Securities & Futures Commission of Hong Kong

Special market conditions - market crash

Q1:

Will the Government intervene to prop up the market as it did before?

A:

The SFC is not in a position to speak on behalf of the Government. Nevertheless, one of the SFC's regulatory objectives is to reduce systemic risk in the securities and futures industry.

Q2:

Will the SFC request that brokers announce their financial status as a result of a market crash?

A:

Brokers' financial positions can fluctuate rapidly under changing market conditions. The SFC will closely monitor brokers' financial positions and take appropriate action where necessary.

Q3:

My broker pledged all of its margin clients' shares to banks. If the value of those shares falls dramatically, would that cause my broker to default?

A:

A market crash may not cause a broker to default if it is able to meet the banks' margin calls.

Q4:

Will the SFC request that listed companies announce whether their financial soundness is endangered by a crash?

A:

Generally speaking, the Listing Rules of The Stock Exchange of Hong Kong Limited require a listed company to make timely disclosure of information necessary to keep the investors and the public fully informed. This helps ensure that the issuance and trading of securities are conducted in a fair and orderly manner, and that investors are given sufficient information to enable them to make a properly informed assessment of a listed company. In addition, Part XIVA of the Securities and Futures Ordinance (as well as the Listing Rules) imposes a general obligation of disclosure of "inside information" by listed companies in a timely manner. Therefore, a listed company normally needs to make a public disclosure of changes in the performance of its business or in its financial condition (eg, a cashflow crisis or a credit crunch).

A listed company can rely on a safe harbour to withhold the disclosure of relevant information under Part XIVA. An example would be where the information concerns the provision of liquidity support from a central bank or a similar body, and where the company has taken reasonable precautions to preserve the confidentiality of the information and the confidentiality is preserved. In addition, where a listed company is a "listed entity" as defined under the Financial Institutions (Resolution) Ordinance (FIRO) (including banking, securities and insurance entities), its disclosure obligations may be deferred under FIRO for the purpose of avoiding the premature disclosure of information which may impede its orderly resolution.

Q5:

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

A:

SFC-authorised funds are normally traded within normal trading hours on designated dealing days. Trading arrangements are set out in the offering documents of SFC-authorised funds, and material changes to such arrangements cannot be made without the prior approval of the SFC.

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

For SFC-authorised funds, suspension of dealing should only occur under exceptional circumstances. In deciding whether to suspend dealing, fund managers and trustees or custodians should have regard to the interests of investors and the circumstances of the fund. During a market crash, fund managers may consider a suspension of dealing if the underlying assets cannot be fairly valued or there is inadequate liquidity to meet redemption demand. Should the fund manager invoke a suspension, it 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 managers of funds with a heavy investment in a particular stock market to suspend dealing if their operations are severely affected by a crash in that market?

A:

The primary concern for the SFC is whether a fund manager's decision to suspend dealing would be in the interests of investors. In deciding whether to suspend dealing, fund managers should have regard to the interests of investors and the circumstances of the fund. It may not be necessary for the fund to be suspended if, for example, there is adequate liquidity to meet redemption demand. Managers of SFC-authorised funds are obligated to notify the SFC immediately of the decision to suspend dealing immediately. To inform investors, such a decision must also be published (within one day of the decision where practicable) and at least once a month in written form via appropriate means such as newspapers or websites during the suspension period. Investors can contact the fund manager or its Hong Kong representative for further information.

Q7:

Will a crash cause funds which heavily invest in a particular stock market to suffer a significant or total loss?

A:

Investment restrictions are imposed on SFC-authorised funds, eg, diversification rules and limitations on short selling and making loans, and an SFC-authorised fund is not allowed to acquire any assets which involve the assumption of unlimited liability. However, all investments involve risk. The value of a fund's investment portfolio, regardless of whether it is an SFC-authorised fund, may fall significantly due to a market crash. This may have a negative impact on the net asset value of the fund. As a result, investors may suffer significant losses or even a total loss of their investment capital.

In addition, a market crash is likely to lead to a suspension of dealing in a fund which is significantly exposed to a particular stock market if the underlying assets cannot be fairly valued or there is inadequate liquidity to meet redemption demand.

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