25 May 1999

Dear Chairman and members of the Bills Committee,


We are in support of introducing legislation to bring securities margin finance operators who are presently unregulated within the scope of regulation. We are very grateful to learn that the regulatory regime aims to increase protection for investors through prudential regulation of securities margin finance operators while maintaining the latter's commercial viability.

In our opinion, the Securities (Margin Financing) (Amendment) Bill 1999 (the Bill) generally fulfils the above purpose. However, whether operators' commercial viability can be maintained depends on the amendments to the Financial Resources Rules (FRR). Since the amended FRR will be introduced into the Legislative Council for negative vetting, we hope you pay particular attention to the amended provisions as to whether they may adversely affect operators' commercial viability, and to consult the industry in due course.

Our views on the new FRR disclosed in the Bill and information paper are as follows:

(1) Registration of securities margin financiers (SMF)

Provisions under this division are in order. However, according to the paper concerned, a minimum paid-up capital of $10 million is required for SMF. Such requirement is more stringent than that for securities dealers. As for other requirements which have already been disclosed, they are as strict as those imposed on securities dealers. Hence, it is doubtful if anyone will be willing to be registered as financiers whose business is restricted to securities margin financing only. There being the case, it seems that the introduction of such class of registrants is unnecessary (the registration of their representatives is of course unnecessary too). The Government can prevent unregulated securities margin financing activities from taking place simply by amending the Ordinance, stipulating that such kind of business shall only be conducted by registered securities dealers and authorised financial institutions.

(2) Conduct of securities margin financing businesses

The proposed section 121Y(3)(h) and (5)(h) provide that information of the disposals of securities collateral held for an account during the period and what happened to the proceeds of those disposals must be disclosed in the daily and monthly statements of account respectively. It is therefore necessary for the securities margin finance operators to dispose the securities entrusted to them by their clients in a segregated manner. This indirectly goes against the Government's intention of respecting and making allowances for the operators' current practice. By doing so, it becomes more difficult, if not impossible, for the operators to continue to dispose the collateral of their clients in a form of pooled stocks. Hence, their commercial viability is greatly reduced. We therefore consider that these two requirements should be cancelled.

(3) Amendments to FRR

Concentrated risk adjustments is a key element of the amended FRR. We agree that in calculating asset values, assets arising from over-exposure to individual collateral or individual clients beyond specified thresholds will be discounted. However, the threshold should not be too low. For instance, the threshold of 10% cited in the information paper will render margin financing operations commercially non-viable. We think that it should be increased to 20%. Moreover, in making such calculations, companies of the same group that issued blue-chip stocks should be treated as different entities, otherwise the operators will be forced to accept more second and third line stocks which in turn increases their exposure to risk.

(4) Transitional Arrangement

The proposed transitional arrangement is that following the legislative amendments, the persons concerned are required to indicate their interest to continue to conduct this kind of business within 30 days. Registered securities dealers who wish to continue to conduct this kind of business will have 6 months to bring themselves into conformity with certain requirements under the new FRR. Since the level of requirements is raised substantially, we are of the view that the transitional period should be extended accordingly, say for one year, to enable those who wish to continue with securities margin financing to adapt to the new rules. If more amendments will be made to the legislation than those proposed in the Bill, the Government should consider extending the time for the entities to indicate their interest to 60 days.

Thank you for your kind consideration of our opinions.

Yours faithfully,


(Signed)
TONG Leung-sang
Chairman
Hong Kong Securities Professionals Association

D4/S115.DOC/J