Financial regulation

Hong Kong securities watchdog alarmed over brokerages’ margin loans quality amid lending surge 

Margin loans extended by the city’s brokerages tops HK$206b in 2017 versus HK$20b in 2006

PUBLISHED : Tuesday, 01 May, 2018, 9:02am
UPDATED : Tuesday, 01 May, 2018, 9:01am

Hong Kong’s securities watchdog is consulting the brokerage industry on ways to bolster their risk management in light of a tenfold surge in margin lending over the past 11 years, according to its chairman. 

The Securities and Futures Commission found that the brokerage industry’s volume of margin loans jumped to HK$206 billion in 2017 from just over HK$20 billion in 2006, Carlson Tong Ka-shing said on Monday.

“The data showed worrying signs of deterioration in the quality of the underlying securities [that back the margin loans], as well as an over-concentration of risks,” he said.

Brokerages typically had 30 per cent of their top 20 margin loans backed by pledged shares of a single listed company last year – up from 11 per cent in 2006, said Julia Leung Fung-yee, the commission’s deputy chief executive. 

In half of these deals, the top three collaterals were “heavily pledged stocks”, up from 23 per cent 11 years ago. 

“Heavily pledged” stocks are those where the total market value of collaterals provided by margin clients to all brokers amounts to 10 per cent or more of the stocks’ market capitalisation.   

“We are discussing with the industry on how to deal with the risks from a high concentration of collaterals on a relatively small number of stocks,” she said. “If the share prices fall sharply, it may seriously dent the liquidity of brokerages.” 

There are many ways we can strengthen risk management … we will first start with a soft consultation
Julia Leung Fung-yee, deputy chief executive of SFC

She noted that during a crash of penny stocks and stocks whose ownership was highly concentrated among a small number of owners last year, the “excess liquid capital” held by nine brokerages plunged by over 40 per cent. 

Some 16 such stocks saw their share price tumble by over half in one day. 

While their liquid capital did not fall below required levels, it still raised serious concern, she said.   

She declined to comment on whether the SFC would consider raising capital requirement for margin loan borrowers. 

“There are many ways we can strengthen risk management … we will first start with a soft consultation,” she said. 

She sidestepped a question on whether the SFC was inclined to introduce new guidelines or policy this year to tackle the risks, only saying: “The market downside risk is there … we want to give the industry a chance to come up with ways to deal with it.” 

Brian Ho Yin-tung, head of the SFC’s corporate finance division, said it was working closely with Hong Kong Exchanges and Clearing on a policy review to tighten loopholes for the “manufacturing” of so-called “shell” listed vehicles.

Such vehicles typically see a transfer of control two years after an initial public offering, enabling the flotation of another business via “back door” listings in the process, so that the business does not have to go through the vetting procedures required of new listings. 

“The 2014 guidance on back door listings has not been effective in deterring such behaviour [as] there are always people who are watching the rules, and then come up with ways to do the deals they want to do,” he said. “It is a delicate balance to protect investors while not killing off legitimate deal making.”            

Meanwhile, SFC chief executive Ashley Alder said the commission last year intervened in 39 cases on “serious issues related to listing matters”, and ordered 16 listing suspensions to protect investors, after a role revamp allowed the SFC to take wade in and take action at a much earlier stage in the regulatory process.