The Hong Kong Monetary Authority and Hong Kong's Securities and Futures Commission have co-ordinated their inspections at a bank that is part of a larger group of banks on the Mainland and a related corporation licensed by the SFC.

The HKMA and the SFC found that the group to which these entities belonged had taken part in a series of complex transactions through a private fund and other entities which they found worrying and symptomatic of arrangements at other Mainland financial institutions.

The regulators are worried about "complex, opaque financing arrangements which may conceal embedded financial risksand make it difficult to conduct rigorous risk assessment." They do not say whether the unnamed group in question participated in these arrangements along with the aforementioned transactions, or whether those transactions formed part of the financing arrangements. They are urging all institutions which may have done the same with their subsidiaries or affiliates to review their arrangements urgently and tackle "all untoward risks."

A subsidiary in the group obtained a credit facility from the bank for purposes involving general business and working capital. It then made a large investment in a private fund set up by a licensed asset manager. The sole purpose of the fund was to provide a loan (Loan A) to a special purpose vehicle or SPV owned by a substantial shareholder of a listed company against a pool of collateral which was mainly composed of the listed company’s shares.

Loan A was used to repay part of a loan of another SPV owned by the substantial shareholder which had financed projects in an emerging market. It was subject to a margin call arrangement whereby additional cash or securities collateral would be required when the loan-to-collateral ratio exceeded an agreed level. In a circular dated 3 August 2018, the SFC expressed concerns about arrangements which effectively provide margin financing in the guise of investments. It called the arrangement "a margin loan leveraging on the funding support from the bank."

The regulators believe that banks should ensure that credit facilities granted to their subsidiaries and affiliated companies or those of their holding company are granted on an arm’s length basis and subject to a prudent credit assessment which should be at least as stringent as that performed on unrelated companies.