Opposition to the Implementation of the “Consultation Paper on the Proposed Guidelines for Securities Margin Financing Activities” by the SFC
Release Date: 2019-09-30
Securities and Futures Commission
By Ordinary Mail and Email
35th Floor, Cheung Kong Center
2 Queen's Road Central, Hong Kong
September 26, 2019
To:
Securities and Futures Commission
Board of Directors
All Directors
By Ordinary Mail and Email
35th Floor, Cheung Kong Center
2 Queen's Road Central, Hong Kong
September 26, 2019
To:
Securities and Futures Commission
Board of Directors
All Directors
Subject: Opposition to the Implementation of the “Consultation Paper on the Proposed Guidelines for Securities Margin Financing Activities” by the SFC
Background
In August 2018, the Securities and Futures Commission (SFC) released a consultation paper regarding the proposed “Consultation Paper on the Proposed Guidelines for Securities Margin Financing Activities” (hereafter referred to as the “Consultation Paper” ). This was during a period of relative economic and social stability in Hong Kong. By October 2018, feedback was provided in response to the Consultation Paper, reflecting the prevailing conditions at that time.
The SFC received a total of 33 responses, with 19 being anonymous. We raise concerns regarding the representativeness of these anonymous submissions and seek clarity on the stakeholder demographics behind them.
Recent Developments
Since mid-February of this year, the government has put forward amendments to the “Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill 2019” which have faced opposition from various sectors, including the business community. This opposition has escalated into a series of significant social activities since mid-June, contributing to a downturn across multiple industries and a pervasive crisis of confidence. Notably, two internationally recognized rating agencies have downgraded Hong Kong's rating. Additionally, the ongoing U.S.-China trade war has intensified both external and internal pressures on Hong Kong, yielding sharp declines in the stock and property markets, alongside an economic recession and rising unemployment.
Recent Actions by Our Association and Industrial Organizations Regarding the “Consultation Paper”
On August 8 of this year, Mr. Christopher Cheung Wah-fung, Legislative Council member for the financial services sector, sent a letter to Mr. Ashley Alder, CEO of the SFC, highlighting the severe impact of recent events on Hong Kong's industry. He urged the SFC to temporarily suspend the “Consultation Paper” in order to navigate these challenges collectively.
On September 23, the SFC convened a meeting with various securities industry organizations, including our association, to discuss the “Guideline on Securities Margin Financing Activities”. During this meeting, we requested (1) a suspension, (2) a delay, or (3) an initial observation period during which the guideline would not be enforced, followed by a review. However, the SFC declined to make any concessions.
At the same meeting, our Association's Chairman emphasized:
1. The existing “Securities and Futures (Financial Resources) Rules” governing margin business operates effectively;
2. Administrative directives could be applied to individual brokers or in a tiered manner;
3. A majority of brokers are unprepared for the implementation of the “Guideline on Securities Margin Financing Activities.”
In response, the SFC representative provided only verbal acknowledgment without establishing a timeline for exercising discretionary power.
Should the SFC proceed with the implementation of the “Guideline on Securities Margin Financing Activities” amidst Hong Kong's ongoing crisis, we must highlight the potential for irreversible consequences:
1. Implementation could necessitate simultaneous stock sales by brokers to comply with the guideline, potentially triggering a market crash;
2. Brokers are already facing a steep decline in commission income, and further reductions in margin income could lead to significant job losses, particularly among small and medium-sized brokers that support many families;
3. The liquidity of the stock market may diminish, reducing international investors' interest in Hong Kong;
4. The long-standing principle of a “small government, big market” is being undermined as regulatory constraints tighten, which could deter both local and international investments and adversely impact the job market.
Suggestions
1. We strongly advocate for the withdrawal of the new margin requirements outlined in the “Guideline on Securities Margin Financing Activities”;
2. The Hong Kong Stock Exchange and SFC should relax regulatory constraints, eliminate barriers, and waive fees to help the government and populace navigate these challenges together;
3. Market diversification should be pursued without blind internationalization, fostering local brokers to create jobs and alleviate public discontent;
4. A genuine dialogue concerning market development is essential, incorporating diverse industry perspectives and avoiding superficial consultations that accept opinions yet persist with ineffective policies;
5. Regulations should be tiered and flexible to minimize costs for brokers, balancing risk, cost, and benefit considerations, thereby freeing resources for business promotion and opportunity exploration;
6. Implement “anti-dumping laws” to prevent predatory business practices and restore a minimum commission system;
7. Recommend the cancellation of the CRS “Common Reporting Standard” to enhance the appeal of foreign investments;
8. Ensure strict protection of employment for local residents.
In conclusion, we express our deep concerns with the following reflections: Without stability, prospects for growth diminish, and without a solid basis for analysis and valuation, investment becomes untenable. The absence of investment leads to market decline, income loss, broker failures, and while the SFC may achieve its aim of reduced regulation, society bears the costs. The cycle of unemployment, public discontent, and governance challenges will only intensify. Can we endure such circumstances? Is this truly the government's policy objective?
We earnestly implore your Commission to recognize the industry's challenges, address the pressing needs of the populace, alleviate their distress, and heed the industry's voices and demands.
For any inquiries regarding this letter, please feel free to contact me or our Mr. Mofiz Chan, Director of Industrial Relations.
Sincerely,
Wong Kwok On David
Hong Kong Securities and Futures Professionals Association
CC:
Ms. Carrie Lam Cheng Yuet-ngor, GBM, GBS, Chief Executive
Mr. Paul Chan Mo-po, GBS, MH, JP, Financial Secretary
Mr. James Henry Lau Yee Cheung Jr, JP, Secretary for Financial Services and the Treasury
Mr. Charles Li, Chief Executive of Hong Kong Exchanges and Clearing Limited
Mr. Christopher Cheung Wah-fung, SBS, JP, Legislative Council Member (Financial Services Sector)
Mr. Ng Chau-pei Stanley, SBS, President of the Hong Kong Federation of Trade Unions and the Hong Kong Clerical and Professional Employees General Union
Legislative Council Members (FTU Team)
- Hon. Kwok Wai-keung
- Hon. Wong Kwok-kin
- Hon. Alice Mak Mei-kuen
- Hon. Ho Kai-ming
- Hon. Luk Chung-hung
Ms. Leung Fung-yee, SBS, JP, SFC Deputy CEO