SFC issues consultation paper on short selling disclosures

Yesterday the HK SFC issued a second consultation paper (see www.sfc.hk) on the issue of mandatory short selling position disclosures.  This paper follows on from the first one where the SFC asked the industry to comment on whether a reporting regime should be put in place.  The MFA and our firm were the only two that at the time said it was a bad idea.  Other organisations seemed to lack the will to explain what a silly policy idea this was.

So now we have the consultation on how the new rules will work.

The new rules essentially will invovle the following:

1 - It will apply initially just to Hang Seng Index component stocks
2 - Reporting threshold is 0.02%
3 - Reporting would be once a week, within 2 days of the last trading day of the week
4 - Reporting is aggregated and published one week after the reporting date, individual positions are confidential
5 - Reporting will be done electronically
6 - OTC short positions do not need to be reported
7 - Reporting is done by the entity beneficially owning the security, ie a fund has an obligation to report.  If a manager has more than one fund then each fund has a separate obligation to report
8- It will be a criminal offence to not comply with the rules with both jail terms and fines for breaches

The new system will be costly to implement and the majority of smaller managers/funds will probably just do what many do in Australia and Japan and go on swap.  The loser here will be investors.  Going on swap adds a few basis points here and there to the cost of every trade.

The Commission is wrong on this point.  There is no policy need for this in Hong Kong, the Commission has other established tools at its disposal to monitor the volume of short sales in relation to a security and to find out who is behind such selling.

In addition the proposal that breaching this costly and unecessary legislation would be a criminal offence is totally unacceptable.  Lets hope the investment community in Hong Kong has a little more stomach to complain to its regulator this time around than they did last time.

Mr Mok Kee Tong short selling fine

On 8 July the FSC reported that Mr Mok Kee Tong, a licensed representative of Lehin Securities Limited, had been fined $54,000 after pleading guilty to 18 charges of illegally short selling. Mok was also instructed to pay the SFC investigation costs.

The SFC’s reported that its investigation found that between 3 September 2009 and 11 December 2009, Mok conducted intraday short selling involving 14 stocks traded on The Stock Exchange of Hong Kong Limited when he did not have a presently exercisable and unconditional right to sell them and did not believe or have reasonable grounds to believe that he had such right (thus constituting illegal short selling). Mok made a profit on each of the short selling occasions.

For further information please see Short Selling Fine

HK SFC takes action against short seller

The Hong Kong Securities and Futures Commission announced that it had suspended the license of an individual following the placement of naked short sales on the Hong Kong market.  In Hong Kong this practice is illegal.  The annoucement was as follows:

SFC suspends Mak Chi Leung for short selling breaches

The Securities and Futures Commission (SFC) has suspended Mr Mak Chi Leung, a responsible officer of KAB Asia Securities Ltd (Note 1), for six weeks from 17 March 2010 to 27 April 2010 for short selling breaches (Note 2).

An SFC investigation found that Mak placed orders for a client resulting in 100 short selling transactions between June and August 2008. Mak also conducted 23 short selling transactions in his own account during the same period.

The SFC found Mak guilty of misconduct. Mak accepted responsibility for his conduct, which earned him a reduction in penalty from two months to six weeks.

End

Notes:

1. Mak is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
2. The selling of stocks through the Stock Exchange of Hong Kong Ltd is naked short selling unless at the time of the sale, the seller (or his client, if he is an agent) has a presently exercisable and unconditional right to sell the stocks, or believes and has reasonable grounds to believe that he (or his client, as the case may be) has such a right. Unless exempted, naked short selling is prohibited. All the short selling transactions in question were naked short sales.

Short reporting for Hong Kong

Whether Hong Kong needs it or not, and we would suggest it does not need it, short position reporting is coming to Hong Kong.  The following was on the SFC website today:

SFC to adopt new short-position reporting regime

In a set of consultation conclusions released today, the Securities and Futures Commission (SFC) announced that after taking into account industry feedback and the domestic market situation, it will introduce a short-position reporting regime to enhance transparency of short-selling activities in Hong Kong.

The SFC received 21 responses from market participants to its 31 July 2009 consultation paper on increasing short-selling transparency which discussed two possible approaches: enhancing the existing transactional reporting regime and implementing a new short-position reporting model.

“A build-up of large short positions may be potentially disruptive to market stability,” said the SFC’s Chief Executive Officer Mr Martin Wheatley. “A short-position reporting regime will not only complement Hong Kong’s robust short-selling regulatory framework but will also provide a more complete picture of short-selling activities in our market.”

Under the proposed regime, the reporting obligation will be triggered if a short position is equal to or exceeds, 0.02% of the issued share capital of a listed company, or a market value of $30 million, whichever is lower. Weekly reports must be submitted to the SFC until the short position falls below both trigger levels. The SFC will publish aggregated short positions of each stock on an anonymous basis a week later.

The proposed short-position reporting regime will only be applicable to constituent stocks of the Hang Seng Index, the H-shares Index, financial stocks and other stocks specified by the SFC. Derivatives will not be included.

The new reporting model will be implemented by a new subsidiary legislation, on which the SFC will be consulting the public in due course.

The consultation paper conclusions reached by the SFC are sad in that they really did not address the issue of the cost of the information that is going to be provided and whether that cost will be of any benefit to Hong Kong.  If the rules were in place tomorrow a short position of more than HK16m (just over US2m) in Esprit Holdings (essentially a fashion brand) would need to be reported each week to the HK SFC.  The SFC would aggregate the reports and publish them after on an aggregated basis.

The world will clearly be a much safer place with well known fashion brands safe from nasty short sellers and industry participants will pay a tax on their operations to report positions and keep our world peachy.

It must be remembered that Hong Kong already has a strong and functioning short selling process and short selling was not an issue that effected Hong Kong in any adverse way during the financial crisis.

This is not the SFC's finest hour and we hope that future changes are given a bit more thought than this one.

Legislation will be needed and it will take time for that to be drafted and passed.