Hong Kong’s SFC orders brokers to end ‘imprudent’ margin financing to pre-empt IPO madness

Futu Securities, the city’s biggest online broker, said the SFC directive might cool the IPO market frenzy a bit

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People walk past an electronic sign showing the Hang Seng Index in Hong Kong on February 26, 2025. Photo: AFP

Published: 8:00am, 21 Mar 2025Updated: 6:34pm, 21 Mar 2025

Hong Kong’s market watchdog has asked the city’s stock brokerages to clean up their act in funding their clients in initial public offerings (IPOs), after a review discovered “imprudent and aggressive financing practices” that exposed both parties to financial risks or default.

They would be required to collect an upfront subscription deposit of 10 per cent from clients who do not fully pre-fund their IPO orders, the Securities and Futures Commission (SFC) said in a circular on Thursday. The firms must also assess their financial capabilities and creditworthiness, as well as segregate those deposits to smoothen refunds for unsuccessful bids, it added.

The decision followed a review of margin financing practices by some undisclosed brokerages, triggered by excessive oversubscription rates in stock offerings by companies including Mixue Group and Blok Group that could create an illusion of “hot” IPOs, officials said.

Mixue’s mascot Snow King strikes a gong during the company’s listing ceremony on March 3. Photo: Reuter

Retail investors in Hong Kong borrowed more than HK$1.8 trillion (US$231.6 billion) from brokerages to bid for China’s largest fresh-drinks chain Mixue, resulting in 5,258 times the number of shares on offer. They also took HK$474 billion in margin financing to bid for shares of toymaker Blok Group, or about 6,000 times the number of shares on offer.

Futu Securities International, Hong Kong’s largest online broker, said it would “closely follow” the directives, founder and chairman Leaf Li Hua said at a media briefing on Friday.

“I can also understand why [the SFC] might introduce a new policy,” he said. “It might have observed that in some past IPO processes, certain investors used excessively high leverage. It may cool down the market frenzy a bit.”

The SFC said “some of the imprudent and aggressive financing practices” exposed brokerages and their clients to undue financial risks, including the risk of default when the number of shares allotted to clients exceeds their financial capabilities. Other “deficiencies” included accepting clients’ orders before ensuring they had sufficient resources to meet their obligations, it added.