin-trading clients to obtain bank financing. Under this pooled system, clients who have traded prudently share the risk of clients who have traded aggressively, as their shares are combined. The exchange source said this proposal had been given up after strong opposition from brokers. 'Many brokers insist it is impossible to arrange financing with banks for each client, as there are so many individual clients, and that each client's lending amount would be too small to get any bank lending,' the source said. 'We agree the pooling method has disadvantages. However, if we introduce measures to ban risk concentration on single stock and client, it will offer better protection to brokers and the market as a whole.' The sub-committee will submit its proposal to the exchange ruling council for approval, and a consultation paper will be issued this month to seek the market's opinion on the proposed rule changes. It will also need approval from the Securities and Futures Commission.