Cap on IPO margin loans revived to ease demand

Staff reporter and Bloomberg

Hong Kong's securities watchdog has revived a cap on margin loans used to buy shares at initial public offerings amid concerns that brokerages' offers of up to 200 times margin financing have led to an overheated listing market.

The Securities and Futures Commission has brought back the practice of requiring new share subscribers to put down at least a 10 percent deposit when drawing a margin loan, according to a circular for licensed corporations yesterday.

This means brokerages could only lend up to 90 percent of total subscription costs for their clients.

The move is a response to a recent IPO market frenzy that has triggered first-day share price pops and concerns that retail investors will end up getting burned.

The hype was driven partly by easy brokers' loans - sometimes carrying interest rates as low as 0 percent or only requiring a deposit of just 0.1 percent of the loan - following the stock exchange's new settlement system known as FINI.

The FINI system shortened the pricing-to-listing period and allowed investors to pay after shares are actually allotted.

The tweaks have ushered in multiple mega-hit IPOs in the city, with retail investors oversubscribing by thousands of times.

The new regulation came after the SFC completed a thematic review of eight brokerage firms recently when it found some of them "engaged in imprudent and aggressive IPO financing practices by accepting subscription orders that exceed their clients' financial capabilities," the regulator said.

They "primarily focused on the subscription levels or anticipated subscription rates of IPO stocks rather than the financial positions of clients, which could result in over-leveraging for clients" and expose themselves to an increased client default risk, the statement said.

Earlier this month, Chinese bubble tea chain Mixue's investors applied for a record HK$1.81 trillion in margin loans for its IPO, making the stock oversubscribed by more than 5,000 times for the retail tranche.

SFC chief executive Julia Leung Fung-yee had expressed concerns about whether the substantial oversubscription of certain IPOs reflects genuine demand last month, urging retail investors to exercise caution and avoid blindly following the crowd in subscribing to new shares.

In the circular yesterday, the market watchdog reminded brokerages that they should evaluate their own financial and liquidity capabilities as well as the creditworthiness of their clients when providing IPO financing to clients.

The move by the SFC is necessary to prevent market risks from spiraling out of control, an industry insider said.

Before the new rules, large brokerage firms with substantial capital strength could offer high-leverage financing to attract clients but smaller peers would face significant risks if forced to follow suit, the insider told The Standard's sister publication Sing Tao Daily.

The SFC also asked brokerages to ensure that the client identification data submitted to FINI for IPO subscriptions is accurate, following reports that the system failed to identify multiple IPO subscriptions made through multiple identification documents in different brokerage firms.

Firms are now required to seek clients' confirmations that there are no other identity documents of a higher priority in the waterfall, the circular said.