Hong Kong Stock Exchange

SFC says it will review the city’s short-selling rules and make changes ‘if necessary’

PUBLISHED : Wednesday, 28 June, 2017, 8:59pm
UPDATED : Wednesday, 28 June, 2017, 9:01pm

The Securities and Futures Commission (SFC) said on Wednesday it will review the city’s short-selling regime and make changes “if necessary”, following sharp declines of a number of Hong Kong-listed companies suspected to be related to short-selling institutions.

The SFC has received 12 complaints about research reports by short sellers in the past five years, some alleging that these reports contained false or misleading representations.

“Hong Kong has a stringent short-selling regime,” said Secretary for Financial Services and the Treasury Chan Ka-keung in the Legislative Council on Wednesday. “The SFC will continue to review and if necessary, enhance the short-selling regime based on changing market activities and global regulatory developments.”

In the past year, Hong Kong listed companies, including furniture maker Man Wah Holdings, Apple supplier AAC Technologies and Huishan Dairy Holdings, saw their share prices drop sharply after they were identified as targets by short selling institutions.

“Most of the short sellers are not license holders in Hong Kong and the city’s authority has difficulties to make investigations,” said Victor Au, the chief operating officer at Delta Asia Securities. “But the watchdog can challenge how the short sellers release their reports...The information should be fully published at once, no squeezed out part by part. ”

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AAC Technologies shares tumbled 11 per cent on a single day in May before being suspended when short-seller Gotham City Research released the second part of a report accusing the company of dubious accounting. The release of the second report came almost a week after its initial report.

“Definitely, the short sellers most of the time help investors avoid falling into a trap. But in the current situation, I think some of short-selling institutions are misleading the market with scathing remarks and do not maintain independence,” said Hanna Li Wai-han, a strategist at UOB Kay Hian (Hong Kong), “To reduce the risks, penalties are necessary for misconduct.”

To date, the SFC has completed one investigation that has resulted in enforcement against the issuer of a short-selling report. Andrew Left, head of Citron Research, was found guilty by Hong Kong’s Market Misconduct Tribunal of publishing a “false and misleading” information in 2012 about Chinese developer China Evergrande Group. The Hong Kong tribunal banned Left from trading for five years, fined him HK$1.6 million in trading profits and ordered him to pay about HK$4 million in legal expenses. Left’s appeal against the ruling was dismissed by the Court of Appeal in Hong Kong in January.

“The SFC should further educate investors on these short-selling reports. For example, investors should know more about the authors of the reports and whether they constantly follow the companies they accused of,” said Linus Yip, a Hong Kong-based strategist with First Shanghai Securities. “A quick response from the companies targeted could also ease the jitters in the markets.”