Overview

• Hong Kong regulations now require beneficial owners of shares in selected HK listed stocks to report each week short positions that exceed the threshold of HKD 30 million or 0.02% of market capitalization on the constituent stocks of the Hang Seng Index, the Hang Seng China Enterprises Index and other financial companies specified by the SFC. A list of affected of stocks can be found here:

http://www.sfc.hk/sfc/html/EN/research/short-position-reporting/specified-shares.html 

• Investors with applicable positions should register directly with the SFC. Registration and guidance on the registration process can be found here.
• Reporting is expected on a weekly basis, but the second business day of the following week.
• Links for the registering and reporting can be found here:

https://portal.sfc.hk/dsp/gateway/welcome?locale=en

Guidelines, Instructions and FAQ's:

SFC announcement with links to legislation

Short position forms, guidelines, reference material and list of specified shares

Link to subscribe to SFC alert service (choose Short Position Reporting Related Matters)

Legislation and Rules

For further details, please refer to the SFC website: www.sfc.hk and/or contact them via email with specific questions at shortpositions@sfc.hk

Interactive Brokers currently offers the ability to short sell stocks before taking delivery on an intra-day basis. In accordance with IB’s intra-day shorting rules, traders are required to deliver shares sold or close short stock positions prior to the end of the trading session. 

Should traders establish a short stock position intra-day and still hold the position ten minutes prior to the end of the trading session at 15:20 IST, Interactive Brokers may, on a best efforts basis, close the position on your behalf. If the position is not closed by the end of the day and the shares are not delivered by the customer before settlement, the loss on account of auction will be borne by the customer. Please note that prices in the auction market are highly variable and typically not favorable compared to the normal market.

It is important to note, IB will not take into consideration any closing orders for short stock positions placed by the customer which may still be working. If your account holds a short position ten minutes prior to the end of the trading session and you have placed working orders to close those positions, there is the possibility your closing order will execute and that IB will act to close out your short position.  In this situation you will be responsible for both executions and will need to manage your long position accordingly.

A fee of INR 2,000 will be charged for this manual processing in addition to any external penalties in the case of short stock positions resulting in auction trades.  As such, we strongly urge customers to monitor their positions and take appropriate action themselves in order to avoid this.

In determining the cash deposit required to collateralize a stock borrow position, the general industry convention is for the lender to require a deposit equal to 102% of the prior business day's** settlement price, rounded up to the nearest whole dollar and then multiplied by the number of shares borrowed.  As borrow rates are determined based upon the value of the loan collateral, this convention impacts the cost of maintaining the short position, with the impact being most significant in the case of low-priced and hard-to-borrow shares. Note, for shares not denominated in USD the calculation will differ. Find below a table summarizing the calculations per currency:

For US Treasuries and corporate bonds, the collateral amount on which the borrow fee is charged will include the accrued interest.

Account holders may view this adjusted price for a given transaction in the "Borrow Fee Details" section of the daily account statement.  Two examples of this collateral calculation and its impact upon borrow fees are provided below.

Example 1

Sell short 100,000 shares of ABC at a price of $1.50

Short sale proceeds received = $150,000.00

Assume the price of ABC falls to $0.25 and the stock has a borrow fee rate of 50%

Short stock collateral value calculation

Price = 0.25 x 102% = 0.255; round up to $1.00

Value = 100,000 shares x $1.00 = $100,000.00

Borrow fee = $100,000 x 50% / 360 days in year = $138.89 per day

Assuming the account holder's cash balance does not include proceeds from any other short sale transaction then this borrow fee will not be offset by any credit interest on the short sale proceeds as the balance does not exceed the minimum $100,000 Tier 1 threshold necessary to accrue interest.

Example 2 (EUR denominated stock)

Sell short 100,000 shares of ABC at a price of EUR 1.50

Assume a prior business day's close price of EUR 1.55 and a borrow fee rate of 50%

Short stock collateral value calculation

Price = EUR 1.55 x 105% = 1.6275; round up to EUR 1.63

Value = 100,000 shares x 1.63 = $163,000.00

Borrow fee = EUR 163,000 x 50% / 360 days in year = EUR 226.38 per day

** Please note, Saturdays and Sundays are treated as a Friday and will use Thursday's settlement price to calculate the required deposit.

Introduction

Clients holding short stock positions (including short positions resulting from option assignments or exercises) are at risk of having these positions bought-in and closed out by us, with no advance notice. This is a risk which is inherent in short selling and generally outside the control of the client. “Buy-ins” are conducted in accordance with regulatory rules that dictate how and when buy-ins are processed.

While similar in their effect, the term “buy-in” refers to an action taken by a third party and a “close-out” refers to an action taken by us. These actions typically result from one of three events:

1.     The shares required to be delivered when a short sale settles cannot be borrowed;

2.     The shares which were borrowed and delivered at settlement are later recalled; or

3.     A fail to deliver with the clearinghouse occurs.

An overview of each of these three events and their considerations is provided below.

1. Short Sale Statement

When stock is sold short, the broker must arrange for the shares to be borrowed for delivery by the settlement date, which in the case of U.S. securities is the first business day following the date of the trade (T+1). Prior to executing the short sale, the broker must have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. This is accomplished by verifying the current availability of the shares for borrowing. Note that there is no assurance that shares available to borrow on the date of trade will remain available to borrow one day later for delivery at settlement, and the short sale may be subject to forced close-out if the shares can no longer be borrowed for delivery. If the client “pre-borrows” shares to deliver at settlement (i.e., actually borrows shares before selling short) the client will not be subject to a close-out as long as the borrowed shares remain available. The processing timeline for determination of a close-out is as follows:

T+1

If we are unable to borrow shares to deliver on settlement date (T+1), we have until market open of the following day, T+2, to cover the delivery obligation and prevent close-outs.

T+2 

09:20 Eastern Time (ET)

If we were unable to borrow shares to meet settlement, a communication will be sent, on a best efforts basis, notifying the client that a close-out will occur.

09:30 Eastern Time (ET)

We initiate the close-out by placing an order prior to the open of regular trading hours. The close-out quantity will be reflected within the TWS Trades window. Since the final close-out price may not be known until the end of the day, the previous trading day’s closing price is used as a placeholder price on TWS. The placeholder price will be updated with the actual execution price upon completion of the close-out order.

It is possible that under certain circumstances, due to limited liquidity in the market, that the close-out order may not be executed or may be only partially executed. In that case, the initial close-out quantity will be corrected down to the executed quantity. The remaining quantity will remain subject to close-out at the start of regular trading hours the following business day.

2. Loan Recall

Once a short sale has settled (i.e., stock has been borrowed and used to deliver the shares sold short to the buyer), the lender of the shares reserves the right to request their return at any time. Should a recall occur, we will attempt to replace the recalled shares with those from another lender. If the recalled shares cannot be replaced within one or two days (depending on the time) of the recall notice, the lender can issue a formal Buy-In Warning which allows for a buy-in to take place that day. While the issuance of this formal warning provides the lender the option to buy-in, the proportion of recall notices that actually result in a buy-in are low (typically due to our ability to source shares elsewhere). 

Once a counterparty issues a Buy-In Warning to us, the counterparty may buy-in the shares we are borrowing at any time for that trade date. In the event the recall results in a buy-in, the lender executes the buy-in transaction and notifies us of the execution price. We vet counterparty buy-in prices for appropriateness with the day's trading activity.

In turn, we allocate the buy-in to clients based upon their settled short stock position. Unsettled trades are not considered when determining liability. Recall buy-ins are viewable within the TWS Trades window once they are posted to the account by approximately 17:30 ET.

3. Fail to Deliver

A fail to deliver occurs when a broker has a net short settlement obligation with the clearinghouse and does not have the shares available within its own inventory or cannot borrow them from another broker in order to meet the delivery obligation. A fail to deliver can result from a long or short sale.

In the case of US stocks, brokers are obligated to close the fail position by no later than the start of regular trading hours on the day following the settlement day. This can be accomplished by delivering purchased or borrowed shares. If available stock borrow transactions prove insufficient to satisfy the delivery obligation, we will close-out clients holding short positions by placing an order prior to the open of regular trading hours. It is possible that under certain circumstances, due to limited liquidity in the market, that the close-out order may not be executed or may be only partially executed. In that case, the initial close-out quantity will be corrected down to the executed quantity. The remaining quantity will remain subject to close-out at the start of regular trading hours the following business day.

Net Purchase Requirement

Clients should note that on any day on which they have been closed out, they are required to end the day as a net purchaser—in aggregate across all of their accounts with the Firm—of at least the number of shares they were closed out on (in the security they were closed out on). As a result, for the remainder of the trading day on which a client was closed out, that client will not be permitted to (i) sell short the stock they were closed out in, (ii) write in-the-money call options on the stock they were closed out in, or (iii) exercise put options on the stock they were closed out in (the "Trading Restrictions"). If a client nevertheless does not end the day as a net purchaser of the required number of shares for the stock they have been closed out in (for example, as the result of being assigned on call options previously written)—in aggregate across all of the client's accounts with the Firm—the Firm will perform another close-out in the account on the next trading day for the number of shares that, when added to the client's aggregate net trading activity in such stock on the close-out date, would have been required to make the client a net purchaser of the required number of shares of such stock that day, and the client will again be required to remain a net purchaser across all of their accounts of that many shares and again subject to the Trading Restrictions for the remainder of that day.

 Note on Execution

Clients should be aware that based on the manner in which we are required to execute a close-out and a third party is allowed to execute a buy-in, significant differences between the price at which the transaction was executed and the prior day's close may result. These differences may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly.