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.
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.
B/D; Bank; HF; IA
Cir, PR, 10/10/2017
Financial; Reporting; Risk; Treasury
Equity; Loan; Repo/Reverse; Securities; Short Sale; Stock Lending