Hong Kong Regulations

SECURITIES AND FUTURES (FINANCIAL RESOURCES) RULES - SECT 43

Short positions in securities (other than options contracts) and specified investments

(1) Subject to subsections (2), (3), (6), (8) and (9) and section  27 (6) and
(7), a licensed corporation which holds for its own account a short position
in securities (other than options contracts) or specified  investments,
whether by short selling or otherwise, shall include in its
ranking liabilities the market value of those securities or specified 
investments.

(2) Subject to subsection (3), a licensed corporation which holds for its own
account a short position, whether by short selling or otherwise, in-

   (a)  subject to subsections (4), (5) and (6) and section 45(5), listed
        shares;

   (b)  qualifying debt securities;

   (c)  special debt securities;

   (d)  subject to subsections (8) and (9) and section 27(6) and (7),
        specified securities; or

   (e)  specified investments, shall increase the amount required to be
        included in its ranking  liabilities under subsection (1) by the
        haircut amounts in relation thereto.

(3) Subject to subsections (4), (5), (6), (8) and (9) and sections  27 (6) and
(7) and 45(5), a licensed corporation which holds for its own account a short
position in securities, whether by short selling or otherwise, which-

   (a)  are not of a type specified in Schedule 2;

   (b)  constitute more than 5% by market value of all securities of the same
        description issued by a particular corporation; or

   (c)  are listed shares or listed warrants which have been suspended from
        trading for at least 3 business days or ceased trading on any exchange
        on which the securities were listed, unless the securities can
        continue to be traded on any other exchange on which the securities
        are listed, shall increase the amount required to be included in its
        ranking  liabilities under subsection (1) by the market value of such
        securities.

(4) Subject to subsection (7), where a licensed corporation short sells any
listed shares and holds a long position in a stock futures  contract in
respect of such shares, to the extent that the number of shares underlying the
futures contract is equal to the number of shares short sold by it,
subsections (2) and (3) do not apply in respect of the shares short sold and
section 40(4) does not apply in respect of the futures contract.

(5) Subject to subsection (7), where a licensed corporation short sells any
listed shares and writes a put stock options contract in respect of such
shares, to the extent that the number of shares underlying the
options contract is equal to the number of shares short sold by it,
subsections (2) and (3) do not apply in respect of the shares short sold and
section 40(3) and (4) does not apply in respect of the options  contract and
it shall include in its ranking liabilities the higher of-

   (a)  the increased amount that would, but for this subsection, arise under
        subsection (2) or (3); and

   (b)  the in-the-money amount of the options contract.

(6) Subject to subsection (7), where a licensed corporation short sells any
listed shares and holds a call stock options contract, which is not subject to
any margin requirement, in respect of such shares, to the extent that the
number of shares underlying the options contract is equal to the number of
shares short sold by it, it may elect not to apply subsections (1), (2) and
(3) in respect of the shares short sold and not to apply section 31(1)(b) in
respect of the options contract, whereupon it shall include in its
ranking liabilities the lower of-

   (a)  the aggregate of the market value of such shares sold short and the
        increased amount that would, but for this subsection, arise under
        subsection (2) or (3); and

   (b)  the number of shares short sold multiplied by the strike price of the
        options contract.

(7) Subsections (4), (5) and (6) do not apply in respect of a stock 
futures contract or a stock options contract which has been grouped with other
positions for the purpose of calculating a net amount of margin 
required to be deposited by the licensed corporation.

(8) A licensed corporation which is the issuer of any call
non-collateralized warrants issued on listed shares shall increase the amount
included in its ranking liabilities under subsection (1) in respect of any
outstanding call non-collateralized warrants so issued which it does not cover
by holding the underlying shares, by the amount by which the haircut amount in
relation to the underlying shares which are not so held exceeds the aggregate
of the out-of-the-money amounts of the warrants.

(9) A licensed corporation shall increase the amount included in its
ranking liabilities under subsection (1) in respect of any outstanding
non-collateralized warrants issued by it on any assets other than shares, by
30% of the market value of the assets underlying such warrants.

(10) A licensed corporation shall include in its ranking  liabilities, in
respect of the short selling of securities for any of its clients, save where
such securities have been delivered to it by the client or are not yet due for
settlement according to the settlement date, the amount by which the aggregate
of-

   (a)  the market value of such securities; and

   (b)  the haircut amount in relation to such securities, exceeds the
        aggregate of-

   (c)  the amount of cash deposited with it by the client and the amount of
        proceeds of sale of such securities withheld by it as security for
        delivery of securities by the client to the licensed corporation;

   (d)  the maximum amount that it can draw under a bank guarantee provided to
        it as security by the client and issued by an authorized 
        financial institution or an
        approved bank incorporated outside Hong Kong; and

   (e)  the market value of collateral deposited with it by the client, less
        the haircut amount in relation to such collateral.