Stock Borrowing and Lending: Hong Kong
Stock borrowing and lending for Hong Kong Securities is regulated by several bodies such as the Hong Kong Securities Clearing Company (HKSCC) and the Securities and Futures Ordinance (SFO). There are several rules and procedures that need to be followed by borrowers and lenders as they participate. More details can be found below.
Stock Borrowing and Lending within Hong Kong Securities
- The Hong Kong Exchanges and Clearing Limited (HKEX) owns the Hong Kong Securities Clearing Company (HKSCC). The HKEX's mission is to "operate a world-class marketplace for Hong Kong and Mainland China securities and derivatives products." It offers access to a fair, secure, efficient, orderly, and transparent marketplace for issuers, investors, and intermediaries. The HKSCC provides "securities clearing and settlement, money settlement, depository and common nominee services."
- The HKSCC has issued compulsory stock borrowing and lending regulations and all transactions need to be performed in accordance with these regulations. It operates the Central Clearing and Settlement System (CCASS) and the depository for all eligible securities that are listed on the Hong Kong Stock Exchange (SEHK).
- A participant in the exchange is permitted to lend or borrow securities only according to the CASS rules or regulations as published by the SEHK.
- Where the borrowing of securities relates to Hong Kong Stock, it also needs to be done according to the applicable law and particularly, the Stamp Duty Ordinance and practice notes.
- A stock lending and borrowing agreement needs to be filled and this is defined in the Securities and Futures Ordinance (SFO) as the "agreement whereby a person borrows or lends securities pursuant to an arrangement where the borrower undertakes to return securities of the same description to the lender or pay the equivalent value of the securities." This includes stock borrowing within the Stamp Duty Ordinance of Hong Kong. The SFC is a body that regulates the securities and futures markets in Hong Kong.
- A seller is treated as a borrower when they enter into a standard securities lending agreement after borrowing the securities.
- For short sales that are covered by a stock borrowing and lending agreement, the borrower or seller needs to provide the SEC with assurance from the stock lender in form of one of the following:
- A recording of the oral assurance through a tape recording of themselves.
- A time-stamped document that provides a record of the specified particulars as they relate to the order.
- A document provided by the stock lender whereby they have recorded the specified particulars as relate to the borrowing.
- For short-selling orders, the exchange participant or their representative needs to input the order into the SEHK trading system and mark it according to the SEHK rules.
- The obligations listed above do not fall upon the lenders but the borrowers only.
- Section 5 of the SFO contains rules specific to the lenders. They are defined as lenders of Hong Kong Listed securities under a "securities borrowing and lending agreement."
- If the lender is acting as an agent for clients, the rules only apply to the agent and not the underlying clients.
- At the time of entering into the agreement (borrow), the lender must document this, identifying:
- The borrower's name.
- The type and quantity of securities that have been borrowed or are available for borrowing.
- The type of agreement.
- If the transaction is arranged via telephone and the lender records the line, the recording will be a documentary record.
- Lenders are required to maintain certain records and keep the records for one year starting the date at which the relevant record is made.
- If the SFC requests the records, the lender should provide them.
- This ensures that information that can provide a proper audit trail of the transaction is retained.
- The non-compliance of stock lenders who are regulated in Hong Kong can affect their continued "fitness and properness" as intermediaries that are registered and licensed by the SFC.
- For overseas lenders, the SFC can report non-compliance to the regulators in the home country.
Report for Stock Borrowing and Lending (“SBL”) for China Connect Securities (Shanghai-Hong Kong Stock Connect)
- The report contains the following mandatory details:
- Item- This is a sequential serial number that should start from one on each report.
- Stock code- This is a 6-digit stock code of the China Connect Security.
- Stock name- the name of the China Connect Security.
- Purpose- The purpose of the stock borrowing which can be short-selling of pre-trade checking.
- The name of the borrower- the borrower can either be the "CCEP’s or Trade-Through EP’s client" or the "CCEP or Trade-Through EP itself for proprietary trading"
- The name of the lender- the lender can be the CCEP or Trade-Through EP, a Non-registered EP, or a Qualified Institution
- Source of stocks- this is the source of shares coming from the lender.
- The date of Borrowing.
- The number of shares borrowed.
- The date of return- if the shares have not yet been returned, this should be left blank. If they are returned in batches, the date of the latest batch should be indicated.
- The number of shares returned.
- If there is a second lender, the same details should be indicated.
- Rollover- an indication of whether the SBL agreement is rolled over. If there is a rollover, the original date of borrowing should be indicated.