MPF stocks lent for short selling? SFC and MPFA reviewed the rules in 2011

In October 2011, short-selling activity in Hong Kong surged and seven securities bodies spoke out together, pointing at a question every employee cared about: could MPF trustees be lending out stocks for short selling without members knowing? The episode thrust MPF stock-lending arrangements into the spotlight.

Can MPF trustees lend stocks for short selling?

MPF trustees lending stocks for short selling is not expressly prohibited by law, but it is subject to limits — for example, lending must not exceed a certain proportion of the portfolio. Lending is legal in itself; the issue is transparency and caps. Members may not know their MPF stocks are being lent, and if lending ratios ran unchecked, portfolios would face extra counterparty risk.

How did the regulators respond?

A government source said the Financial Services and the Treasury Bureau had been working closely with regulators — the SFC, the Hong Kong Monetary Authority and the MPFA — to ensure existing controls were enforced, and was exploring improvements to the current framework, including stock lending. The government and the SFC would also push for legislation to strengthen the short-position reporting regime and improve market transparency.

Ashley Alder: the rise in short selling was not abnormal

SFC chief executive Ashley Alder said the marked rise in short selling over the preceding months was not unusual given market conditions, and there was no evidence that Hong Kong stocks’ recent falls were caused by short selling. The SFC would act against manipulation or abuse of short selling. He reiterated that Hong Kong’s short-selling rules were stricter than most overseas markets — only “covered” short selling is allowed, and breaches can attract criminal prosecution.

The industry’s demand: a system to ban short selling

On the government having no intention of suspending short selling, Hong Kong Securities and Futures Professionals Association president Wong Kwok-on fired back: the industry was not asking for an immediate ban, but for a system that could ban it — “so the market won’t go so wild”. In other words, they wanted a brake that could be pulled at any time, not unlimited short selling in turbulent markets.

MPF is long-term retirement saving; short-term short-selling noise should not sway members’ long-horizon plans. But the transparency of lending arrangements is worth one extra question to your trustee. For the basics of MPF investment safeguards, see the MPF education hub.