SFC Consultation Paper on Proposed Measures to Address Risks Arising from Securities Margin Financing
Release Date: 2004-10-28
October 28, 2004
Intermediaries Supervision Department
Securities and Futures Commission
Subject: Response to the Consultation Paper on Proposed Measures to Address Risks Arising from Securities Margin Financing
Dear Sir/Madam,
Our union has engaged in extensive discussions with our members regarding the consultation paper. After compiling and analyzing the feedback, we express our firm opposition to the proposed measures detailed within the paper for the following eight key reasons. We strongly urge the SFC to consider these perspectives seriously, as they have extensive implications and could potentially incite a “domino effect” in the stock market due to forced liquidations.
1. Evolving Market Conditions: The landscape and risk associated with securities financing today are markedly different from the “C. A. Pacific Securities Limited Incident” (CAPS) era. In early 1998, during the aftermath of the 1997 stock market boom, the total margin lending was immense, exemplified by CAPS’ unauthorized lending of $548 million. Currently, total margin lending is approximately $16 billion, with collateral market value reaching $64.3 billion, indicating a significantly reduced scale and risk. Therefore, additional regulatory measures seem unnecessary.
2. Current Regulation Sufficiency: Securities margin operations are already under stringent regulation. Historically, margin lending was facilitated through finance companies with money lender licenses. Following the CAPS Incident, margin lending was classified as a regulated activity under the Securities and Futures Ordinance, with capital requirements for securities companies increased from $5 million to $10 million, now proposed to rise to $30 million. The sector's shareholder funds have grown by 60% since 2000, demonstrating companies' commitment to client risk management.
3. Adequate Legal Framework: The new Securities and Futures Ordinance, effective from April 1 of last year, has criminalized many previously unregulated activities. In this fortified legal milieu, additional regulatory measures appear excessive and redundant.
4. Economic Impact: Margin lending is a vital revenue stream for securities firms. The proposed tightening could severely limit business growth, leading to downsizing and increased unemployment in the sector. The SFC's approach may inadvertently benefit banks at the expense of securities companies.
5. Misguided Objectives: Despite the CAPS Incident occurring over six years ago, there has been no formal government report explaining its causes. Industry insights suggest it resulted from excessive illegal borrowing, misappropriation of client assets, and fraudulent market schemes. The SFC's current proposals, lacking a government-backed report, unjustly penalize the entire industry for past isolated misconduct.
6. Simpler Solutions Available: The main goal of the new proposals is to mitigate concentration and credit risk. Prohibiting the use of non-borrowing clients' assets for refinancing or promoting cash accounts are simpler solutions that do not require drastic regulatory changes. Immediate adoption of independent investor accounts post-CAPS would have already addressed investor risk concerns.
7. Risk of Ignoring Market Dynamics: The proposals overlook the interests of all market players. Tightening regulations on margin lending, especially for lower-tier stocks, may force stakeholders to liquidate assets, triggering a market crisis similar to the 2002 "penny stock incident." The proposed transition period provides inadequate mitigation for potential adverse effects.
8. Impact on SMEs: The proposed deduction rates for lower-tier stocks disproportionately affect small and medium-sized enterprises (SMEs), contradicting the government's commitment to supporting SMEs. This disparity in treatment between blue-chip and lower-tier stocks reflects an inequitable approach.
For these reasons, our union strongly opposes the proposed measures and urges the SFC to undertake a comprehensive review of these issues, considering the profound impact on the securities industry.
Sincerely,
Wong Kwok On David
Chairman
Hong Kong Securities and Futures Staff Union
Intermediaries Supervision Department
Securities and Futures Commission
Subject: Response to the Consultation Paper on Proposed Measures to Address Risks Arising from Securities Margin Financing
Dear Sir/Madam,
Our union has engaged in extensive discussions with our members regarding the consultation paper. After compiling and analyzing the feedback, we express our firm opposition to the proposed measures detailed within the paper for the following eight key reasons. We strongly urge the SFC to consider these perspectives seriously, as they have extensive implications and could potentially incite a “domino effect” in the stock market due to forced liquidations.
1. Evolving Market Conditions: The landscape and risk associated with securities financing today are markedly different from the “C. A. Pacific Securities Limited Incident” (CAPS) era. In early 1998, during the aftermath of the 1997 stock market boom, the total margin lending was immense, exemplified by CAPS’ unauthorized lending of $548 million. Currently, total margin lending is approximately $16 billion, with collateral market value reaching $64.3 billion, indicating a significantly reduced scale and risk. Therefore, additional regulatory measures seem unnecessary.
2. Current Regulation Sufficiency: Securities margin operations are already under stringent regulation. Historically, margin lending was facilitated through finance companies with money lender licenses. Following the CAPS Incident, margin lending was classified as a regulated activity under the Securities and Futures Ordinance, with capital requirements for securities companies increased from $5 million to $10 million, now proposed to rise to $30 million. The sector's shareholder funds have grown by 60% since 2000, demonstrating companies' commitment to client risk management.
3. Adequate Legal Framework: The new Securities and Futures Ordinance, effective from April 1 of last year, has criminalized many previously unregulated activities. In this fortified legal milieu, additional regulatory measures appear excessive and redundant.
4. Economic Impact: Margin lending is a vital revenue stream for securities firms. The proposed tightening could severely limit business growth, leading to downsizing and increased unemployment in the sector. The SFC's approach may inadvertently benefit banks at the expense of securities companies.
5. Misguided Objectives: Despite the CAPS Incident occurring over six years ago, there has been no formal government report explaining its causes. Industry insights suggest it resulted from excessive illegal borrowing, misappropriation of client assets, and fraudulent market schemes. The SFC's current proposals, lacking a government-backed report, unjustly penalize the entire industry for past isolated misconduct.
6. Simpler Solutions Available: The main goal of the new proposals is to mitigate concentration and credit risk. Prohibiting the use of non-borrowing clients' assets for refinancing or promoting cash accounts are simpler solutions that do not require drastic regulatory changes. Immediate adoption of independent investor accounts post-CAPS would have already addressed investor risk concerns.
7. Risk of Ignoring Market Dynamics: The proposals overlook the interests of all market players. Tightening regulations on margin lending, especially for lower-tier stocks, may force stakeholders to liquidate assets, triggering a market crisis similar to the 2002 "penny stock incident." The proposed transition period provides inadequate mitigation for potential adverse effects.
8. Impact on SMEs: The proposed deduction rates for lower-tier stocks disproportionately affect small and medium-sized enterprises (SMEs), contradicting the government's commitment to supporting SMEs. This disparity in treatment between blue-chip and lower-tier stocks reflects an inequitable approach.
For these reasons, our union strongly opposes the proposed measures and urges the SFC to undertake a comprehensive review of these issues, considering the profound impact on the securities industry.
Sincerely,
Wong Kwok On David
Chairman
Hong Kong Securities and Futures Staff Union