The Securities and Futures Commission (“SFC”) on 17 August issued a consultation paper on the “Proposed Guidelines for Securities Margin Financing Activities” (the “Consultation Paper”) to clarify, codify and standardise the risk management practices for securities margin financing (“SMF”).
The Consultation Paper was issued subsequent to a review of SMF activities conducted by SFC in 2017 (the “SMF Review”). According to the SMF Review, brokers’ margin loans increased ninefold between 2006 and 2017, but the margin loan quality had deteriorated. There were slack risk controls which led to excessive concentration of exposure to margin clients and individual collateral stocks, particularly non-index stocks and illiquid stocks. There were also delays in the collection of outstanding margins and inadequate stress testing.
To address the above, SFC in the Consultation Paper proposed guidelines on the following key risk control areas:
- Total margin loans controls
- Margin client credit limit controls
- Securities collateral concentration controls
- Margin client concentration controls
- Haircuts for securities collateral
- Margin calls, stopping further advances and forced liquidation
- Stress testing
SFC proposes to require SMF brokers to put in place prudent controls to prevent excessive leverage and over concentration both in terms of securities collateral and individual margin clients. Brokers would also be required to set and enforce specific policies for margin calls and conduct stress tests at least monthly. The above proposed guidelines would set out clearer guidance for haircuts for securities acceptable as collateral.
The proposed guidelines will apply to all licensed corporations carrying SMF activities. Any deviation from the guidelines must be properly justified by equivalent or compensating controls which are no less prudent than those sent out in those guidelines.
With the assistance of the Investment Products & Financial Services Committee, the Law Society reviewed the consultation questions and has provided a submission. The SFC’s proposals in the Consultation Paper are generally supported.
A copy of the submissions can be found on the Law Society’s website: