Response to Consultation Paper on Proposed Guidelines for Securities Margin Financing Activities
Release Date: 2018-10-18
October 18, 2018
To: Securities and Futures Commission
Subject: Response to Consultation Paper on Proposed Guidelines for Securities Margin Financing Activities
1. Introduction: On August 17, 2018, your Commission released the Consultation Paper, and our Association hereby submits this written response.
2. Market Analysis: According to paragraph 3 of the Consultation Paper, the total margin loans issued by brokerage firms surged from HKD 21 billion on December 31, 2006, to HKD 206 billion by December 31, 2017—an increase of ninefold. In response, we refer to your document:
- The market capitalization of the Hong Kong Main Board and GEM rose by 1.54 times, from HKD 13,377 billion in 2006 to HKD 33,998 billion in 2017.
- The average daily turnover grew by 1.61 times, from HKD 338 billion in 2006 to HKD 882 billion in 2017.
- The number of securities dealers and margin financiers expanded by 91%, from 641 in 2006 to 1,222 in 2017.
- Active margin clients increased by 3.2 times, from 80,348 in 2006 to 337,599 in 2017.
Given these market dynamics, the rise in total margin loans appears justified and objective.
3. Collateral Ratio Trends: The average securities financing collateral ratio from 2006 to 2017 exhibits a decline, with the ratio in 2017 being 21% lower than in 2006. This indicates a trend of decreasing risk, suggesting heightened risk awareness amidst an increase in securities margin providers. Thus, the Commission's concerns about margin financing activities might be overstated. We propose that securities margin providers adjust the collateral ratio based on their risk tolerance.
4. Concentration of Margin Providers: Data from 2010 to 2017 indicates that the top 20 securities margin providers accounted for 73% to 79% of the industry's outstanding margin loans, dominating three-quarters of the market share. We believe that issuing administrative directives to these 20 firms is a viable approach to ensure proper margin financing management, without necessitating additional stringent guidelines for the remaining 1,200 providers. Furthermore, we request clarification on the preference for shareholder capital over the total margin loans.
5. Risk Management: Acknowledging the inherent risks in securities margin business, we concur with the regulation of single-stock collaterals and those with significant issued volumes. For instance, imposing a cap based on a proportion of the average daily trading volume can mitigate excessive stock concentration during price drops, thereby preventing market disruptions.
6. Monitoring Pledged Stocks: Although securities margin providers may not always be aware of a pledger's other engagements, your Commission can identify the top 20 margin clients through the Financial Resources Rules (FRR) monitoring. This data allows for the assessment of overall stock financing across Hong Kong. If a stock is found to be highly pledged, administrative orders can be issued to adjust financing limits or require additional margin from clients to mitigate market risks.
7. Uniform Practices: As highlighted in point 4, we anticipate the adoption of uniform practices by all securities margin providers, but recommend avoiding overly strict measures. We hope that future implementations will include a robust monitoring system for significant stakeholders.
We invite further discussion on our response to the Consultation Paper. Please contact our Chairman, Mr. Wong Kwok On David, for any inquiries.
Best regards,
Wong Kwok On David
Chairman
Hong Kong Securities and Futures Professionals Association
To: Securities and Futures Commission
Subject: Response to Consultation Paper on Proposed Guidelines for Securities Margin Financing Activities
1. Introduction: On August 17, 2018, your Commission released the Consultation Paper, and our Association hereby submits this written response.
2. Market Analysis: According to paragraph 3 of the Consultation Paper, the total margin loans issued by brokerage firms surged from HKD 21 billion on December 31, 2006, to HKD 206 billion by December 31, 2017—an increase of ninefold. In response, we refer to your document:
- The market capitalization of the Hong Kong Main Board and GEM rose by 1.54 times, from HKD 13,377 billion in 2006 to HKD 33,998 billion in 2017.
- The average daily turnover grew by 1.61 times, from HKD 338 billion in 2006 to HKD 882 billion in 2017.
- The number of securities dealers and margin financiers expanded by 91%, from 641 in 2006 to 1,222 in 2017.
- Active margin clients increased by 3.2 times, from 80,348 in 2006 to 337,599 in 2017.
Given these market dynamics, the rise in total margin loans appears justified and objective.
3. Collateral Ratio Trends: The average securities financing collateral ratio from 2006 to 2017 exhibits a decline, with the ratio in 2017 being 21% lower than in 2006. This indicates a trend of decreasing risk, suggesting heightened risk awareness amidst an increase in securities margin providers. Thus, the Commission's concerns about margin financing activities might be overstated. We propose that securities margin providers adjust the collateral ratio based on their risk tolerance.
4. Concentration of Margin Providers: Data from 2010 to 2017 indicates that the top 20 securities margin providers accounted for 73% to 79% of the industry's outstanding margin loans, dominating three-quarters of the market share. We believe that issuing administrative directives to these 20 firms is a viable approach to ensure proper margin financing management, without necessitating additional stringent guidelines for the remaining 1,200 providers. Furthermore, we request clarification on the preference for shareholder capital over the total margin loans.
5. Risk Management: Acknowledging the inherent risks in securities margin business, we concur with the regulation of single-stock collaterals and those with significant issued volumes. For instance, imposing a cap based on a proportion of the average daily trading volume can mitigate excessive stock concentration during price drops, thereby preventing market disruptions.
6. Monitoring Pledged Stocks: Although securities margin providers may not always be aware of a pledger's other engagements, your Commission can identify the top 20 margin clients through the Financial Resources Rules (FRR) monitoring. This data allows for the assessment of overall stock financing across Hong Kong. If a stock is found to be highly pledged, administrative orders can be issued to adjust financing limits or require additional margin from clients to mitigate market risks.
7. Uniform Practices: As highlighted in point 4, we anticipate the adoption of uniform practices by all securities margin providers, but recommend avoiding overly strict measures. We hope that future implementations will include a robust monitoring system for significant stakeholders.
We invite further discussion on our response to the Consultation Paper. Please contact our Chairman, Mr. Wong Kwok On David, for any inquiries.
Best regards,
Wong Kwok On David
Chairman
Hong Kong Securities and Futures Professionals Association