Hong Kong securities watchdog proposes cap on margin financing as risks rise to worrying levels
Securities and Futures Commission says total margin financing loan offered by brokers to clients to buy stocks must be between two to five times their capital
Hong Kong’s securities watchdog has proposed a new cap on margin financing by brokerages to investors as the risks have risen to worrying levels, but brokers are concerned that the new rules would reduce market liquidity.
Under the proposal released on Friday as part of a two-month consultation until October 18, the Securities and Futures Commission (SFC) will impose restrictions on brokers, which stipulates that their total margin financing loan offered to clients to buy stocks, must be between two to five times their respective capital.
This compares with four times shareholders’ capital in China and between three to four times in Singapore.
A study conducted by the SFC last year showed that half of Hong Kong brokers offer total margin loan equal to five times their capital, but in some rare cases it was as high as nine times, which was considered too risky by the regulator.
“The rapid growth in total margin loans coupled with a deterioration in the quality of loan collateral in the past decade is very worrying,” said Julia Leung Fung-yee, deputy chief executive at SFC. “The proposed guidelines aim to standardise the risk management practices for margin lending and improve margin brokers’ resilience to stock market volatility.”
