Hong Kong’s market watchdog has launched a review of eight brokerages to examine their margin financing practices after witnessing heavy oversubscriptions for some initial public offerings (IPOs).
The Securities and Futures Commission (SFC) was closely monitoring whether these brokerages were careful with their risk management of margin financing for new stocks, CEO Julia Leung Fung-yee said on Friday. Margin financing refers to loans that brokerages offer clients to buy stocks.
“We will examine the securities firms’ policies – whether they are sound, fully consider the customer’s repayment ability and set appropriate loan limits to prevent overfinancing,” she said.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
The SFC did not name the brokers that were being monitored.
SFC CEO Julie Leung pictured in December 2022. She said individual investors should be careful in gauging demand for new shares from the oversubscription multiple alone. Photo: May Tse alt=SFC CEO Julie Leung pictured in December 2022. She said individual investors should be careful in gauging demand for new shares from the oversubscription multiple alone. Photo: May Tse>
In November 2023, the SFC sent a circular to licensed companies saying they needed to prudently manage their risks when providing IPO subscription services and financing following changes introduced by the Fast Interface for New Issuance (FINI) platform.
The FINI platform allows brokers to prepay for only the maximum number of shares that can be allotted in a public offering, instead of locking in funds for the entire excess amount. Some brokers offer zero-interest margin financing loans to attract customers.
The SFC had urged companies to guard against any improper risk-taking activities, such as accepting large subscription orders without collecting sufficient subscription deposits from clients upfront or providing excessive IPO financing to clients.
Leung’s comments came after the watchdog observed that some IPOs were heavily oversubscribed because of easy margin financing terms offered by brokers since the launch of FINI.
She reminded individual investors to be careful about gauging demand for new shares from the oversubscription multiple. The performance of some “hot” IPOs on the stock market was not as good as expected, she added.
“The [FINI] mechanism allows brokerage firms to lend large amounts because there is a cap on funds they need to pay [as] real funding costs are not reflected,” said Dickie Wong, executive director of research at Kingston Securities.
