Recently someone asked me if a Type 1 broker providing securities margin financing (SMF) can repledge clients' securities collateral to another Type 1 broker. I answered NO. Then he argued that Section 8 of Client Securities Rules (CSR) permits this. He had a misinterpretation of CSR.
In fact, Type 1 intermediaries are only allowed by Section 7 of CSR to repledge margin clients' securities collateral to authorized financial institutions ("AFI", i.e. banks in Hong Kong), but Type 8 intermediaries (licensed for SMF) are allowed by Section 8 to repledge securities collaterals to either AFI or Type 1 intermediaries.
Having said the above, I also want to highlight Section 3 of CSR:
"…these Rules apply to client securities and securities collateral of an intermediary that are—
(a) either—
(i) listed or traded on a recognized stock market [i.e. SEHK]; or
(ii) interests in a collective investment scheme authorized by the Commission under section 104 of the Ordinance; and
(b) received or held in Hong Kong by or on behalf of—
(i) the intermediary in the course of the conduct of any regulated activity for which the intermediary is licensed or registered; or
(ii) an associated entity of the intermediary in relation to the conduct of such regulated activity."
Therefore, if the securities collateral is not listed on SEHK (e.g. US stocks) or even unlisted (e.g. an OTC bond), Type 1 / 8 intermediaries are implicitly allowed by CSR to repledge such collateral to any third party.
