December 2015
Practice Group:
Investment
Management
Global Government
Solutions
By Michael P. Wong
On 27 November 2015, the Securities and Futures Commission of Hong Kong (the “ SFC ”) published the “Consultation to expand the scope of short position reporting and on the corresponding amendments to the Securities and Futures (Short Position Reporting) Rules”
(the “ Consultation ”). (The full version of the Consultation can be viewed at http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=15CP6 .) In
June 2012, the Securities and Futures (Short Position Reporting) Rules (Chapter 571AJ of the Laws of Hong Kong) (the “ SPR Rules ”) implemented the short position reporting regime
(the “ Regime ”). The Regime covers constituent stock of Hang Seng Index (“ HSI ”), the Hang
Seng China Enterprise Index (“ HSCEI ”) and other stocks as may be specified by the SFC from time to time. In a bid to better monitor short-selling activities and promote market stability, the SFC proposes to expand the scope of the Regime. The proposed changes are set out in the Consultation and are summarized below.
The SFC is aware of growing short-selling activity with respect to stocks not covered by the
Regime, and has proposed in the Consultation that all securities that can be short-sold under the “Rules of the Exchange” published by The Stock Exchange of Hong Kong Limited (the
“ SEHK ”) (i.e., securities defined as “ Designated Security ” under the Rules of the Exchange) are subject to short position reporting. This proposal is generally in line with the short-selling reporting requirements in other jurisdictions, such as the United States, the European Union,
Australia and Japan. A review of the list of Designated Securities that is currently available on the website of the Hong Kong Exchanges and Clearing Limited, (see http://www.hkex.com.hk/eng/market/sec_tradinfo/stkcdorder.htm
) shows that Designated
Securities include not only operating companies, but also certain exchange traded funds
(“ ETFs ”), real estate investment trusts (“ REITs ”) and other unit trusts and mutual funds that are currently traded on the SEHK.
At present, short position of a covered security is required to be reported where the net short position exceeds the lower of (1) 0.02% of the market capitalization of the listed issuer concerned or (2) HK$30million, at the end of the last trading day of each week. In respect of a CIS, it is often difficult to calculate its market capitalization, given that the number of outstanding units or shares in a CIS (assuming an open-ended CIS) may vary substantially depending on its daily creation and redemption. Therefore, it is proposed in the Consultation that a CIS would only be subject to the HK$30 million threshold. In other words, where a

person holds a net short position in a CIS that has a value equivalent to or exceeding HK$30 million at the end of the last trading day of a week, that person is required to report to the
SFC regardless of market capitalization.
For the purpose of determining the value of the net short position of a Designated Security traded in a foreign currency, the SFC proposed that the closing price should be converted in
Hong Kong dollars (“ HKD ”). Where a Designated Security is traded in multiple currencies
(i.e. traded in both HKD counter and another foreign currency counter), the value of the net short position in the foreign currency counter should also be converted into HKD. The exchange rate for the conversion is the buying rate for telegraphic transfers on the reporting day, as determined by the Hong Kong Monetary Authority (“ HKMA ”).
Under the SPR Rules, the SFC has the power to require daily reporting on all securities that are subject to the Regime. In view of the short position reporting obligation being extended to cover Designated Securities, this would impose a heavy burden on both the SFC and market participants in the event the SFC exercises its power to require daily reporting. In this regard, it is proposed that in contingency situations the SFC will determine the
Designated Securities that would be subject to daily reporting.
Short positions are currently reported on an electronic system developed specifically for such purpose, namely the Short Position Reporting Service which is available at http://www.sfc.hk/web/html/EN/sfc_online_portal/online_service.html
. It is anticipated that there will be other alternative electronic systems developed for market participants to report their short positions. However, the SFC has not expressly mentioned a clear implementation timeline in the Consultation. The existing electronic system will continue to remain for the use by market participants. In addition, it is proposed in the Consultation that the SPR rules will be amended to impose an obligation on market participants to comply with its instructions and directions regarding the use of the electronic system and the submission of short position reports.
The SFC’s proposal aims to enhance market transparency and strengthen its role in regulating short selling activities. The expansion of the scope of the short position reporting regime will require market participants to closely monitor their level of short positions in a greater number of securities. Market participants should keep abreast of the Consultation conclusions relating to the proposal, which is expected to be released in a few months’ time.
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Authors:
Michael P. Wong michael.wong@klgates.com
+852.2230.3529
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