Hong Kong may not need to strengthen regulation of short selling because current rules are working, said Ronald Arculli, chairman of the Hong Kong Exchanges & Clearing Ltd., the world’s second second-biggest exchange operator by market value.
The Hong Kong bourse is gauging the need for a central stock borrowing and lending facility, and will conduct a public consultation if they pursue the plan, Arculli said at a Bloomberg conference today in Hong Kong. The city’s regulator plans to improve reporting of short-selling, when an investor borrows securities to sell in hopes of buying them back at a lower price and pocketing the difference, the Financial Services and the Treasury Bureau said on Oct. 11.
“As far as we’re concerned, no naked shorts and the uptick rule has so far served Hong Kong well,” said Arculli. “I imagine some need of some form of constraint, but it does add to the liquidity.”
Short selling in Hong Kong climbed as the city’s benchmark Hang Seng Index last month posted its worst quarterly drop in a decade. Short selling surged to the highest level in 12 years, with bets on declines reaching HK$12.8 billion ($1.6 billion) on Sept. 30, or 14 percent of the total value traded on Hong Kong’s stock market, according to data compiled by the city’s exchange.
Current regulation in Hong Kong prohibits so-called naked short selling, when traders short shares without actually taking possession of them. Otherwise, short selling is permitted if it complies with reporting obligations, according to the Securities and Futures Commission. The city also has in place a so-called uptick rule, which requires short sales to be entered at a price higher than the previous trade.