CA Pacific collapse involving $2.5b loss behind the move to amend rules and protect clients' investment The Securities and Futures Commission will today ask lawmakers to approve new rules governing customer margin financing provided by brokers, including a limit on how much of client stock held as collateral can be repledged by brokers to obtain bank loans. The long-awaited move is aimed at preventing a repeat of the infamous collapse of CA Pacific Securities in 1998 - when a small broker with capital of only $16 million was able to borrow $548 million by repledging $2.5 billion of client shares in collateral. The brokerage's failure led to about 5,000 clients losing their money and only a combined $983 million was awarded in compensation. To secure the amendments to the Securities and Futures (Client Securities) Rules, however, the watchdog will have to overcome the objections of some critics who believe the changes are not needed. 'The commission should not add this proposed curb on share margin financing. It has already adopted very strict financial requirements on brokers to prevent them from failing,' said Christopher Cheung Wah-fung, the chairman of Hong Kong Securities Professional Association. 'In such circumstances, there is no further need to add curbs on share margin financing,' Mr Cheung said. However, a presentation by the SFC to lawmakers before today's meeting indicates the regulator is determined to proceed with the measure. Also planned as a long-term proposal is a ban on the practice among brokers of pooling client collateral to secure bank loans. Tony Espina, chairman of Hong Kong Stockbrokers Association, said if the commission planned such curbs for brokers who did repledge client shares to secure bank loans, it should relax the regulation on brokers who did not. There are 243 brokers offering share financing services to lend money to clients to trade stocks but only 84 repledge client shares as collateral for bank loans which are then provided to their clients as margin financing. 'This means 159 brokers are not repledging client shares to get bank loans but they use internal resources to lend to clients. But now these brokers face the same regulations as those repledging client shares. This is unfair,' Mr Espina said. He added that the SFC should make the limit and high financial requirements apply only to those who repledge the clients' shares. Under the SFC proposal, the value of collateral shares a brokerage may repledge to its bank as security for loans will be limited to no more than 180 per cent of the amount of its lending to all its clients in the first stage. Under such a limit, if a brokerage loaned $100 million to its clients, it may repledge only $180 million worth of collateral shares to apply for bank loans. In the second stage of implementation, the SFC proposes to lower the limit to 130 per cent or 150 per cent. The SFC paper said if the repledging limit were set at 130 per cent, seven of the 84 brokers might need to use their own capital or funding sources other than bank loans to comply with the limit. The commission also wants to ban the practice of pooling clients' stock collateral and will require each client's collateral to be treated separately but it said this would not be implemented in the near term. However, the SFC presentation to lawmakers said a medium-sized broker would incur $500,000 in additional administrative costs per month if it was required to separately handle each client's accounts and that the cost may be passed on to investors. 'The SFC supports segregation as our long-term goal. However, in light of its potential impact on the industry as well as investors, we need to further assess the possible consequences of the segregation proposition and how it could be implemented cost-effectively,' the commission paper said.