Recent disciplinary action by the Securities and Futures Commission (SFC) is a timely reminder to managers of the need to ensure they have in place appropriate systems and procedures to ensure they meet the Hong Kong Short Selling Reporting obligations of the funds that they manage.

On 15th April 2021, the Securities and Futures Commission (SFC) publicly reprimanded and fined Optimas Capital Limited HK$1.05 million for failures concerning short position reporting between 2017 and 2018.

This is the second large fine the Securities and Futures Commission (SFC) has issued this year, and follows the $3.15 million fine the Securities and Futures Commission (SFC) issued in February following short position reporting failures by Brilliance Asset Management Limited.

Before looking at the Hong Kong Short Selling rules, let’s take a look at the failings that gave rise to the Optimas Capital Limited penalty.

Between 2017 and 2018, a total of 350 reportable short positions were omitted from 56 Short Position Reports submitted by Optimas to the Securities and Futures Commission (SFC).

The errors in the SPRs occurred as a result of a programming mistake in a scrip created to automate the process of identifying short positions held in order to filter out those that were reportable.

In particular, the reporting criteria in the script had mistakenly been set as below the 0.02% Threshold. This led Optimas to have reported all net short positions in specified shares held by the CIS that were equal to or above HK$30 million in value and/or below the 0.02% Threshold, while failing to include in the SPRs short positions that were equal to or above the 0.02% Threshold.

Under the Hong Kong short selling regime, reporting is done on an individual-entity basis and there is no aggregation within groups.

Where an investment manager has been appointed to report on behalf of multiple funds that it manages, the reportable short positions of each fund must be calculated and reported separately.

Unless a daily reporting requirement notice is in force, short positions should be calculated at the end of the last SEHK trading day of each week – usually a Friday.

If the Stock Exchange is not open for trading on the Friday, the last weekday before Friday on which the Stock Exchange is open for trading should be used.

Shares, or interests in a collective investment scheme, which are determined by the Stock Exchange Company to be a “designated security” are in scope for short position disclosures in Hong Kong.

Exposure to Designated Securities through derivatives (physically or cash settled) is not included.

Market Capitalisation!

This was one of the failings of Brilliance Asset Management flagged by the Securities and Futures Commission (SFC) last month. Brilliance “erroneously used data sources that included the market capitalisation of A-shares and non-listed shares of the issuers in calculating whether the net short positions held by the CISs exceed the 0.02 per cent reportable threshold instead of only using the market capitalisation of Hong Kong-listed shares.”

A subtlety of the Hong Kong short position reporting, is that it applies only to “specified shares” – these are defined as shares in a corporation, or interests in a collective investment scheme, which are listed or admitted to trading on the Stock Exchange.

This means that shares that are not listed or admitted to trading on SEHK such as “A” shares should not be taken into account.

Reportable positions must be reported by the second business day of the following week.