Short Position Reporting Rules - SFC

Question 1

What is the general short selling reporting principle?

Answer 1

Anyone who has a “reportable short sell position” is required to report to the SFC

Question 2

Which HK rules govern short possition reporting?

Answer 2

Cap. 571AJ Securities and Futures (Short Position Reporting) Rules.

There are 3 Parts to the rules, 7 sections, and 2 schedules.

Part 1 - Preliminary

• Interpretation
• “Reportable Short Positions”

Part 2 - Reportable Short Positions

• “Reportable short positions to be notified to the Commission”
• “Commission may designate online communication system”
• “Commission to publish particulars of reported short positions”

Part 3 - Daily Reporting Requirements
- “Daily Reporting Notice”

Sch 1 - “Specified Shares”

Sch 2 - “Specified ATS”

Question 3

What is a “reportable short position” under the HK SFC’s short possition reporting rules?

Answer 3

Rule 3 - A person has a reportable short position in any specified shares if the person has a net short position value in the specified shares that is equal to or more than the threshold in relation to a reporting day being the lower of:

(i) HK$30 million; and
(ii) 0.02% of the value of the total number of the specified shares issued by the corporation concerned, calculated by:

     C   x   D

Where “C” = the specified closing price of the specified shares; and

“D” = the total number of the specified shares issued by the corporation, as at the close of trading on the exchange on the reporting day.

Question 4

What is the “net short position value” that a person has in any specified shares under the HK short possition reporting rules?

Answer 4

Rule 2(a)

For the purposes of rule 2, the “net short position value” that a person has in any specified shares is calculated by:

    ( A  -  B)  x C

Where “A” = the number of the specified shares in the person’s short position;

“B” - the number of the specified shares in the person’s long position;

“C” - the specified closing price of the shares

Question 5

What is the “specified closing price” in relation to any specified shares under the HK short possition reporting rules?

Answer 5

Rule 2(c)

“Specified closing price” in relation to any specified shares, is:

(i) the closing price of the specified shares on the reporting day; or
(ii) if on the reporting day the specified shares are suspended from trading on the Stock Exchange, the last closing price of the specified shares before the suspension, as determined in accordance with the rules of the Stock Exchange Company.

Question 6

What is a “long position” under the HK short possition reporting rules?

Answer 6

A “long position” in relation to any specified shares, means the number of the specified shares that a person beneficially owns

Question 7

What is a “short position” under the HK short possition reporting rules?

Answer 7

A “short position” in relation to any specified shares, means the position in the 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 ATS, or any combination of these methods of selling, 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.

Question 8

What are the reportable short position notification obligations under the HK short possition reporting rules?

Answer 8

Rule 4(1)

(1) Unless a daily reporting requirement notice is in force, a person must notify the Commission of the reportable short position in any specified shares within 2 business days after the close of trading on the Stock Exchange on —
(a) the Friday of any week; or
(b) if the Exchange does not open for trading on the Friday of any week, the last weekday before Friday on which the Stock Exchange is open for trading.

Question 9

What are the reportable short position notification obligations under the HK short possition reporting rules for daily reporting requirements?

Answer 9

Rule 4(3)

If a daily reporting requirement notice is in force, a person must notify the Commission of the reportable short position of specified shares within 1 business day after the close of trading on the Exchange on each day on which the Exchange is open for trading.

Question 10

What are the reportable short position notification obligations under the HK short possition reporting rules for specified shares held on trust?

Answer 10

Rule 4(5)

If a reportable short position in any specified shares is held on trust, the duty to notify under subrule 4(2) or 4(4) does not apply to a beneficiary of the trust, and instead applies to the person who is the trustee of the trust, as if that person were the beneficiary.

Question 11

How does a corporation determine if it has any reportable short position in specified shares with respect to collective investment schemes under the HK short possition reporting rules?

Answer 11

Rule 4(6)

In determining whether a corporation has a reportable short position in any specified shares—

(a) the short position and the long position (if any) in the specified shares attributable to a particular collective investment scheme; and
(b) those attributable to another collective investment scheme,

are to be treated separately and not to be aggregated.

Question 12

How does a person determine if it has any reportable short position in specified shares under the HK short possition reporting rules?

Answer 12

Rule 4(7)

In determining whether a person has a reportable short position in any specified shares—

(a) the short position and the long position (if any) in the specified shares attributable to any partnership; and

(b) those attributable to another partnership,
are to be treated separately and not to be aggregated.

Question 13

How does a person determine if it has any reportable short position in specified shares attributable to a partnership under the HK short possition reporting rules?

Answer 13

If the partners in a partnership have a reportable short position in any specified shares attributable to the partnership, those partners are regarded as having complied with the duty to notify under subrule 4(2) or (4) in respect of those specified shares if one of those partners or another person authorized by all those partners has submitted, on behalf of those partners, a notice that complies with subrule 4(9).

Question 14

What are the notification form requirements to the Commission under the HK short possition reporting rules?

Answer 14

Rule 4(9)

Notification to the Commission required under subrule 4(2) or (4) must—

(a) be in the form specified by the Commission under section 402 of the Ordinance for the purposes of this rule;
(b) contain—
(i) particulars identifying the person who has a reportable short position in specified shares;
(ii) particulars of the net short position value and number of specified shares comprised in the reportable short position; and
(iii) the name and stock code of the specified shares comprised in the reportable short position; and
(c) be submitted to the Commission electronically by means of an online communication system designated by the Commission under rule 5(1) for the purposes of these Rules.

Question 15

What are the HK SFC’s obligations to publish particulars of reported short positions?

Answer 15

Rule 4(6)

(1) Subject to subrules 4(2) and (3), the Commission must, as soon as reasonably practicable after the reporting deadline for a reporting day, publish in the manner that it considers appropriate the particulars of the reportable short positions notified to it in respect of the reporting day under rule 4(2) or (4) that it considers appropriate.
(2) Subrule 4(1) does not require the Commission to publish particulars—
(a) earlier than 5 business days after the reporting day; or

(b )if a daily reporting requirement notice is in force, more frequently than once a week.

(3) Any particulars published under subrule (1) must be, so far as reasonably practicable, presented in a way which prevents the identity of a person who has submitted a notice under rule 4(2) or (4) and that person’s reportable short position from being ascertained from it.

Question 16

Does the SFC’s Guidance Note on Short Position Reporting have force of law? What is the legal force of it?

Answer 16

The SFC made the “Securities and Futures (Short Position Reporting) Rules” under ss 397(1) and (2) of the Securities and Futures Ordinance (Cap. 571), which sets out the regulatory requirements in relation to short sale position reporting.

The SFC published its Guidance Note under the SFO (s 399(1) to explain its policy intent in relation to certain aspects of the Short Sell Position Reporting Rules. It does not have the force of law.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 17

What is the general rule under the Short Sell Position Reporting Rules in HK to report a short sell position?

Answer 17

Rule 4(1) and (3) of the SS Rules impose a duty to report on a “person” who has a reportable short position. Rule 3 provides for the meaning of reportable short position by reference to the person’s net short position value measured against a threshold.

A “person” defined in the Interpretation and General Clauses Ordinance (Cap 1) includes a corporation. A corporation, in determining whether it has a reportable short position, must look at its overall position by aggregating the long and short positions of the entire legal entity in the relevant specified shares.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 18

How does a seller have “a presently exercisable and unconditional right to vest the securities in the purchase of them”?

Answer 18

For the purposes of section 170 (short selling restricted) and 171 of the SFO (requirements to confirm short selling orders), the SFC laid out three acceptable approaches for the purposes of determining whether a seller has a presently exercisable and unconditional right to vest the securities in the purchaser of them”, being:

1. The position of the seller’s own trading book (trading book basis);
2. The aggregated positions of a number of trading books which the seller controls or has knowledge of (trading unit basis); or
3. The aggregated position of the entire legal entity (legal entity basis).

Regardless of which of the three approaches is adopted for marking short selling orders, the SFC considers it is appropriate and makes good logical sense that the firm should apply the same approach in reporting short positions to maintain overall consistency in the data provided by the firm in relation to its short sales and short positions.

The SFC will regard reporting of the resulting net short position derived as having complied with the Rules.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 19

What is the objective of the SFC in introducing short position reporting?

Answer 19

To increase transparency on short positions, including:

1. To enable the SFC to have an effective means to monitor the market, including detection of significant build-up of short positions;
2. To deter and detect abusive short selling behaviour;
3. To provide ready access to information on short selling to improve insight into market dynamics; and
4. To expedite post event investigation.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 20

What does the SFC expect if a firm tracks its short sales on a “trading book” basis?

Answer 20

The SFC expects that if a firm tracks its short sales on a “trading book basis” for the purposes of short position reporting, the firm will add up the net short positions of the different trading books and report the aggregated net short position to the SFC if the reporting threshold is triggered.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 21

What does the SFC expect if a firm tracks its short sales on a “trading unit” basis?

Answer 21

The SFC expects that if a firm tracks its short sales on a “trading book unit” for the purposes of short position reporting, the firm will sum the net short positions of the different trading units and notify the SFC if the total net short position crosses the reporting threshold.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 22

What does the SFC expect if a firm tracks its short sales on a “legal entity” basis?

Answer 22

The SFC expects that if a firm tracks its short sales on a “legal entity basis” for the purposes of short position reporting, the firm will take a consistent approach in their short position reporting.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 23

Trading Book A:
Bought shares: 1,000,000
Sold shares: -800,000
Day-end net position at reporting day: 200,000 (net long)

Trading Book B:
Bought shares: 50,000
Sold shares: -80,000
Day-end net position at reporting day: -30,000 (net short)

Trading Book C:
Bought shares: 1,200,000
Sold shares: -1,500,000
Day-end net position at reporting day: -300,000 (net short)

Under a “Trading Book” short sell reporting approach, what will the entity have to report?

Answer 23

The entity will have to determine whether its total net short position of 330,000 shares ((-30,000 of trading book B) + (-300,000) of trading book C, amounts to or exceeds the reporting threshold. If it does, it will need to report the reportable short sale positions.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 24

Trading Book X: 
Bought shares: 500,000
Sold shares:  -800,000
Bought shares:  100,000
Day-end net position at reporting day: -200,000 (net short)

Trading Book Y: 
Bought shares:  50,000
Sold shares:  -80,000
Sold shares:  -100,000
Day-end net position at reporting day:  -130,000 (net short)

Trading Book Z:
Bought shares:  1,200,000
Sold shares:  -2,500,000
Bought shares:   1,000,000
Day-end net position at reporting day:  -300,000 (net short)

Under a “Trading Unit” short sell reporting approach, what will the entity have to report?

Answer 24

The entity will need consider whether its total net short position of 630,000 shares ((-200,000 of trading unit X) + (-130,000 of trading unit Y) + (-300,000 of trading unit Z) amounts to or exceeds the short sale position reporting threshold. If it does, it will be a reportable short sell position and need to report to the SFC.

Source: SFO Guidance Note on Short Position Reporting (in effect June 2012)

Question 25

What is the difference between short selling and short positions?

Answer 25

What is the difference between a short position and a short sale?

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A:

Ashort positionand ashort saleare very similar concepts; for this reason, they are often collectively referred to as “shorting,” and the two terms are quite commonly used interchangeably. The difference between the two lies in the subject of the transaction. While short selling and short positioning generally refer to the same thing both in common parlance and technical jargon, there are some instances where short positioning is not the same as short selling. A transaction undertaken by means of a derivative contract is a short position, but it is technically not a short sale because no asset is actually delivered to the buyer. Therefore, when the transactions involve futures, options and swaps, it is short positioning and not short selling.

In both cases, the aim of the trader is to sell the items at a high price and then to purchase them back at a lower one. The profit accrued from these techniques is the difference between the price at which the trader sold and the price at which they were purchased back. As shorting refers to borrowed commodities, they must be eventually returned to their rightful owner, so buying them back is a necessity. For this reason, it is a very risky strategy and should only be undertaken by experienced traders who know when toshort a stock.. This can be done at any time before the time the securities are supposed to be returned. Purchasing the sold goods back is referred to as both “covering the short” or “covering the position.”