April 4, 2019 / 9:56 AM / 3 months ago

Hong Kong to cap securities margin financing

HONG KONG, April 4 (Reuters) - Hong Kong’s financial markets watchdog plans to limit the amount brokers can lend against shares to five times their capital.

Margin financing is an important source of revenue particularly for the city’s small brokers, but last year the Securities and Futures Commission (SFC) said it was concerned the activity posed a risk to financial stability in the Asian financial hub.

At that time, the regulator proposed a series of measures, including capping securities lending at between two and five times the capital of the brokerage.

The SFC on Thursday issued the final version of the rules, which as well as imposing a cap on margin loans, require brokers to control their exposure to individual clients to avoid concentration risks, and strictly enforce margin calls.

The rules will take effect on Oct. 4.

Industry members welcomed the rules.

Christopher Cheung, a stockbroker and member of Hong Kong’s legislature representing the financial services sector, said in an email on Thursday that given the SFC insisted on capping margin financing, the level of five times capital was “barely acceptable”.

Small brokers had opposed the SFC’s proposal to impose a stricter cap on margin financing, saying they feared it would reduce trading turnover.

SFC said last year that brokers’ margin loans increased nine-fold between 2006 and 2017, while the quality of margin loans had declined, describing the situation as “very worrying”.

“Managing margin lending risk is crucial to ensure brokers’ financial stability and protect market integrity,” SFC Chief Executive Officer Ashley Alder said on Thursday. (Reporting by Alun Johnl; Editing by Kim Coghill)

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