Hong Kong Regulator Concludes Short Position Reporting Rules

The Securities and Futures Commission (SFC),  an independent non-governmental statutory body outside the civil service, responsible for regulating the securities and futures markets in Hong Kong today publishes the conclusions to the Further Consultation on the Securities and Futures (Short Position Reporting) Rules (Rules) ended in November 2011. The proposed Rules attached to the conclusions will be submitted to the Legislative Council for consideration. Subject to the legislative process, the Rules will come into effect on 18 June 2012. 

In view of additional market feedback, the proposed Rules have provided for reporting of short positions on a net basis. They also have been modified to provide greater clarity in certain areas, including reporting obligations in relation to corporate “umbrella” funds and jointly owned short positions. Other than the aforesaid refined policy proposals, the proposed Rules are fundamentally the same as those consulted previously.

Followings are major considered issues of final conclusion of the Rule by the Regulator:

(a) Short positions to be reported to the SFC will be on a net basis;

(b) For corporate ―umbrella‖ funds that have underlying sub-funds, we have provided in the Rules that the net short position that is attributable to each sub-fund is to be treated and reported separately and is not to be aggregated with the positions of other sub-funds within the same ―umbrella‖ fund;

(c) The Proposal will be retained to enable those market participants whose trading activities are conducted on a trading unit/book basis to leverage on their current trading infrastructure for short position reporting. As mentioned in the Further Consultation, the SFC will issue guidelines on the application of the Proposal in due course;

(d) On the question of reporting jointly owned positions, we envisage that this issue is most likely to arise in relation to short positions owned by partnerships. Consequently, we have provided in the Rules that if the partners in a partnership have a reportable short position, then a report submitted by a partner or another person authorized by all the partners, on behalf of those partners, is regarded as having complied with the Rules. A person who has a reportable short position as a partner in more than one partnership must treat the short position attributable to each partnership separately; and

(e) With regard to imposing criminal sanction for a breach of the Rules, as explained in the Conclusions, this approach is consistent with similar provisions in the SFO and other rules made by the SFC for non-compliance with notification requirements.

“The Rules published today have been shaped by extensive consultation with relevant stakeholders to lay down a clear regulatory framework for market participants to report short positions to the SFC,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “With this regime in place, the SFC will be able to perform its role more effectively in monitoring the market, including detection of significant build-up of short positions. We believe our publication of data on aggregated short positions will enhance transparency to the market,” Mr Alder added.