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    HKMA Updated Supervisory Policy on Share Margin Financing

    October 25, 2021

    The Hong Kong Monetary Authority (HKMA) updated the supervisory policy on credit risk management of share margin financing. As stipulated in the Supervisory Policy Module CRS-4, titled “New Share Subscription and Share Margin Financing,” authorized institutions should set maximum loan-to-value ratios for share collateral in line with the prevailing market norms. The SPM module further prescribes the market norms for different categories of shares with reference to the common market practices in Hong Kong.

    Since the SPM module was issued in 2007, the wealth management and private banking business in Hong Kong has become increasingly globally connected. Many institutions use Hong Kong as the regional hub to serve clients and manage related risks. Their share collateral portfolios often comprise shares from bourses in different markets. It has become operationally challenging for them to integrate the prescriptive market norms for loan-to-value ratios specified in the HKMA module into their global risk management framework. Considering the global nature of Hong Kong’s wealth management and private banking business and the benchmarking against latest supervisory practices in other major financial centers, HKMA is of the view that continued enforcement of the requirement to observe market norms in the setting of maximum loan-to-value ratios is no longer appropriate. Starting from the date of this letter, authorized institutions are no longer expected to fulfil the said requirement.

    HKMA also stressed that this change in supervisory policy does not reflect an intention to relax the existing supervisory standards on authorized institutions' share margin financing business. Authorized institutions should continue to undertake share margin financing business prudently. In setting maximum loan-to-value ratios for share collateral, authorized institutions should give due regard to key factors such as their credit risk appetite, risk characteristics of individual stocks, and their expertise and proficiency in margin call management. Other requirements in the Policy module will continue to apply. Going forward, HKMA will proactively assess whether authorized institutions are prudent in setting maximum loan-to-value ratios by stepping up surveillance and collection of data. As the settlement process for initial public offerings of shares is going to be overhauled under the Fast Interface for New Issuance (FINI) arrangement in 2022-23, HKMA plans to initiate a comprehensive review of the Supervisory Policy module on “New Share Subscription and Share Margin Financing.” HKMA will take the opportunity of the exercise to reflect the aforesaid change with respect to the maximum loan-to-value ratios setting in the Supervisory Policy module.

     

    Keywords: Asia Pacific, Hong Kong, Banking, Supervisory Policy Manual, Share Margin Financing, LTV, Credit Risk, Loan-to-Value Risk, SPM CRS-4, HKMA

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