HK SFC Margin Finance Risk


On Oct. 10, HK SFC issued risk guide on securities margin finance.


  • Concern of poor risk management in margin, follows volatility in small cap stocks.
  • Weak risk management policy, and internal control of securities margin financing.
  • Created undue risk and in some cases resulted in financial loss, to licensed firms.
  • Excess exposures to securities collateral which is highly concentrated, correlated
    (e.g. stock with significant cross shareholdings), volatile or illiquid (i.e. holding a
    large portion of a stock given turnover or capitalisation, so is difficult to liquidate.
  • If market conditions reverse and share prices plunge, margin loans will be at risk.
  • Code of Conduct
  • Code of conduct requires licensed corporation to have clear margin lending policy.
  • To provide basis for protecting capital, and ensure policy and procedures in place.
  • Allow firm to identify risks, carry out effective monitoring, take corrective actions.
  • Develop, document and communicate to staff, and strictly enforce, a clear policy.
  • Identify, avoid excessive or concentrated exposure to stocks with high correlation.
  • Avoid excess exposure to individual securities relative to liquidity or capitalization.
  • Maintain a list of acceptable securities collateral, and assign appropriate haircuts.
  • Avoid concentration of lending to related clients; prevent clients with outstanding
    margin call from margin trading; and promptly collect any amount due as margin.
  • Other Requirements
  • In serious cases, SFC may take regulatory action against firm for failing to comply.
  • Even in the absence of an immediate breach of the minimum capital requirements.
  • Comprehensive rule framework on margin finance, is made up of code of conduct,
    schedule of requirements for securities margin financing activities (in Schedule 5).
  • Management, supervision and control guidelines of licensed persons, require their
    risk policies ensure risk of loss from client defaults at acceptable/appropriate level.
  • Make haircuts to collateral market values to establish clients have adequate equity.
  • Aggregate credit risk posed by all clients belonging to a single group of companies.
  • Securities and Futures (Financial Resources) Rules, which set out minimum capital.
  • Along with treatment of margin loans and related risks in liquid capital calculations.
  • Requirements for handling of client securities collateral per Client Securities Rules.
  • Need to obtain written authorizations from clients for re-pledging of their collateral.

Regulators HK SFC
Entity Types B/D; Bank; HF; IA
Reference Cir, PR, 10/10/2017
Functions Financial; Reporting; Risk; Treasury
Countries Hong Kong
Products Equity; Loan; Repo/Reverse; Securities; Short Sale; Stock Lending
Regions AP
Rule Type Guidance
Rule Date 10/10/2017
Effective Date 10/10/2017
Rule Id 35438
Linked to N/A
Report Issue 10/15/2017
Report Section International

Last substantive update on 10/10/2017