The Securities (Miscellaneous) (Amendment) Rules 2002, which came into effect on November 15 2002, introduced new exemptions for section 80 of the Securities Ordinance for relieving prohibition of the uncovered short selling of securities.
By creating a criminal offence in the form of a fine of up to HK$100,000 ($12,800) and imprisonment for two years, section 80 of the Securities Ordinance prohibits naked or uncovered short selling at or through the Unified Exchange, unless at the time of the sale, the person or his client either has a presently exercisable and unconditional right to vest the securities in the purchaser of them, or reasonably and honestly believes that the right exists.
In addition to the general defence of section 80(4), the Securities and Futures Commission has recently, by Rule 17 of the Rules, relieved all market-makers and liquidity providers of the Stock Exchange Hong Kong and the Hong Kong Futures Exchange Limited from section 80 to enhance their obligations of performing market-making roles.
Three categories of persons are permitted to conduct naked or uncovered short sales under the new rules. These are: Hong Kong Monetary Authority-appointed market makers; Securities Market Makers conducting jobbing business; and Futures Market Makers conducting jobbing business. Jobbing business includes liquidity providers selling securities in the course of performing or hedging their market-making or liquidity-providing functions.
The Rules were designed to take effect before the enforcement of the upcoming Securities and Futures Ordinance so the industry could benefit as soon as possible.