Read the following article 'Hong Kong securities watchdog proposes cap on margin financing as risks rise to worrying levels'. Hong Kong securities watchdog proposes cap on margin financing as risks rise to worrying levels Hong Kong's securities watchdog has proposed a new cap on margin financing by brokerages to investors as the risks have risen to worrying levels, but brokers are concerned that the new rules would reduce market liquidity. Under the proposal released on Friday as part of a two-month consultation until October 18, the Securities and Futures Commission (SFC) will impose restrictions on brokers, which stipulates that their total margin financing loan offered to clients to buy stocks, must be between two to five times their respective capital. This compares with four times shareholders' capital in China and between three to four times in Singapore. A study conducted by the SFC last year showed that half of Hong Kong brokers offer total margin loan equal to five times their capital, but in some rare cases it was as high as nine times, which was considered too risky by the regulator. *The rapid growth in total margin loans coupled with a deterioration in the quality of loan collateral in the past decade is very worrying,' said Julia Leung Fung-yee, deputy chief executive at SFC. 'The proposed guidelines aim to standardise the risk management practices for margin lending and improve margin brokers' resilience to stock market volatility' Joseph Tong Tang, chairman of Morton Securities, said the SFC's proposed new rules would force brokers to reduce rending. *The deleveraging will reduce market risk but it will also cut down the funding for investment and this will affect the market sentiment,' Tong said. Gordon Tsui Luen-on, managing director of Hantec Pacific, however supported the SFC proposals. Some brokers are too aggressive and they lend too much money on some penny stocks as collaterals. This adds risk to the market as a whole. The tightening of regulation on margin financing will reduce risks in the market,' Tsui said. The SFC study also showed brokers' margin lending in Hong Kong had increased by nine times over the past 11 years. The total amount of margin loans jumped to HK$206 billion (US$26.2 billion) in 2017 from just over HK$21 billion in 2006, The number of brokers active in margin financing also increased 41 per cent from 224 in 2006 to 315 in 2017. The number of investors resorting to margin financing to trade stock also rose 320 per cent from 80,348 in 2006 to 337,608 in 2017. The loan quality also deteriorated with the shortfall of these loans to brokers' shareholder funds increasing from 7 per cent in 2006 to 19 per cent in 2017. Many brokers also allowed clients not to cover margin calls for a lengthy time, the SFC study showed. Besides the new cap, the SFC also requires brokers to conduct more frequent stress tests to monitor their risks in the event of a market collapse. The brokers will also have to reduce lending too much on certain stocks as collaterals. Tong said that the quantitative cap of the loan to capital ratio was not a fair approach and that the SFC should access the quality of the stocks. Lending for a single client would be considered as too high if the loan for the single client exceeds 20 to 40 per cent of the brokers' shareholder fund. The new restrictions will not be imposed on lending for customers for subscribing to initial public offering. The proposals, if it gains support from the market, will be implemented six months after the consultations conclusions are released. Source: Yiu E (2019) 'Hong Kong securities watchdog proposes cap on margin financing as risks rise to worrying levels", South China Morning Post, August 17 Answer the following question. Question 1 (50 marks) Critically appraise the above news article and submit a written report. The report should focus on the listed firm(s) with publicly available financial information, and should relate to the topic on sources of long- term financing or impact of leverage and the firm's financial mix. Write no more than 500 words (please provide a word count). The report should cover theory understanding, concept application, analysis, research efforts, conclusion and references. Read the following article 'Hong Kong securities watchdog proposes cap on margin financing as risks rise to worrying levels'. Hong Kong securities watchdog proposes cap on margin financing as risks rise to worrying levels Hong Kong's securities watchdog has proposed a new cap on margin financing by brokerages to investors as the risks have risen to worrying levels, but brokers are concerned that the new rules would reduce market liquidity. Under the proposal released on Friday as part of a two-month consultation until October 18, the Securities and Futures Commission (SFC) will impose restrictions on brokers, which stipulates that their total margin financing loan offered to clients to buy stocks, must be between two to five times their respective capital. This compares with four times shareholders' capital in China and between three to four times in Singapore. A study conducted by the SFC last year showed that half of Hong Kong brokers offer total margin loan equal to five times their capital, but in some rare cases it was as high as nine times, which was considered too risky by the regulator. *The rapid growth in total margin loans coupled with a deterioration in the quality of loan collateral in the past decade is very worrying,' said Julia Leung Fung-yee, deputy chief executive at SFC. 'The proposed guidelines aim to standardise the risk management practices for margin lending and improve margin brokers' resilience to stock market volatility' Joseph Tong Tang, chairman of Morton Securities, said the SFC's proposed new rules would force brokers to reduce rending. *The deleveraging will reduce market risk but it will also cut down the funding for investment and this will affect the market sentiment,' Tong said. Gordon Tsui Luen-on, managing director of Hantec Pacific, however supported the SFC proposals. Some brokers are too aggressive and they lend too much money on some penny stocks as collaterals. This adds risk to the market as a whole. The tightening of regulation on margin financing will reduce risks in the market,' Tsui said. The SFC study also showed brokers' margin lending in Hong Kong had increased by nine times over the past 11 years. The total amount of margin loans jumped to HK$206 billion (US$26.2 billion) in 2017 from just over HK$21 billion in 2006, The number of brokers active in margin financing also increased 41 per cent from 224 in 2006 to 315 in 2017. The number of investors resorting to margin financing to trade stock also rose 320 per cent from 80,348 in 2006 to 337,608 in 2017. The loan quality also deteriorated with the shortfall of these loans to brokers' shareholder funds increasing from 7 per cent in 2006 to 19 per cent in 2017. Many brokers also allowed clients not to cover margin calls for a lengthy time, the SFC study showed. Besides the new cap, the SFC also requires brokers to conduct more frequent stress tests to monitor their risks in the event of a market collapse. The brokers will also have to reduce lending too much on certain stocks as collaterals. Tong said that the quantitative cap of the loan to capital ratio was not a fair approach and that the SFC should access the quality of the stocks. Lending for a single client would be considered as too high if the loan for the single client exceeds 20 to 40 per cent of the brokers' shareholder fund. The new restrictions will not be imposed on lending for customers for subscribing to initial public offering. The proposals, if it gains support from the market, will be implemented six months after the consultations conclusions are released. Source: Yiu E (2019) 'Hong Kong securities watchdog proposes cap on margin financing as risks rise to worrying levels", South China Morning Post, August 17 Answer the following question. Question 1 (50 marks) Critically appraise the above news article and submit a written report. The report should focus on the listed firm(s) with publicly available financial information, and should relate to the topic on sources of long- term financing or impact of leverage and the firm's financial mix. Write no more than 500 words (please provide a word count). The report should cover theory understanding, concept application, analysis, research efforts, conclusion and references