HK securities regulator proposes expanded short position rules

[HONG KONG] Hong Kong's securities regulator has proposed to expand the financial centre's rules on reporting short positions as the watchdog steps up scrutiny of the Hong Kong market.

The Securities and Futures Commission (SFC) published a consultation on Friday outlining plans to extend short-position disclosure requirements to a broader range of securities, in a bid to improve monitoring and aid regulatory investigations.

The proposal comes just weeks after SFC chief executive Ashley Alder signalled an overhaul of the way the watchdog monitors the market and pledged to go after insider trading and market manipulation highlighted by solar technology firm Hanergy Thin Film.

Short-selling involves borrowing stock in order to sell it, with the aim of buying it back more cheaply and thereby make a profit. The practice attracted intense scrutiny during the global financial crisis prompting watchdogs across the world to introduce short-position disclosure requirements.

Regulators in China have also blamed "malicious" trading practices including short-selling for a sell-off that wiped around 40 per cent off the value of mainland shares between July and August.

The SFC's current disclosure rules, introduced in 2012, apply to constituents of the Hang Seng Index, the Hang Seng China Enterprises Index and other financial stocks deemed systemically important. In total, 127 stocks or 14 per cent of all securities that can be short-sold are subject to the rules as of October, according to the SFC.

The watchdog proposes to expand the disclosure requirements to include all securities that can be short sold under the exchange rules, including smaller stocks such as Hanergy. Many smaller stocks are actively short-sold at a higher rate than those covered by the disclosure rules, the SFC said. "As short selling may exacerbate selling pressure, there is a general concern that the use of short selling in combination with abusive trading strategies will increase the risk of a disorderly market," the SFC said in the consultation.

Under the current rules, a short position that is 0.02 per cent or more of a stock's market capitalisation must be disclosed on the SFC's public reporting system. This threshold will remain unchanged, the SFC said.

The disclosure requirements will also be extended to mutual funds, trusts and REITS.

The consultation closes on Dec 31.

REUTERS