Securities & Futures Commission of Hong Kong

Special Market Conditions - Market Crash

Q1:

Will the government intervene to boost up the market as it did before?

A:

The SFC is not in a position to speak on behalf of the Government. Nevertheless, the SFC is not aware of any government policy of intervening in bear markets or in the event of a market crash. The market intervention undertaken by the Government in 1998 was, we understand, a one-off event.

Q2:

Will the SFC request all brokerages to announce their financial status as a result of the market crash?

A:

Financial position can change rapidly attributable to change in value of securities. Healthy position at one point of time may not imply a continuously healthy position. The SFC will closely monitor the brokerages, financial position and take appropriate action where necessary.

Q3:

I know my brokerage pledged all its margin clients' shares to banks. Will the crash cause the brokerage to default as values of shares pledged to banks fall dramatically?

A:

The market crash may not cause a brokerage to default if the brokerage is able to meet calls from the banks, if any.

Q4:

Will the SFC request listed companies to announce if their financial soundness is endangered by the crash?

A:

Generally speaking, the Listing Rules require that listed companies keep the Stock Exchange of Hong Kong (SEHK), shareholders and members of the public informed of any information necessary to appraise the position of the listed companies, to avoid the establishment of false markets and which is price sensitive. Specifically, listed companies must notify all the above parties without delay when the directors become aware that there is major market upheaval in the industries, countries or regions where the listed companies have significant operations or transactions or significant changes in exchange rates of currencies that are key to their operations.

If the market crash has affected the financial soundness of a listed company, the listed company is bound by the Listing Rules to make an announcement.

Q5:

As a temporary measure, can a fund be traded on a business day which is not a designated trading day under normal arrangement during a market crash? Can a fund still accept redemption orders under such a market condition?

A:

No, it is unlikely. A fund will only be traded within normal trading hours on designated dealing days. Trading arrangements are set out in the offering document of a fund and these cannot be changed without prior approval of the SFC.

With a view to protect the interests of investors, a fund manager is entitled at its discretion and with the approval of the trustee to limit redemption of the fund units on any dealing day to 10% of the total number of fund units in issue. Outstanding redemption requests will be carried forward for execution, subject to the same limitation, on the next dealing day.

It is up to the fund managers and trustees to decide whether to suspend or defer dealing of a fund having regard to the interests of investors and the circumstances of the fund. During a market crash, dealings should be suspended if the underlying assets of a fund cannot be fairly valued or there is inadequate liquidity to meet the redemption demand. Should the fund manager invoke suspension, he should continue to accept redemption requests from investors, which should be accumulated during the suspension period and processed immediately upon resumption of dealing.

Q6:

Will the SFC request fund managers of funds with a heavy investment in a particular stock market to announce if their operations are severely affected by a crash in that market?

A:

It is up to the fund managers and trustees to decide whether to suspend dealing of a fund having regard to the interests of investors and the circumstances of the fund. It may not be necessary for the funds to be suspended if, for example, there is adequate liquidity to meet the redemption demand. The primary concern for the SFC is whether a decision to suspend dealing would be in the interests of investors. Fund managers are obligated to immediately notify the SFC of the decision for suspension. Such a decision must also be published immediately (where practicable, within one day of the decision) and at least once a month during the period of suspension, in newspapers in which the funds prices are normally published. Depending on the length of the suspension, a circular which details the reasons for the suspension may be required to be sent out to all investors of the fund. In addition, local investors can contact the fund manager or its Hong Kong representative for further information. The SFC will monitor the situation closely and regular reporting may be required if there is prolonged suspension of dealings.

Q7:

Will the crash cause the funds, which heavily invests in a particular stock market, to go bankrupt?

A:

A fund will go bankrupt only when the amount of its liabilities exceeds the value of its assets. It is unlikely that a traditional fund will go bankrupt since there are investment restrictions imposed on a fund, e.g. diversification rules and limitations on short selling and making loans, to reduce the risk of the fund going bankrupt. In addition, a fund is not allowed to acquire any asset that involves the assumption of unlimited liability.

However, it is likely that the market crash will lead to a suspension of dealings in a country fund that is significantly exposed to the relevant stock market if the underlying assets cannot be fairly valued or there is inadequate liquidity to meet the redemption demand.

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