Short Selling – Recent Regulatory Reform

Short Selling – Recent Regulatory Reform

Short Selling – Recent Regulatory Reform 1401 788 Hauzen

Following the Asian financial crisis of 1998, Hong Kong now has a comparatively more stringent regulatory framework for short selling compared to other jurisdictions. Naked short selling is not permitted and only certain stocks can be sold short, always at or above the best current asking price. By contrast, Australia and Singapore permit short selling in shares without price restrictions or disclosure requirements.

Under the Securities and Futures Ordinance (Cap 571) (SFO), naked short selling is prohibited with the exception of covered short sales—shares that are borrowed before the person can place a short selling order on the Stock Exchange of Hong Kong (SEHK) for execution.

Designated securities, which are securities that can be sold ‘short’ under SEHK rules, are permitted. The list of Designated Securities comprises stocks and collective investment schemes (CISs) which include exchange traded funds, real estate investment trusts and other unit trusts/mutual funds.

The list of Designated Securities eligible for short selling is published on the website of the Hong Kong Exchanges and Clearing Limited.

References: HKEX website

Following the collapse of Lehman Brothers in 2008, regulators worldwide enhanced regulation of short selling to restore investor confidence and reduce systemic risk.

In particular, the International Organization of Securities Commissions published a report entitled Regulation of Short Selling which recommended that short selling should be subject to a reporting regime providing timely information to the market or to market authorities. Australia and the United Kingdom introduced a short position reporting regime. Likewise, the European Union also came up with a similar short position reporting mechanism for compliance by all member states. The short position reporting regime in Hong Kong is therefore on par with several major stock markets.

Amidst these global regulatory developments, the Securities and Futures Commission (SFC) enacted the Securities and Futures (Short Position Reporting) Rules (Cap 571AJ) (SPR Rules), which came into effect on 18 June 2012. This introduced a short position reporting regime in Hong Kong.

Specified shares for short selling include the constituent stocks of the Hang Seng Index, Hang Seng China Enterprises Index and other financial stocks specified by the SFC.

Under the reporting rules, a person who has a net short position in any of the specified shares that amounts to or exceeds the reporting threshold must report the short position to the SFC. The reporting threshold is 0.02% of the market capitalization of the listed company concerned or HK$30 million, whichever is lower.

Short positions must normally be reported at the end of the last trading day each week.

On 24 February 2016, the SFC published its Consultation Conclusion on the expansion of the short position reporting position and correspondence amendments to SPR Rules. The expanded reporting regime came into force on 15 March 2017.


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