SFC consultation addresses risks in securities margin financing

17 Aug 2018



The Securities and Futures Commission (SFC) today launched a two-month consultation on proposed guidelines to clarify, codify and standardise the risk management practices for securities margin financing (SMF).

The proposed guidelines provide qualitative guidance as well as quantitative benchmarks for margin lending policies and key risk controls to prevent SMF brokers from expanding margin loans beyond their financial capability.

Key proposals include requiring SMF brokers to put in place prudent controls to prevent excessive leverage and over concentration both in terms of securities collateral and individual margin clients. Brokers would also be required to set and enforce specific policies for margin calls and conduct stress tests at least monthly. In addition, the proposed guidelines set out clearer guidance for haircuts for securities acceptable as collateral.

"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 Ms Julia Leung, the SFC’s Deputy Chief Executive Officer and Executive Director of Intermediaries. "The proposed guidelines aim to standardise the risk management practices for margin lending and improve margin brokers’ resilience to stock market volatility."

The consultation follows a review the SFC conducted last year which showed that brokers’ margin loans increased ninefold between 2006 and 2017. Furthermore, margin loan quality had deteriorated. The review noted slack risk controls which led to excessive concentration of exposure to margin clients and individual collateral stocks, particularly non-index stocks (Note 1) and illiquid stocks. It also found delays in collecting outstanding margins and inadequate stress testing. The findings of the review are summarised in a report also published today by the SFC.

Interested parties are invited to submit their comments on the proposed guidelines to the SFC on or before 18 October 2018 via the SFC website (www.sfc.hk), by email to 2018_SMFconsultation@sfc.hk, by post or by fax to 2523 4598.

End

Note:

  1. A stock which was not a constituent of the Hang Seng Index or Hang Seng China Enterprises Index.


Page last updated : 17 Aug 2018