(Sept 25): Hong Kong’s stock brokers have failed to convince regulators to delay a new cap on margin financing they say will lead to closures and a further fall in stock market turnover.
Industry bodies representing the city’s brokerages say they will now take their opposition to the government after the Securities and Futures Commission on Monday rejected their request.
The new rule, which will apply from October 4, will cap the amount of money a brokerage house can lend to its clients to trade stocks at five times its capital. There is currently no restriction on the practice known as margin lending, regarded as a crucial source of income for brokers.
The new regulation has come as a huge blow to many of Hong Kong’s smaller brokerages, which are already struggling to keep their doors open with their revenues down almost a third amid the city’s ongoing political crisis.
Protests force Hong Kong’s small stock brokers out of business
“We are very disappointed that the SFC did not accept our demand to delay the new rule for a year. The commission only agreed to adopt a ‘light touch’ in enforcement, which does not help,” said lawmaker Christopher Cheung Wah-fung, who is also a broker.
The SFC says the rule is necessary as a way of minimising risk in the financial market after margin lending boomed to record levels and the quality of the loans deteriorated.
Cheung and representatives of nine industry bodies had tried during a three-hour meeting on Monday afternoon to convince the SFC’s deputy chief executive Julia Leung Fung-yee and other executives to accept their demand to push back the new rule by one year.
“We will not give up. Our next step forward is to bring the matter to the Financial Services and the Treasury Bureau to urge the government to listen to our demand,” Cheung told the Post after the meeting.
The postponement was badly needed for the almost 600 local brokerage houses, Cheung said, as many small players struggled to make ends meet. Stock market turnover has plummeted by 30 per cent year on year during the anti-government protests, now well into their fourth month.
Ten brokerage firms have already shut down during the protest period, while many more have started to lay people off.
The SFC told participants at the meeting that the new guidelines are an important risk management tool of particular relevance in times of increased market volatility.
“The SFC has also made clear that the guidelines are flexible. And the SFC will engage constructively with individual brokers in their transition to operate in alignment with these expectations,” an SFC source told the Post.
Margin financing refers to investors paying interest to brokers to borrow funds to trade equities or other financial assets by using the stocks as collaterals. Such lending provides an essential source of income for stockbrokers, according to Tom Chan Pak-lam, chairman of the Institute of Securities Dealers, who also attended the meeting.
“The commission income has decreased by 30 per cent in recent month as the [stock market] turnover has decreased. The new margin financing rule will force them to cut down their lending and hence their income will go down further,” Chan said.
“This will lead to a market slump as investors may be forced to sell their stocks to repay the brokers’ lending under the tightened new rule.
“The current weak market situation definitely makes it a bad time to introduce the new rule. We are very disappointed that the SFC did not care about the livelihood of the brokers and the negative impact on the stock market.”
The SFC’s new rules are aimed at cutting down risk after brokers’ margin lending jumped by nine times to HK$206 billion (US$26.2 billion) in 2017 from about HK$21 billion in 2006. The loan quality has also deteriorated in that time, the watchdog says.