Position Statement on Enhancing Current Short Selling Regulations
Release Date: 2011-10-10
10 October 2011
Position Statement on Enhancing Current Short Selling Regulations
Dear Sir/Madam,
We are writing to clarify our position regarding the enhancement of the existing short selling regulations to ensure clarity on this matter.
1. Our concerns about the short selling mechanism do not stem from a desire to avert market declines. We uphold the principles of a free market. However, when we identify loopholes, systemic risks, misuse, and indications of market instability within the current short selling framework, we feel compelled to advocate for more robust regulation. Our objective is to restore a fair and lawful trading environment that accurately mirrors investors' value judgments.
2. We propose strengthening regulations surrounding the current short selling mechanism. This includes enhancing transparency for both short sellers and lenders, imposing limits on maximum short positions, improving margin risk management, and instituting a conditional short selling ban.
3. We respectfully disagree with Secretary KC Chan's assertion that the current short selling system is devoid of systemic risks. A prudent government should adopt a proactive and cautious approach. In 2009, we consistently pointed out flaws in the closing auction session that led to the deliberate depression of HSBC’s value to HKD 28. We also opposed the rapid proliferation of derivatives, which culminated in the Lehman Brothers minibond crisis. The government should learn from past experiences, promptly review, and refine the short selling system.
Our Key Demands:
1. Establish a conditional short selling ban. Stock prices often serve as indicators of public confidence in the economy. If misused, short selling can trigger a confidence crisis, exacerbated by adverse news, reports, and rumors, leading to irrational asset sell-offs and social unrest. We propose that if the Hang Seng Index drops by 5% in a single day, or an individual stock by 10%, the market should be declared in a state of emergency, warranting a ban on short selling. This measure, common in Western countries, aims to stabilize confidence and facilitate normal market transactions.
2. Increase disclosure requirements for short sellers and lenders. At present, short sellers must report to the Securities and Futures Commission, while lenders have no disclosure obligations. We propose:
a. Similar to significant shareholders (over 5%), short sellers should disclose their positions if they exceed 5% of the total short positions.
b. Lenders must disclose their stock lending activities as they pertain to public interest and risk.
c. Enforce stringent regulations on margin and margin maintenance for short positions.
3. Impose limits on maximum short positions. While judicious short selling can offer hedging opportunities, excessive speculation can destabilize financial markets and fuel irrational behavior. We suggest capping individual short positions as a percentage of total short positions, such as 20%. Similarly, lenders should not lend more than 20% of their total holdings of a particular stock.
4. Clearly define the authorization process for stock lending, with strict penalties for unauthorized actions. The current system lacks clarity, often benefiting intermediaries while original stockholders suffer the consequences of price drops. This unfair arrangement harms investors and requires rigorous regulation. Clear client authorization should be mandated for stock lending. It is crucial to clarify whether the Hong Kong Mandatory Provident Fund and government-appointed fund managers are authorized to lend stocks. Unauthorized lending should be severely penalized as asset theft.
We represent over 2,900 members from the securities and futures industry, reflecting a broad spectrum of opinions from industry peers, investors, and the public. We urge the exchange authorities to consider public opinion, prioritize financial security, enhance short selling mechanisms, and safeguard investor rights to foster a more harmonious and favorable investment climate. Neglecting these issues could result in financial disasters for which the government will be held accountable.
Sincerely,
Hong Kong Securities and Futures Professionals Association
Position Statement on Enhancing Current Short Selling Regulations
Dear Sir/Madam,
We are writing to clarify our position regarding the enhancement of the existing short selling regulations to ensure clarity on this matter.
1. Our concerns about the short selling mechanism do not stem from a desire to avert market declines. We uphold the principles of a free market. However, when we identify loopholes, systemic risks, misuse, and indications of market instability within the current short selling framework, we feel compelled to advocate for more robust regulation. Our objective is to restore a fair and lawful trading environment that accurately mirrors investors' value judgments.
2. We propose strengthening regulations surrounding the current short selling mechanism. This includes enhancing transparency for both short sellers and lenders, imposing limits on maximum short positions, improving margin risk management, and instituting a conditional short selling ban.
3. We respectfully disagree with Secretary KC Chan's assertion that the current short selling system is devoid of systemic risks. A prudent government should adopt a proactive and cautious approach. In 2009, we consistently pointed out flaws in the closing auction session that led to the deliberate depression of HSBC’s value to HKD 28. We also opposed the rapid proliferation of derivatives, which culminated in the Lehman Brothers minibond crisis. The government should learn from past experiences, promptly review, and refine the short selling system.
Our Key Demands:
1. Establish a conditional short selling ban. Stock prices often serve as indicators of public confidence in the economy. If misused, short selling can trigger a confidence crisis, exacerbated by adverse news, reports, and rumors, leading to irrational asset sell-offs and social unrest. We propose that if the Hang Seng Index drops by 5% in a single day, or an individual stock by 10%, the market should be declared in a state of emergency, warranting a ban on short selling. This measure, common in Western countries, aims to stabilize confidence and facilitate normal market transactions.
2. Increase disclosure requirements for short sellers and lenders. At present, short sellers must report to the Securities and Futures Commission, while lenders have no disclosure obligations. We propose:
a. Similar to significant shareholders (over 5%), short sellers should disclose their positions if they exceed 5% of the total short positions.
b. Lenders must disclose their stock lending activities as they pertain to public interest and risk.
c. Enforce stringent regulations on margin and margin maintenance for short positions.
3. Impose limits on maximum short positions. While judicious short selling can offer hedging opportunities, excessive speculation can destabilize financial markets and fuel irrational behavior. We suggest capping individual short positions as a percentage of total short positions, such as 20%. Similarly, lenders should not lend more than 20% of their total holdings of a particular stock.
4. Clearly define the authorization process for stock lending, with strict penalties for unauthorized actions. The current system lacks clarity, often benefiting intermediaries while original stockholders suffer the consequences of price drops. This unfair arrangement harms investors and requires rigorous regulation. Clear client authorization should be mandated for stock lending. It is crucial to clarify whether the Hong Kong Mandatory Provident Fund and government-appointed fund managers are authorized to lend stocks. Unauthorized lending should be severely penalized as asset theft.
We represent over 2,900 members from the securities and futures industry, reflecting a broad spectrum of opinions from industry peers, investors, and the public. We urge the exchange authorities to consider public opinion, prioritize financial security, enhance short selling mechanisms, and safeguard investor rights to foster a more harmonious and favorable investment climate. Neglecting these issues could result in financial disasters for which the government will be held accountable.
Sincerely,
Hong Kong Securities and Futures Professionals Association