Following the establishment of the “Shanghai-Hong Kong Stock Connect Program” (“Program”) this past June1, the Shanghai Stock Exchange (“SSE”) issued two rules on September 26, 2014, introducing certain changes to the Program, the most significant of which is the permission to engage in margin trading and short selling2 in the “northbound” trading channel (i.e. trading SSE-listed shares by investors in Hong Kong).
Eligible shares for margin trading and short selling under northbound trading are those that simultaneously meet the following requirements:
(A) The shares must be eligible shares for northbound trading3, which
(a) include all the constituents of the SSE 180 Index and SSE 380 Index, and all SSE listed companies that have issued both A shares and H shares4, but
(b) exclude all shares under the risk alert board of SSE, B shares5, and any other shares designated by SSE; and
(B) The shares must fall in the scope of underlying shares6 for margin trading and short selling pursuant to the Detailed Rules of Shanghai Stock Exchange for Implementation of Margin Trading and Short Selling (the “Domestic Rules”):
(a) the underlying shares shall have been listed and traded in the SSE for more than 3 months;
(b) the aggregate float of the issuer the shares of which are bought in margin trading shall not be less than 100,000,000 shares or not less than RMB 500,000,000 in market value; and the aggregate float of the issuer the shares of which are sold in short selling shall not be less than 200,000,000 shares or not less than RMB 800,000,000 in market value; and
(c) the number of holders of such issuer’s outstanding shares shall not be less than 4,000 persons;
(d) none of the following has occurred within the last 3 months:
1) the daily average turnover rate is lower than 15% of the daily average turnover rate of the benchmark index, and the daily average transaction value is less than RMB 50,000,000;
2) the deviation between the daily average range of price increase and decrease and average range of price increase and decrease of the benchmark index exceeds 4%; or
3) the fluctuation range reaches above 5 times the fluctuation range of the benchmark index;
(e) the issuer shall have completed the non-tradable share reform (pursuant to which shares owned by the government and formerly considered non-tradable have been rendered tradable);
(f) the shares are not under the risk alert board of SSE; and
(g) the SSE has not otherwise designated the shares as outside the scope of the shares eligible for margin trading and short selling under the Domestic Rules.
Maximum Share Percentage
In respect of each SSE-listed company, the short selling percentage on each northbound trading day shall not exceed 1%, and the sum of short-selling percentages over a period of ten consecutive northbound trading days shall not exceed 5%. SSE has the power to adjust the aforementioned percentage or temporarily suspend accepting submissions for short-selling based on market conditions. See also “Domestic Rules” below.
Under the rules issued by SSE, the short selling percentage is calculated as: the shares of a SSE-listed company short-sold through northbound trading on a northbound trading day, divided by the shares of the same SSE-listed company held by Hong Kong Securities Clearing Company Limited (a subsidiary of SEHK (as the nominee holder)) for all investors under the northbound trading in the preceding northbound trading day.
(B) Margin trading
There is no specific maximum percentage requirement in respect of margin trading under northbound trading under the Program.
In respect of shares of a SSE-listed company, the price submitted for short-selling under northbound trading must not be lower than the last recorded transaction price for the shares of the same company, or the previous closing price of the same company, if no transaction is concluded on that day.
(B) Margin trading
There is no specific requirement in respect of price for margin trading under northbound trading under the Program.
Margin Ratio and Collateral
There is no specific requirement imposed under PRC law regarding margin ratio or collateral under the Program.
Share Borrowing and Securities Margin Financing
Borrowing shares through shares borrowing and lending (in respect of short selling) and obtaining funds through securities margin financing (in respect of margin trading) shall occur in the Hong Kong market, which shall be governed by the law of Hong Kong according to the “home market” principle under the Program.
SSE has the power to temporarily suspend or resume short selling or margin trading in the shares of a SSE-listed company, when the shares of the same company is suspended or resumed for short selling or margin trading under the Domestic Rules.
1 The Program is expected to be formally launched in October.
2 Under northbound trading, margin trading refers to purchases of shares by investors under northbound trading with funds obtained through securities margin financing in the Hong Kong market, and short-selling refers to selling the shares which investors under northbound trading have borrowed through share borrowing and lending in Hong Kong market.
3 A list of eligible shares is available at http://www.hkex.com.hk/eng/market/sec_tradinfra/
4 Shares of Mainland companies that are listed on the Stock Exchange of Hong Kong Limited (the “SEHK”).
5 Shares of Mainland companies that are listed in SSE or Shenzhen Stock Exchange (the “SZSE”), denominated in RMB but settled in foreign currency.
6 A list of underlying securities (including shares and others) for margin trading and short selling pursuant to the Domestic Rules is available at
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:Ye-Xiaowei
This article was originally published by Bingham McCutchen LLP.