Background
A short position reporting regime was introduced in Hong Kong following the global financial crisis of 2008. Prior to this, short selling orders were required to be marked so they could be traced by the Securities and Futures Commission (SFC).
At the time, there were increasing concerns in Hong Kong over the impact of possible market manipulation and short selling activities on market stability. A public consultation was conducted in July 2009 to deliberate the introduction of a reporting regime.
References:
Background brief on the proposal for a short position reporting regime, 6 January 2012
Consultation on increasing short position transparency, 31 July 2009
It was noted in the consultation that since September 2008 a number of overseas jurisdictions had imposed emergency measures to regulate short selling and were moving toward permanent regulations to increase transparency of short sales. Furthermore, the International Organization of Securities Commissions published a report, ‘Regulation of Short Selling’, which recommended, among other things, a reporting regime to market authorities, to place Hong Kong on par with other major markets—Australia, the United Kingdom, and the EU, who had introduced a short position reporting regime.
The SFC released the consultation conclusions in March 2010, in which it outlined a new short position reporting regime. A further consultation was carried out in October 2011, with the conclusions released in February 2012.
References:
Consultation on increasing short position transparency, 31 July 2009
Consultation conclusions and further consultation on the Securities and Futures (Short Position Reporting) Rules, 18 October 2011
Consultation conclusions and further consultation on the Securities and Futures (Short Position Reporting) Rules, 18 October 2011
Subsidiary legislation was introduced in the form of the Securities and Futures (Short Position Reporting) Rules (Cap 571AJ), which came into operation in June 2012.
References: Securities and Futures (Short Position Reporting) Rules
Short sellers were required to calculate their short position in shares at the end of the last trading day of each week to see whether it amounted to at least 0.02% of the issued share capital of that particular stock or whether the value of the short position was at least HK$30 million, whichever was lower.
If the short position exceeded either of these thresholds, the gross short position must report to the SFC by the second business day of the following week.
This weekly reporting should continue until the short position fell below 0.02% of the issued share capital of that particular listed company and HK$30 million.
The short position reports are not disclosed by the SFC in the format presented to it by investors: the data was aggregated on a per stock basis and published on the SFC’s website a week later. Short positions are reported to the SFC in pro forma format via a special service which is available on the regulator’s website.
In contingency situations, SFC would have the power to require daily reporting of short positions in all the specified shares.
The regime covered constituent stocks of the Hang Seng Index, Hang Seng China Enterprises Index and other financial stocks specified by SFC, known as ‘specified shares’.
In addition, the Securities and Futures (Offences and Penalties) Regulation (Cap 571AH) (Penalties Regulation) was amended to provide that a person who, without reasonable excuse, contravenes the duty to report under the Rules commits an offence and is liable, on conviction on indictment to a HK$100,000 and a term of imprisonment for two years, and on summary conviction, a HK$10,000 fine and six months imprisonment.
References: Securities and Futures (Short Position Reporting) Rules
Expanding the scope of reporting
In late 2015 the regulatory focus was again on short selling and in particular expanding the scope of short position reporting. The SFC carried out a consultation in November 2015, proposing to extend short position reporting to all securities that are eligible to be sold under the Short Position Reporting rules, namely all securities determined by the Stock Exchange of Hong Kong (SEHK) to be ‘Designated Securities’. In addition, the trigger threshold for collective investment schemes was set at HK$30 million.
References:
Consultation to expand the scope of short position reporting and on the corresponding amendments to the Securities and Futures (Short Position Reporting) Rules, November 2015
At the time, the SFC argued that while the initial focus of the reporting rules was on stocks whose performance might have impacted the financial stability of the stock market, increased transparency on short positions would help the SFC to perform its regulatory functions, including the early detection of build-ups of large short positions which could potentially disrupt the market. It was arguably also going to assist the regulator in detecting abusive short selling behavior.
There were at the time 889 Designated Securities which could be shorted; of these 127 were subject to short selling reporting.
In its consultation conclusions in February 2012, the SFC noted there was broad support for the proposal, and to give the market reasonable lead time to get their reporting systems and procedures in place, the amended SPR rules would be introduced on 15 March 2017
References:
Consultation to expand the scope of short position reporting and on the corresponding amendments to the Securities and Futures (Short Position Reporting) Rules, November 2015
Amendments
The Securities and Futures (Short Position Reporting) (Amendment) Rules 2016 amended the existing regime to:
- expand the scope of the short position reporting regime to cover all Designated Securities;
- provide for separate thresholds for reporting short positions in relation to CISs;
- provide for the calculation of the net short position value in the specified shares where the closing price is expressed in a currency other than Hong Kong dollars;
- provide that SFC may designate one or more electronic systems for reporting; and
- add a requirement that the daily reporting requirement notice must identify the specified shares to which the notice relates.
References: Securities and Futures (Short Position Reporting) (Amendment) Rules 2016
A list of designated securities for short selling is available on the Hong Kong Exchanges and Clearing website and after 5 March 2017, reporting of short positions in all Designated Securities determined by SEHK is required.
References:
List of Designated Securities Eligible for Short Selling
Short Position Reporting Specified Shares, 9 September 2016
Reporting threshold
Prior to March 2017, a person who has a net short position in any of the SFC-specified shares that is equal to or exceeds 0.02% of the market capitalization of the listed issuer concerned, or HK$30 million, whichever is lower, has to report to the SFC at the end of the last trading day of a week. That person must continue to report until his net short position falls below the reporting threshold.
After March 2017, the reporting threshold (ie 0.02% mentioned above) will apply to all Designated Securities, with the exception of collective investment schemes, which includes Exchange Traded funds and Real Estate Investment Trusts. For a collective investment scheme, a report should be made to the SFC if there is a net short position with a value equal to or exceeding HK$30 million at the end of the last trading day of a week.
Further Information is available in a User Guide for reporting purposes, giving details on completing the reporting form, registration, and other functions of the reporting service. There is also a pro forma template for reference.
References: Short Position Reporting Service – User Guide
Guidance is also given in a Nov 2017 publication: ‘Short Position Reporting – Frequently Asked Questions’.
References: Short Position Reporting – Frequently Asked Questions, 7 Nov 2017
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