Understanding Stock Loans and Repos in Hong Kong

Securities lending (stock borrowing) and repurchase agreements (repos) are fundamental mechanisms in Hong Kong’s financial markets, enabling short selling, hedging strategies, and liquidity management. However, these transactions carry hidden costs that many traders overlook, particularly stamp duty obligations that can significantly impact profitability.

This comprehensive guide examines the stamp duty implications of stock loans and repos, recent regulatory changes, exemption procedures, and practical cost calculations for Hong Kong traders.

What Are Stock Loans and Repos?

Securities Lending (Stock Borrowing)

Securities lending is a transaction where one party (the lender) transfers securities to another party (the borrower) in exchange for collateral, with an agreement that the borrower will return equivalent securities at a future date. The lender receives a lending fee for providing the securities.

Key characteristics:

• Borrower provides collateral (typically 102-105% of market value)
• Lender receives lending fees (typically expressed in basis points annually)
• Enables short selling and hedging strategies
• Transfer of legal ownership occurs (though beneficial interest differs)

Repurchase Agreements (Repos)

A repo is a transaction where one party sells securities to another with a simultaneous agreement to repurchase the same securities at a specified price on a future date. Economically similar to a collateralized loan, repos are widely used for short-term financing.

Key characteristics:

• Seller retains economic exposure to the securities
• Buyer provides financing at an agreed repo rate
• Commonly used in fixed income markets
• Involves two separate transfers: initial sale and subsequent repurchase

Hong Kong Stamp Duty Framework

Current Stamp Duty Rates

As of November 17, 2023, Hong Kong stamp duty on stock transfers is charged at:

Note: This rate was reduced from 0.13% per side (0.26% total) that was in effect from August 2021 to November 2023.

Additional Trading Fees (As of July 2025)

Beyond stamp duty, traders face additional costs on HKEX transactions:

Stamp Duty Relief for Stock Borrowing and Lending

Available Exemptions

The Hong Kong Inland Revenue Department (IRD) provides stamp duty relief for stock borrowing and lending transactions under specific conditions. This relief is governed by the Stamp Duty Ordinance (Cap. 117) and detailed in the Stamp Office Interpretation and Practice Notes (SOIPN02).

Qualifying conditions for relief:

• A Stock Borrowing and Lending Agreement (SBLA) must be registered with the IRD
• The transfer must be solely for stock borrowing/lending purposes
• The borrower must return equivalent securities (not the identical securities)
• All statutory conditions specified in the Stamp Duty Ordinance must be met

Registration Procedures

The IRD has streamlined the registration process through electronic services available via the e-Tax platform (launched April 23, 2012).

Step-by-step registration process:

1. Prepare the SBLA: Execute a Stock Borrowing and Lending Agreement with your broker or counterparty
2. Electronic Registration: Register the SBLA online via the e-Tax system at GovHK e-Stock Borrowing Relief
3. Pay Registration Fee: Submit the required registration fee (typically paid by the broker on behalf of the client)
4. Annual Filing: File an annual return of stock borrowing transactions as required by U3/SOG/PN06A
5. Receive Approval: Upon approval, previously collected stamp duty will be refunded

“Deduct in Advance, Refund Later” Approach

For short selling transactions conducted before IRD approval is granted, brokers implement a “deduct in advance, refund later” mechanism:

• Initial Collection: Broker collects 0.1% stamp duty on borrowed securities
• Return Collection: Broker collects 0.1% stamp duty when securities are returned
• Total Upfront Cost: 0.2% of transaction value (matching the normal buy/sell stamp duty)
• Refund Timeline: Stamp duty refunded to client’s account once IRD approves the SBLA registration

Important: The registration process and approval timeline mean traders must have sufficient capital to cover the upfront stamp duty collection, which can be substantial for large short positions. Plan your cash flow accordingly.

Stamp Duty Treatment of Repo Transactions

Equity Repos

Repurchase agreements involving Hong Kong-listed equities face complex stamp duty treatment because repos legally involve two separate transfers:

1. Initial Sale: Transfer from seller to buyer (attracts stamp duty)
2. Repurchase: Transfer from buyer back to seller (attracts stamp duty)

Unlike securities lending, there is no general stamp duty exemption for equity repos. Each leg of the transaction is treated as a separate transfer subject to the standard 0.2% stamp duty (0.1% per side).

Bond Repos vs. Equity Repos

A critical distinction exists between bond repos and equity repos:

• Bond Repos: Debt securities and bonds are generally not subject to Hong Kong stamp duty, making bond repos stamp duty-free
• Equity Repos: Hong Kong-listed stocks are subject to stamp duty on each transfer, making equity repos significantly more expensive

This structural difference is why equity repos are relatively uncommon in Hong Kong markets, while securities lending (with its available exemption) is the preferred mechanism for short-term equity financing.

Stock Loans vs. Repos: Comparative Analysis

Practical Cost Calculations for Traders

Scenario 1: Short Selling Without Stamp Duty Exemption

Trader Profile: Retail investor shorting HKD 500,000 worth of HSBC Holdings (00005.HK)

Scenario 2: Short Selling With Stamp Duty Exemption (Registered SBLA)

Same trade with approved SBLA registration:

Key Insight: Registering your SBLA saves HKD 980 (nearly HKD 1,000) on this single HKD 500,000 short trade. For active short sellers, this exemption is essential for profitability. The savings represent a 4.9% improvement in net returns.

Scenario 3: High-Frequency Short Seller (Monthly Analysis)

Trader Profile: Professional trader with HKD 5,000,000 average short exposure, 4 round-trip trades per month

Professional Trader Impact: For high-volume short sellers, the SBLA exemption can save nearly half a million HKD annually. This is not a minor optimization—it’s essential for competitive trading operations.

Stock Borrowing Costs in Hong Kong

Lending Fees and Market Dynamics

Beyond stamp duty, traders must account for stock borrowing fees, which have increased significantly in recent years.

Current market conditions (2024-2025):

• According to Markit Securities Finance, borrowing costs in Hong Kong have risen substantially
• 21% of securities on loan now cost more than 500 basis points (5% annually)
• This represents an increase from 13% in previous years
• Hard-to-borrow stocks can command fees exceeding 1,000 basis points (10% annually)

Full Cost Analysis for Short Sellers

Margin and Collateral Requirements

HKEX requires margin accounts to maintain specific ratios:

• Minimum Margin Ratio: 150% for most stocks (50% equity requirement)
• Maintenance Margin: Must be maintained at all times to avoid margin calls
• Collateral for Stock Borrowing: Typically 102-105% of market value
• Marked to Market: Daily valuation adjustments to collateral requirements

Margin Call Risk: If your position moves against you and the margin ratio falls below maintenance requirements, you’ll receive a margin call demanding additional capital or face forced liquidation. Factor this risk into your position sizing.

Recent Regulatory Changes (2024-2025)

December 2024: Stamp Duty Legislation Amendments

On December 11, 2024, the Hong Kong Legislative Council passed the Stamp Duty Legislation (Miscellaneous Amendments) Ordinance 2024, which was gazetted on December 20, 2024. Key changes include:

• REITs Exemption: Transfers of Real Estate Investment Trust (REIT) shares and units are now exempt from stamp duty (previously 0.2% total)
• Options Market Makers: Exempted from the HKD 5 stamp duty per transaction document
• Effective Date: Amendments came into operation on December 21, 2024
• Policy Objective: Enhance Hong Kong’s competitiveness as a financial center and reduce costs for market makers

Court Rulings on Section 45 Relief

On June 16, 2025, the Court of Final Appeal (CFA) issued an important ruling affecting intra-group stamp duty relief:

• Section 45 Relief Limitation: Stamp duty relief for intra-group share transfers is only available to associated bodies corporate with issued share capital
• Entities Affected: Limited Liability Partnerships (LLPs), Limited Liability Companies (LLCs), and other structures without traditional share capital may not qualify
• Impact: Corporate groups using non-traditional structures must review their restructuring plans and stamp duty exposure

Important for Securities Lending: While this ruling primarily affects intra-group transfers, it demonstrates the courts’ strict interpretation of stamp duty exemptions. Ensure your SBLA is properly structured and registered to avoid disputes over exemption eligibility.

HKEX Collateral Enhancements (March 2025)

Effective March 21, 2025, HKEX introduced expanded collateral options for derivatives clearing:

• Foreign investors can now use Chinese Government Bonds (CGBs) and policy bank bonds via Bond Connect as margin collateral
• Applies to all derivative transactions cleared by OTC Clearing Hong Kong
• Part of deepening financial connectivity between Hong Kong and mainland China
• Expands acceptable collateral beyond traditional HKD and USD securities

Exempt Securities and Instruments

Traders can avoid stamp duty entirely by trading certain exempt products:

Stamp Duty-Free Instruments

Strategy Tip: Many traders use cash-settled derivatives (futures, options, CBBCs) to gain equity exposure while avoiding stamp duty. However, derivatives carry their own risks and costs, including wider bid-ask spreads and time decay for options.

Best Practices for Hong Kong Traders

1. Register Your SBLA Immediately

• Don’t wait until you execute short trades—register your Stock Borrowing and Lending Agreement proactively
• Use the electronic e-Tax system for faster processing
• Work with your broker to ensure proper documentation
• The upfront cost of registration is negligible compared to potential savings

2. Calculate All-In Costs Before Trading

Before entering a short position, calculate your full cost of carry:

3. Monitor Borrowing Costs Regularly

• Stock borrowing fees fluctuate based on supply and demand
• Hard-to-borrow stocks can spike to 10%+ annually during high demand periods
• Consider closing positions if borrowing costs exceed your expected return
• Some brokers offer alerts when borrowing rates change significantly

4. Maintain Adequate Margin Buffers

• Don’t operate at the minimum 150% margin ratio
• Maintain 200%+ margin ratio to avoid forced liquidations during volatile markets
• Remember that margin calls can occur intraday during extreme volatility
• Keep liquid cash reserves to meet potential margin calls without forced selling

5. Consider Alternative Instruments

For certain strategies, stamp duty-exempt instruments may be more cost-effective:

• For directional bets: Futures or cash-settled options (no stamp duty)
• For hedging: ETFs or index derivatives (exempt)
• For short exposure: Bear CBBCs or inverse ETFs (exempt)
• Trade-off: These instruments have other costs (wider spreads, time decay) but eliminate stamp duty

6. Keep Detailed Records

• Maintain records of all SBLA registrations and IRD correspondence
• Track stamp duty paid and refunded to reconcile with broker statements
• Document stock borrowing fees for tax reporting purposes
• File annual returns as required by U3/SOG/PN06A procedures

Common Pitfalls and How to Avoid Them

Pitfall 1: Failing to Register SBLA

Mistake: Traders assume their broker automatically handles stamp duty exemptions.

Reality: You must proactively register your SBLA. Without registration, you’ll pay full stamp duty on both borrowing and returning securities.

Solution: Confirm in writing with your broker that your SBLA is registered. Request the IRD approval documentation.

Pitfall 2: Ignoring Upfront Cash Flow Impact

Mistake: Not budgeting for the “deduct in advance, refund later” stamp duty collection.

Reality: Even with eventual refund, you need liquidity to cover 0.2% stamp duty on borrowed and returned securities upfront.

Solution: Maintain adequate cash reserves. For a HKD 1 million short position, budget HKD 4,000 for upfront stamp duty collection.

Pitfall 3: Underestimating Stock Borrowing Costs

Mistake: Focusing only on stamp duty while ignoring high borrowing fees.

Reality: Hard-to-borrow stocks may charge 500-1,000+ bps (5-10% annually), dwarfing stamp duty costs.

Solution: Always confirm borrowing fees before initiating short positions. Set maximum acceptable rates.

Pitfall 4: Using Equity Repos Instead of Securities Lending

Mistake: Structuring transactions as repos rather than securities lending.

Reality: Repos pay stamp duty on both legs (0.4% total) with no exemption available, while registered securities lending is exempt.

Solution: For Hong Kong equities, always use securities lending structures rather than repo agreements.

Pitfall 5: Non-Compliance with Annual Filing Requirements

Mistake: Registering SBLA but failing to file required annual returns.

Reality: IRD requires annual filing of stock borrowing transaction returns (per U3/SOG/PN06A).

Solution: Set calendar reminders for annual filing deadlines. Work with your broker’s compliance team to ensure timely submission.

Resources and Official Guidance

Hong Kong Inland Revenue Department

• Main Stamp Duty Page: https://www.ird.gov.hk/eng/tax/sdu.htm
• Stock Borrowing Relief – SOIPN02: https://www.ird.gov.hk/eng/pdf/soipn02.pdf
• Registration Procedures – SOG/PN06A: https://www.ird.gov.hk/eng/pdf/sog_pn06a.pdf
• e-Stock Borrowing Relief Registration: https://www.gov.hk/en/residents/taxes/etax/services/stock_borrowing_relief.htm

Hong Kong Exchange (HKEX)

• Securities Exempt from Stamp Duty List: HKEX Stamp Duty Information
• Stamp Duty Exchange Rates: https://www.hkex.com.hk/eng/market/sec_tradinfo/stampfx/stampfx.asp
• Margin Requirements: HKEX Securities Margin Requirement

Legal References

• Stamp Duty Ordinance (Cap. 117): https://www.elegislation.gov.hk/hk/cap117
• Stamp Duty Legislation (Miscellaneous Amendments) Ordinance 2024: Gazetted December 20, 2024