SFC Proposal to Restrict Margin Lending Threatens Brokers’ Survival – Report

LegCo member Christopher Cheung met with SFC chairman Carlson Tong to represent broker concerns on potential margin lending restrictions.

Hong Kong brokers have united against restrictions on margin lending proposed by the SFC (Securities and Futures Commission), saying that the move would reduce trading volume and threaten the industry’s survival.

According to the SCMP, Christopher Cheung Wah-fung, a member of LegCo (the Legislative Council) and chief executive of Christfund Securities, recently met with SFC chairman Carlson Tong Ka-shing to represent the interests of the financial services sector against the proposed margin lending requirements, the subject of an SFC reform proposal in consultation until the 18 October.

The reforms were proposed after the SFC found in its survey of brokers last year that half of the industry was offering margin loans equal to five times their capital. In some cases, loans equal to nine times capital were offered, and Hong Kong currently has no restrictions on how much brokers can lend to retail investors compared to capital reserves.

In contrast, China imposes a cap of three times capital for margin lending and Singapore caps margin loans to three to four times broker capital.

The SFC is considering a cap between two to five times of the capital, controls that are required given a “deterioration” in the quality of loans made to clients, said the SFC’s Tong. “This, together with the uncertain market conditions, led us to conclude we need to take early action while the market is still stable and the situation manageable,” he told the SCMP recently.

Cheung reportedly told the SFC that brokers would be willing to accept a smaller cap on margin lending, but that “it should be set at five times or more than the capital of the brokerage firm.”

Brokers argue that the margin lending restrictions will further cut fees, which are already under pressure from the rise of internet trading. They charge between 4 and 9 percent interest on margin lending, a source of revenue Hong Kong’s 500 or so brokers increasingly rely on.

“The cap would reduce the amount of money available to invest in the stock market. This will further hit market sentiment and dry up liquidity,” Cheung told the SCMP. “If that happens, it would reduce overall market turnover, which has been on a decline in recent months.”

Cheung added that the proposed restrictions did not consider the quality of collateral brokers accepted in exchange for margin loans.

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