Hong Kong Regulator Concerned on Nine-Fold Rise in Margin Loans

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(Bloomberg) -- Hong Kong’s Securities and Futures Commission is consulting brokers about risks stemming from a rapid run up in margin lending.

Outstanding margin loans -- borrowing against pledged stock -- hit HK$206 billion ($26.3 billion) at the end of 2017, a nine-fold increase since 2006, Deputy Chief Executive Officer Julia Leung told reporters on Monday. The regulator is worried such lending poses a risk given that many of the firms involved are illiquid and it may take a while for brokers to recover their money in case of a liquidation, Leung said.

“In a forced liquidation situation if it is illiquid, it means it takes several months if not years to complete,” said Leung. “The risk to the broker is not small.”

Share pledges by firms’ major shareholders contributed to the increase in margin loans, she said. These are companies listed on the city’s small cap exchange, or companies outside Hang Seng indexes, said Leung.

Leung cited the sudden price drop at dozens of firms last June as an example of the dangers posed to brokers who lend against volatile small caps.

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