Financial resources rules and financial return

Q1 : If a cash client purchased a security on a cash-against- delivery basis and subsequently sold or withdrew it before he pays for the purchase, can the broker include in its liquid assets the amount receivable from the client arising from the purchase under section 21(1) of the FRR?

No. A broker can only include such receivable if the client has not sold or withdrawn the security being the subject of the purchase. The intention is to ensure that the broker, where needed, will have the security on hand for debt recovery purposes.

For the avoidance of doubt, if a client purchased a security and sold it on the same day, the broker could not use the proceeds arising from that sale to offset other amounts receivable from the client whilst counting the amount receivable arising from that purchase in its liquid assets on the premise that such receivable has not been outstanding for more than 5 business days after the settlement date.

Section reference: Section 21(1)

Q2 : When will the concentration discount factor be abolished?

The concentration discounting factor will be abolished with effect from 1 October 2006.

Section reference: Section 22(1)(b)(i)

Q3 : Who is subject to the gearing adjustment?

The gearing adjustment applies to licensed corporations which are licensed for Type 1 or Type 8 regulated activity and obtain financial accommodation wholly or partly by pledging collateral provided by its margin clients.

For licensed corporations which are licensed for Type 1 or Type 8 regulated activity immediately prior to 1 October 2006, the triggering threshold for gearing adjustment is 65%. With effect from 1 October 2007, the triggering threshold for gearing adjustment for such licensed corporations will be relaxed to 80%.

For licensed corporations which are licensed for Type 1 or Type 8 regulated activity on or after 1 October 2006, the triggering threshold for gearing adjustment is 80%.

Section reference: Section 42(2)

Q4 : Can a licensed corporation apply for approval of a subordinated loan to enable it to meet the liquid capital requirement arising from drawing of bank loans for financing IPO subscription purpose?

Yes. Licensed corporations can apply to the SFC for approval of subordinated loans in order to enable them to meet short term increase in required liquid capital caused by IPO bank loans. Nevertheless, licensed corporations are reminded to manage prudently their risk in conducting IPO financing business (such as clients default risk and market risk) and ensure the risks are within their financial capacity.

Section reference: Section 58(5)(b)

Q5 : Is there any limit on the size of approved subordinated loan?

Yes. The Commission generally sets a limit taking into account various factors such as the nature of the loan and the size of the shareholders’ funds of the licensed corporation receiving the subordinated loan. Please refer to the “Subordinated Loan Application Guidelines” posted in the SFC website for details of the normal limit.

Section reference: Section 58(5) (b) & (c)

Q6 : If more than one haircut percentage prescribed in the FRR is applicable to a stock because it is listed in both Hong Kong and overseas, can a licensed corporation choose between the different applicable haircut percentages prescribed in the FRR?

If the stock is held as collateral for the purpose of securing a client’s margin loan, the licensed corporation must in respect of the stock apply the haircut percentage prescribed in Table 1A in Schedule 2 for the purpose of calculating the haircut amount under section 22(1)(b)(i) of the FRR, notwithstanding the stock is listed both in Hong Kong and overseas.

If the stock is held for other purposes, the licensed corporation can elect a haircut percentage from among the applicable haircut percentages prescribed in the FRR for the purposes of its liquid capital computation.

Section reference: Schedule 2

Q7 : For the purpose of calculating the amounts receivable from margin clients that qualify as liquid assets, what is the haircut percentage that applies to securities collateral that is listed in Hong Kong and not a constituent of any of the following indices:

Hang Seng Index;

Hang Seng Hong Kong LargeCap Index;

Hang Seng Hong Kong MidCap Index;

Morgan Stanley Capital International Inc. Hong Kong Index;

Morgan Stanley Capital International Inc. China Index; or

Hang Seng Composite Index?

For securities margin financing providers that repledge clients' collateral, the haircut percentage for such non- index constituent stocks is 60% in accordance with item 1(e)(ii) or 2(b) of Table 1A in Schedule 2 of FRR.

For securities margin financing providers that do not repledge clients’ collateral, the haircut percentage for such non-index constituent stocks is 30% in accordance with item 1(e)(i) or 2(a) of Table 1A in Schedule 2 of FRR.

Section reference: Table 1A in Schedule 2

Q8 : Does the new haircut percentage of 100% on listed warrants apply to a licensed corporation that does not repledge listed warrants?

Yes. The new 100% haircut percentage for listed warrants applies to all licensed corporations and irrespective of the purpose for which the listed warrants are held and whether the listed warrants are repledged.

Section reference: Table 7 item 1 in Schedule 2

Last update: 28 Sep 2006