Should MPF Funds Lend Securities for Short Selling? The Unsettled 2011 Debate

In November 2011, the MPFA consulted the industry on MPF securities lending, opening a debate about MPF reform and investment rules: should funds be allowed to keep lending their holdings to short sellers? Early industry reactions were split — and one surprising fact emerged: no MPF fund had ever actually lent a single security.

Can MPF funds lend out their securities?

Under 2011 rules, MPF funds were permitted to lend securities, but under tight constraints: at no time could lent securities exceed 10% of a constituent fund’s assets, borrowers had to post collateral worth at least 105% of the lent securities’ market value — cash or high-quality bonds only — marked to market daily. As of 24 October 2011, no MPF fund had ever engaged in securities lending, and the MPFA said it would review the existing guidelines to strengthen member protection.

How strict were the rules?

Keep the flexibility or ban it outright?

The Hong Kong Trustees’ Association considered the current regulation adequate and wanted to keep the flexibility to earn lending income. But some MPF providers disagreed: when markets are hot for borrow-to-short, volatility spikes and counterparty risk climbs — however sufficient the collateral, a defaulting or collapsing counterparty would leave providers in deep trouble, so better to ban it outright. Others worried that lending-fuelled shorting could drag the whole market down, hurting the fund’s other holdings and violating the ordinance’s requirement that lending must bring members extra return.

The MPFA’s consultation also revealed it knew some trustees and investment managers had studied lending feasibility, and asked the industry to share their findings.

MPF investment rules are explained at the MPF education hub.