(March 20): Hong Kong’s market regulator is planning to cap margin loans used to buy shares at initial public offerings (IPOs), according to people familiar with the matter, in an effort to clamp down on heated demand from retail investors.

Under the plan, the Securities and Futures Commission would revive a cap that requires retail investors to put down at least a 10% deposit when drawing a margin loan to subscribe for IPOs, the people said, asking not to be identified discussing a private matter.

If it’s finalized, brokers would be able to lend only up to 90% of the total subscription costs for their clients. The regulator is consulting the industry and will issue a circular shortly, the people said. The SFC’s plans were first reported by local newspaper Ming Pao.

The move is a response to a recent IPO market frenzy that’s triggered first-day share price pops and concerns that retail investors will end up getting burned. The hype was driven partly by easy brokers’ loans — sometimes carrying interest rates as low as 0% — following the stock exchange’s new settlement system known as FINI.

The FINI system shortened the pricing-to-listing period and allowed investors to pay after shares are actually allotted. The tweaks have ushered in multiple mega-hit IPOs in the city, with retail investors oversubscribing by thousands of times.

The oversubscriptions trigger an arrangement, known as the clawback mechanism, that effectively moves the new shares from the institutional side to retail investors.

The Hong Kong stock exchange has just closed a market consultation to limit clawbacks, hoping to keep more shares for institutional investors. The SFC also reviewed eight brokers with the highest IPO oversubscription volumes.

“We do not comment on market speculations,” an SFC spokesperson said in a statement. “We have concluded the thematic review on the eight brokers on whether they comply with the prudent risk management standard in providing IPO subscription services detailed in our circular dated Nov. 2023 when FINI launched. We will announce the review result and further regulatory guidance shortly.”

In the SFC’s plan now being considered, brokers may have the option to offset the 10% deposit requirement if the investor already holds stocks that can be used as collateral in their accounts, the people said.

Uploaded by Siow Chen Ming