Hong Kong’s Securities and Futures Commission (SFC) has reprimanded and fined Nine Masts Capital HK$1.2 million ($152,000) for violating ‘naked short selling’ rules. The short selling incident was in relation to the shares of Yuzhou Properties Company Limited and dated over four years back.
According to the SFC’s filing, the trade in question occurred in 2015, when the firm shorted a new share issue of Yuzhou before they were available for trading.
Specifically, Yuzhou Properties announced on May 12, 2015, its proposed placing of new shares, which was subject to the fulfillment of certain conditions and were expected to be despatched nine days later. Its custodian notified the company on May 13 that it was entitled to 32 million placing shares of Yuzhou Properties, of which Nine Masts sold 10,633,000 shares.
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As a result, the watchdog indicated that the disposal caused the hedge fund to sell shorts associated with over 10 million shares of Yuzhou Properties that they do not possess and have not confirmed their ability to possess.
Naked shorting is an illegal practice of short trading
The SFC said Nine Masts not only failed to act with due skill, care, and diligence in dealing in the bonus shares but also failed to supervise its staff members and implement adequate controls to ensure compliance with the short selling requirements.
Short selling – which allows investors to make gains in a falling market by borrowing a security they don’t own, selling it and agreeing to buy it back at a lower price – plays a vital role in developed capital markets since it makes price discovery more efficient and smooths volatility whilst providing investors with a host of risk-management tools.
Hong Kong’s regulations require firms to deliver the shares, after completion of a short sale transaction, on the settlement date or take affirmative action to close out the “failure to deliver” shares by purchasing or borrowing the securities. To limit ongoing naked short positions, the broker has no choice but to reject any additional sale orders if the securities were not delivered or closed out within legally required time frames.