The Hong Kong Securities and Futures (Short Position Reporting) Rules (the “Rules”) came into force on 18 June 2012, and the online system developed by the Hong Kong Securities and Futures Commission (the “SFC”) to facilitate short position reporting has gone live. The Rules will require investors to notify the SFC on a weekly basis of their reportable short positions in certain Hong Kong listed shares. The SFC will not commence publishing data on aggregated short positions however until 7 September 2012.
The final Rules reflect the culmination of a lengthy three-year consultation process. The SFC published final versions of its guidance materials in relation to the Rules on 13 June 2012, which are available on the SFC’s website. A reminder of the key provisions of the Rules is set out below.
One very recent development which will be of particular interest to investment funds and their advisers is that, provided certain conditions are met, the SFC is prepared to relax its previous requirement that detailed particulars of each limited partner in a limited partnership be registered with the SFC and kept up-to-date. A number of investment funds structured as limited partnerships had highlighted that this would cause practical difficulties where an investment fund has a large number of limited partners and permits regular subscriptions and redemptions. The SFC has emphasized however that a limited partnership or its general partner/authorized person must provide the SFC with a full list of limited partners upon request.
Who has the duty to report?
A person who beneficially owns a reportable short position in any specified shares has the duty to notify the SFC of such position. A person who exercises control over a short position does not necessarily have the duty to report under the Rules. For example, where an intermediary conducts discretionary trading as manager of a fund, the fund rather than the intermediary will typically be responsible for reporting any reportable short positions. Intermediaries may be appointed as agent to make reports on behalf of the person with a reportable short position however.
The Rules contain special provisions in relation to reporting by trusts, corporate “umbrella” funds and partnerships:
What is the reporting threshold?
A person only has a reportable short position if s/he has a net short position on The Stock Exchange of Hong Kong Limited (the "Exchange") at the close of trading on the last trading day of the week, equal to or exceeding the lower of (i) HK$30 million or (ii) 0.02 per cent of the value of the issued share capital of the corporation.
How is the net short position calculated?
A person’s net short position in any specified shares is calculated as:
(A - B) x C
“A” represents the number of specified shares in the person's “short positions”.
“B” represents the number of specified shares that a person beneficially owns.
“C” represents the specified closing price of the specified shares.
“Short position” is defined as the position in specified shares that a person has as a result of selling the specified shares at or through the Exchange or by means of any one or more specified automated trading services or any combination of these methods, where:
(a) At the time of each sale comprised in the position, the person did not have a presently exercisable and unconditional right to vest the specified shares in the purchaser; or
(b) Each sale comprised in the position was the subject of a short selling order.
Short positions established through derivatives or off exchange trading are excluded from the reporting requirement.
What shares are specified shares?
The reporting requirement only applies to specified shares in a corporation, namely those which are listed or admitted to trading on the Exchange and are designated:
(a) As a constituent of the Hang Seng Index;
(b) As a constituent of the Hang Seng China Enterprises Index; or
(c) By the Exchange to be a “designated security” according to the rules of the Exchange and classified by the Hang Seng Indexes Company Limited as “financial” stocks.
The SFC will publish a list of specified shares on its website, which will be updated by the SFC from time to time.
When and how must reports be made?
Any person who has a reportable short position in respect of any specified shares at the close of trading on the Exchange on the last trading day of the week must notify the SFC of the reportable short position within two business days of the last trading day in the previous week.
The SFC may publish a daily reporting requirement notice if it believes that circumstances exist, in Hong Kong or elsewhere, which threaten or may threaten the financial stability of Hong Kong. In such event, a person who has a reportable short position on each day on which the Exchange is open for trading must notify the SFC of such position within one business day.
Notifications must be made online, using the form specified by the SFC, through the Short Position Reporting Service (“SPRS”). A person who has a reportable short position may appoint an agent (e.g. the investment manager) to file a report on its behalf, but such person remains responsible for the reporting obligation, and both parties must register for the SPRS separately.
Publication of short position report by the SFC
Starting from 7 September 2012, the SFC will publish the particulars of the aggregate reportable short positions in respect of any specified shares at the close of trading on the Exchange on a delayed basis approximately a week after the short position reports are made. Such particulars will not reveal the identity of the holders of the relevant short positions.
Sanctions for non-compliance
Any person who, without reasonable excuse, breaches the Rules is liable to incur fines of up to HK$100,000 (equivalent to US$12,900) and/or a term of imprisonment of up to two years.
Parties with a reportable short position and their appointed agent (if any) will each need to register with the SPRS and provide certain information in advance of filing any reports.
Intermediaries such as investment advisers and broker-dealers which intend to make reports on behalf of their clients should check the terms of their engagement to ensure that they are duly authorised to perform such acts. In addition, where a client has short positions which are executed or controlled by more than one intermediary, it will be important to ascertain the aggregate reportable position on an ongoing basis and to ensure there is clarity as to which party will file the necessary reports.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Joseph-Roger
This article was originally published by Bingham McCutchen LLP.