Introduction
The Hong Kong Securities and Futures Commission (SFC) has published its conclusions on the Securities and Futures (Short Position Reporting) Rules (the Rules) following its most recent consultation on the Rules in October 2011 (the Third Consultation).
The Third Consultation was conducted in light of the industry’s concern about difficulties in reporting short positions on a gross basis, a proposal initially contained in the SFC’s second consultation in May 2011. Responding to market feedback on the Third Consultation, the SFC has revised the Rules to provide for a reporting of short positions on a net basis. Clarity on net reporting obligations in relation to corporate umbrella funds and jointly-owned short positions has also been provided.
The Rules, when implemented, will give effect to a new short position reporting regime that is separate from Part XV of the Securities and Futures Ordinance (disclosure of interests) and will run in parallel to the existing reporting requirements of the Stock Exchange of Hong Kong (SEHK).
Below is a summary of the new reporting regime and the Rules which, subject to negative vetting by the Hong Kong Legislative Council, is intended to come into effect on 18 June 2012.
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Reporting requirements
Thresholds
Net short positions in specified shares traded on the SEHK or a specified SFC-authorised automated trading services platform must be reported to the SFC if, at the close of trading on the last trading day of a week (the reporting day), a person has a “net short position value” in the specified shares that equals to or exceeds the lower of:
- HK$30 million; and
- a value of 0.02 per cent of the closing price of the specified shares multiplied by the total issued share capital of the listed company as at the close of trading on the reporting day.
The “net short position value” is determined by multiplying the number of specified shares in the person’s short position (after netting off against his long position in the shares) by the closing price of the specified shares on the reporting day.
Reporting on Umbrella Funds
For corporate umbrella funds that have underlying sub-funds, the net short position that is attributable to each sub-fund is to be treated and reported separately and is not to be aggregated with the positions of other sub-funds within the same umbrella fund. Accordingly, a corporate umbrella fund should determine and report the reportable short position of each sub-fund separately.
Reporting on Trading Activities on a Trading/Unit book basis
For an entity that organises its trading activities on a trading unit/book basis, the SFC has indicated that it would allow the entity to add together the net short positions of its trading units/books and to report to the SFC the sum of the net short positions across its trading units/books. The SFC expects those who opt for this reporting approach to apply the approach consistently.
Market participants, however, should note that if this approach is adopted, there can be no netting of short positions against long positions across their trading units/books. Accordingly, the chance of their short position hitting the reporting threshold may be increased and they may have to report their short position more frequently. The SFC has stated that it will issue guidelines on the application of this reporting approach in due course.
Reporting on Partnerships
A person who has a reportable short position as a partner in more than one partnership must treat and report the short position attributable to each partnership separately (i.e. the person’s positions in the different partnerships should not be aggregated).
Reporting on Legal Entity Basis
The SFC stated in its May 2011 consultation that, in the case of a group structure that has multiple entities (e.g. a global financial institution), the reporting obligation will be on the individual legal entities within the group. The entities will not be required to aggregate the short positions within the group and should report their short positions on a separate basis.
There has been no subsequent indication that the SFC’s position in this regard has changed, therefore, it is presumed that the individual legal entities within a group should report their short position on a separate basis under the new regime.
Optional Reporting
The SFC indicated in its May 2011 consultation that it will permit voluntary submission of short position reports regardless of whether the statutory threshold has in fact been hit. Such voluntary reporting could help facilitate compliance by market participants with a high transaction volume as it might otherwise be difficult and onerous for them to monitor when the statutory threshold has been reached. We understand the SFC’s position remains the same.
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Scope of reporting
Constituent Stocks
The reporting requirement will only apply to short positions in the constituent stocks of the Hang Seng Index, the Hang Seng China Enterprises Index (H Shares) and other financial stocks specified by the SFC (shares which are determined to be a designated security by the SEHK and classified as financial stocks under the Hang Seng Industry Classification System).
Exclusion of Derivatives
In its previous consultation conclusions, the SFC has stated that derivatives will be excluded from the reporting requirement at the initial stage of the new reporting regime. This position has not been addressed again in the Third Consultation and we understand that derivatives are excluded from the reporting requirement under the new regime, until further notice.
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Publication of reports
Ordinary Circumstances
Where a person has a reportable short position at the close of trading on the last trading day of a week, that person must notify the reportable short position to the SFC within the following two business day. The SFC will then publish the aggregated short positions of each stock on an anonymous basis. The SFC, however, has stated that it will commence publication of the aggregated short positions only when the market has adjusted to the new reporting requirements. The SFC will publish a notice in the Gazette when it intends to commence publication of the aggregated data.
Contingency Measures
In circumstances of threat to Hong Kong’s financial stability, the SFC will have the power to require, on not less than 24 hours’ notice, a daily reporting of reportable short positions. The SFC will publish its daily reporting requirement notice in the Gazette (which may also be published on the SFC’s website). The notice will specify the date from which daily reporting is required.
When a daily reporting requirement is in force, a market participant who has a reportable short position as at the end of a trading day must report to SFC within the following business day. A cessation notice will be published on the SFC’s website when the SFC considers the daily reporting requirement is no longer necessary.
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Responsibility to report
The beneficial owner of the short position is ultimately responsible for reporting. Although agency reporting is allowed (for example, where a fund manager reports on behalf of a fund), the legal responsibility for reporting will remain with the principal. In the case of trusts, the legal responsibility to report will fall on the trustee.
Following feedback received from the industry, the Rules have been revised to provide that if the partners in a partnership have a reportable short position, then a report submitted by a partner or another person authorised by all the partners, on behalf of those partners, will be regarded as having complied with the Rules. This will avoid multiple reporting in a partnership context.
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Overseas application
The Rules apply to all who hold short positions in the relevant shares, regardless of where the beneficial owner is located (i.e., they may be located outside Hong Kong).
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Method
Reportable short position reports should be submitted to the SFC electronically through the Short Positions Reporting Service (SPR Service). This will be accessible via the SFC Online Services Portal. The SPR Service will provide a template for reporting short positions, which will require the net short position value and the number of specified shares comprised in the reportable short position to be stated. The template proposed to be used is attached to the conclusions of the Third Consultation.
Prior to the first time that a report is submitted, a person who has the duty to report under the Rules must register with the SPR Service. A unique identity reference, the Short Position Reporting ID (SPRID), will be assigned to the registrant upon successful registration. The SPRID must be cited in all submissions of reportable short positions. If an agent is reporting on behalf of his principal, the agent will also need to register and obtain a SPRID and quote his SPRID when submitting the short positions reports for his principal.
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Penalties
A person who, without reasonable excuse, contravenes the duty to report under the Rules will commit an offence and will be liable, on conviction on indictment to a fine of HK$100,000 and a term of imprisonment for two years, and, on summary conviction, a fine of HK$10,000 and a term of imprisonment for six months.
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Next steps
The Rules will be submitted by the SFC to the Legislative Council for negative vetting. Subject to the legislative process, it is intended that the Rules will come into effect on 18 June 2012 (other than the Rules relating to the publication of aggregated net short positions by the SFC).
Market participants may subscribe to the SFC’s alert service named “Short Position Reporting Related Matters” through which they can receive email alerts of the latest developments in relation to the new reporting regime (such as the implementation timetable, notification that a daily reporting requirement has been invoked or ceased, and changes to the list of specified shares). The SFC will also publish FAQs or guidance notes in relation to the new reporting regime in due course.
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