SFC Warns Against Disguised Margin Financing

On 03 August 2018, the SFC published a circular threatening to take action against asset managers and brokers assisting unlicensed firms with disguised margin financing.

The SFC has warned that it will take action against asset managers and brokers that assist firms without a licence to offer stock margin-financing disguised as investments, in breach of both the Securities and Futures Ordinance (SFO) and other regulatory requirements.

"Deliberate use of an investment arrangement to conceal unlicensed margin financing activities is illegal," said the SFC’s Deputy Chief Executive Officer and Executive Director of Intermediaries, Julia Leung, before declaring that anyone involved in such arrangements may be liable to prosecution and should cease these activities with immediate effect.

Securities margin financing is defined as a type 8 regulated activity under the SFO, meaning that an entity performing such activities must be licenced. Any firm found to deliberately aid and abet such activities to fund security purchases may face serious implications regarding their SFC licence.

Suspected margin financing arrangements involve unlicensed affiliates of asset managers or other third parties, who appear to be financing the purchase of securities jointly with the licenced corporation’s clients, while taking the securities as collateral. These arrangements may operate through discretionary accounts or private funds and are disguised in order to avoid regulatory requirements, and some of these tie-ups may allow the unlicensed firm to collect money from a client that received the asset, much like interest payments to fund managers in margin financing.

This warning from the SFC can be seen as an attempt to improve investor protection and market integrity in Hong Kong in order to boost investor performance, as the city positions itself as a global hub for firms to list their shares.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.