HK Targets Margin Transaction Risks

The Hong Kong Securities and Futures Commission is to look into aggressive lending and "pooling risks," which occurs when a margin client authorizes a brokerage to re-pledge his securities. Chairman Martin Wheatley outlined the priorities in a recent speech in Hong Kong. A spokesman elaborated that the aggressive practices include securities margin finance (SMF) providers granting loans to margin clients in an amount that exceeds the marginable value of the client collateral deposited with the firm. The marginable value of a stock is the value that banks, which accept re-pledged client collateral as security for loans, would be prepared to advance to SMF providers against any given stock collateral.

The SFC spokesman said the collapse of C.A. Pacific Securities Ltd. and C.A. Pacific Finance Ltd. in January 1998 highlighted the risks to which the pooling and re-pledging of client collateral could expose margin clients. Pooling risks include that the client may be unable to get back all his securities from the brokerage, even though the client never used the margin facility, the spokesman said. In contrast, the position of cash clients is much stronger since their securities are required to be segregated in a trust account. The spokesman said at the time of its collapse, C.A. Pacific Finance Ltd. had a capital of only $16 million, but had borrowed $548 million by re-pledging client collateral of over $2.5 billion. The two companies had over 5,000 clients, and compensation claims that were allowed amounted to $983 million and the Compensation Fund made payments totaling $300.4 million.