Issuing authority: China Securities Regulatory Commission (“CSRC”)
Subject: Margin financing and securities lending
The CSRC made a formal announcement on 5 October 2008 that it will soon launch margin financing and securities lending on a trial basis pending the issue of specific notice(the “Announcement”). The Announcement indicates that stock borrowing and short selling will finally materialise in the PRC further to the issue of the relevant rules (the “Implementation Rules”) more than two years ago, but it also came as a surprise to the international community given the global trend to ban short selling under current market conditions.
Highlights
- Only limited securities companies will be approved to conduct margin financing and securities lending business on a trial basis. When approving the first batch of securities companies, the CSRC will consider their scale of net assets, compliance track record, net assets risk control indicators, and their readiness for conducting the business. The types of securities companies and their physical location will also be considered. On this basis, it appears likely that only a small number of “A” ranking securities companies will initially be granted the licenses.
- The relevant stock exchanges will announce the securities which qualify for margin financing and stock lending. Based on the criteria as set out in the Implementation Rules and given the cautious approach taken by the CSRC, it appears unlikely that initially there will be a high number of such securities eligible for margin financing and stock lending.
- Those approved securities companies are permitted to use only their proprietary funds and securities for margin financing and stock borrowing business, which means that there will be a limited supply of funds and securities for this. In addition, while the Implementation Rules require 50% collateral for both fund borrowing and stock borrowing, it is likely that the CSRC would require qualified securities companies to set higher collateral thresholds at the initial stage. As such, it is anticipated that the size of funds and stock borrowing would not be significant for now.
- The approved securities companies will be required to apply relatively high qualification requirement to the investors eligible for margin financing and stock borrowing. Pursuant to the Implementation Rules, an investor must, among other things, have been a client of the relevant securities company for more than half a year in order to be eligible for funds and/or stock borrowing from that securities company.
- It is not clear at this stage whether a QFII will be permitted to borrow funds/stocks for its trading in A shares given that the government has been controlling the size of securities trading by QFIIs.
- Pursuant to the existing clearing and settlement rules, short selling will only be on a covered basis and unless specific rules and practical guidance are issued, short sale may only be made after settlement of borrowed stocks is completed
Please contact:
Zili Shao ( zili.shao@linklaters.com tel: +86 21 2891 1868) or Fang Jian ( jian.fang@linklaters.com tel: +86 21 2891 1858) if you would like further details.
