MPF’s “three no-lends”: the rules around securities lending and short-selling fears

When Hong Kong’s short-selling ratio topped 10%, nerves jangled: who was shorting? Because MPF law lets approved trustees or custodians lend securities, some asked whether MPF was indirectly fuelling short activity. In a November 2011 column, 程劍慧, Fidelity’s Hong Kong managing director, laid out the tightly regulated mechanism as “three no-lends”.

Does lending MPF stocks aid short-selling?

MPF funds may not short-sell, but trustees may lend out holdings to earn interest and lift fund returns; the whole activity is tightly fenced by MPF legislation, and 程劍慧 saw no need to ban it. Securities lending is commonplace in world markets — Hong Kong should stay competitive — and the interest earned benefits funds without materially adding risk.

The three no-lends

First, no lending to anonymous borrowers: under section 52 of the Mandatory Provident Fund Schemes (General) Regulation, custodians must fully know the borrower’s identity, keeping counterparty risk strictly controlled.

Second, no lending without a written agreement: both sides must sign a loan agreement spelling out fees and collateral. No agreement, no lending. Lent securities may never exceed 10% of fund assets at any time, nor 50% of the fund’s holdings in any single issuer’s securities.

Third, no collateral worth “less than 105%”: collateral must be cash or debt securities, marked to market daily, and worth at least 5% more than the lent securities — HK$105 of collateral for every HK$100 lent. Collateral bonds must be issued by AAA-rated government bodies; if the lent securities turn volatile, trustees may demand more collateral, and securities change hands only after collateral is received.

Should members worry?

程劍慧 noted that MPF investment strategies had generally been cautious since inception, securities lending was uncommon, and the statutory fetters were strict — members need not fret unduly. The short-selling scare, in other words, was more sentiment than substance. The MPF education hub details MPF’s other investment restrictions.