Regulator says measures to quell speculation dating from Asian financial crisis no longer appropriate The Securities and Futures Commission plans to relax restrictions on short selling for the first time since they were introduced as part of a packet of measures to combat market-grating speculation during the Asian financial crisis. Citing the negative impact of the rules on Hong Kong's place as an international financial centre, SFC chief executive Martin Wheatley said yesterday that after a review over the next few months, shorting restriction would be relaxed later this year, including removing the uptick rule, which bans short selling below the market price. He also said that the cap limiting a single investor to 10,000 positions in Hang Seng Index futures and options introduced at the same time would be raised by June. Other derivatives trading restrictions from that period have been gradually removed. The SFC today will submit to the Legislative Council a proposal to double the limit of H-share index futures and options to 12,000, effective from March 30. 'As the market has grown much larger than 10 years ago, it is now time to consider changing the rules,' Mr Wheatley said in a briefing to the Hong Kong Investment Funds Association, without elaborating on how the changes may be implemented. The regulations introduced in August 1998 instituted the derivative ownership cap, barred short sellers from offering shares at below market price - the uptick rule - and mandated that they actually hold the stocks they were offering. Anyone breaking the rules faced criminal charges, fines and even jail time. Short selling refers to a process in which investors borrow shares and then sell them, in the hope that their price will drop before they need to be returned to the lender. But, in what is called uncovered shorts, investors actually sell the shares before owning them, in the hope that they could be snapped up for less on the market in the three-day window before they need to be delivered to the buyer. 'We need to review all of those, to make sure Hong Kong has got as efficient a market as possible so that it can compete on the world stage,' Mr Wheatley said, noting in Hong Kong, short selling makes up about 5 per cent of total market turnover, far behind the 25 to 30 per cent in New York and London. Hong Kong is the 19th largest derivative market worldwide, although its exchange is the sixth largest in terms of capitalisation. The rules were implemented at the peak of the region's financial collapse, when the government spent HK$118 billion to buy Hong Kong-listed shares, in order to fend off attacks against both the local currency and the stock market. Joseph Tang Tong, the chief executive of Sun Hung Kai Financial wealth management, capital markets and brokerage, said the measures did not go far enough. 'The SFC should widen the list of stocks allowed for short selling, which currently includes only about 300 stocks,' Mr Tang said. Meanwhile, Mr Wheatley also said the government would submit to the Legislative Council within the next few months a proposal to add statutory backing to some listing rules, such as releasing misleading information and breach of a connected transaction. The listing rules are governed by the exchange, which does not have the power to impose criminal charges. Under the proposal, the SFC will be able to prosecute the wrongdoers.
