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The Acting Secretary for Financial Services, Mrs Rebecca Lai, announced today (Friday) that the consultation on the Proposed Regulation on Share Margin Financing that commences today will last for two months.
Prepared by a working group established under the Financial Services Bureau (the Working Group), the Paper sets out the findings and conclusion of the study by the Working Group and its recommendations on the regulation of share margin financing activities.
The proposed regulatory regime covers finance companies which offer share margin financing services and brings them under the supervision of the Securities and Futures Commission (SFC). The Working Group also proposes to amend the existing Securities Ordinance and the Financial Resources Rules (FRR) and introduce a new Code of Business Standards to ensure that licensed dealers who engage in share margin financing activities are financially sound and have in place appropriate measures for prudent risk management and protection of clients' assets. It proposes to strengthen investor protection and education.
The Working Group also proposes to allow existing finance companies and securities dealers 30 days to decide whether to apply for registration under the new regulatory regime and to waive certain FRR requirements for six months after the coming into effect of the relevant legislation.
Mrs Lai stressed, "When considering the question of how the regulation over share margin financing could be strengthened, the Working Group has to strike a balance between prudent regulation and investor protection on the one hand, and market viability on the other, in order that the investors will be reasonably protected.
"Therefore, the Working Group's overall strategic objective is that share margin financing should be permitted only where adequate safeguards are in place for the protection of investors as well as market integrity. Similarly, capital requirements imposed should be set at levels consistent with the risks undertaken and not as a barrier to deter bona-fide and properly managed companies".
Specific recommendations of the Working Group include:
* to amend the definition of "dealer" and "dealing in securities" in the Securities Ordinance (Cap. 333) to encompass share margin financing activities into the securities regulatory framework;
* to amend the Financial Resources Rules (subsidiary legislation of the SFC Ordinance, Cap. 24) to ensure that share margin financing is provided with adequate capital backing, including:
(1) to impose a minimum paid-up capital requirement of $10 million;
(2) to require that the liquid capital must at all time maintain at a level of or above 5% of the total liabilities;
(3) to apply different haircut deduction to stocks of different liquidity:
- 10% deduction applicable to constituent stocks of the Hang Seng Index;
- 15% deduction applicable to other stocks listed on the SEHK which are constituent stocks of HS100 or eligible for a derivative warrant issue; and
- 25% deduction applicable to all other stocks listed on the SEHK.
(4) to require that licensed securities dealers should not conduct other financing business other than share margin financing, such as home mortgage, private loans or loans for taxi licence;
(5) to include in ranking liabilities any excess of a single stock collateral over 10% of aggregate collateral value to prevent these companies from building up excessive exposures to individual stock;
(6) to also include in ranking liabilities any excess of a single client receivables over 10% of loan made;
(7) to introduce reporting and notification requirements focusing on share margin financing as well as liquidity issues;
* to amend sections 81 and 84 of the Securities Ordinance to limit uses of clients' securities by securities dealers provided that the clients are fully aware of the risks involved and subject to clients' proper authorisation and to ensure proper information disclosure and to enforce more strictly the requirement of segregation of the accounts of cash and margin clients so as to provide better protection for clients' interests;
* to introduce a Code of Business Standards to prescribe additional minimum standards in margin lending and margin call policies in addition to existing SFC Codes and SEHK Rules and to require the adoption of prudent risk management and cashflow management measures;
* to amend the Money Lenders Ordinance to exempt a loan made by a dealer (as proposed to be re-defined under the SO) for the purpose of share margin financing;
* during the transitional period, propose to allow existing finance companies and securities dealers 30 days to decide whether to apply for registration under the proposed licensing regime and to waive certain FRR requirements for existing registered securities dealers for six months; and
* to strengthen investor education.
"After collecting the comments from the market and other interested parties, the Working Group aims to complete the drafting work of legislative amendments as soon as possible and introduce the amendments to the LegCo within October and November. We hope to bring the new regulatory regime into operation by the end of this year," added Mrs Lai.
The Working Group was established by the Financial Services Bureau in December 1997. It comprises representatives of the Securities and Futures Commission (SFC), the Stock Exchange of Hong Kong (SEHK), the Hong Kong Monetary Authority (HKMA), the Companies Registry and the Department of Justice.
The Paper is available at the Financial Services Bureau, the SFC and the SEHK. Besides, it is also available on the Bureau's website at http://www.info.gov.hk/fsb/. The SFC and the SEHK will later hold joint seminars to explain the proposals set out in the Consultation Paper. The consultation period will last until July 7. Interested parties may submit written comments on the Consultation Paper by mail to the Bureau, 18th Floor, Admiralty Centre Tower I, 18 Harcourt Road, Hong Kong or by e-mail to secsdfsb@hkstar.com.
End/Friday, May 8, 1998
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