Trump tackles covert Chinese military funding, causes securities lending confusion
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Trump tackles covert Chinese military funding, causes securities lending confusion 13 January 2021US Reporter: Drew Nicol
Image: Mirko_Raatz/adobe.stock.com
Outgoing president Donald Trump caused a week of confusion in the securities lending market as he sought to delist securities of Chinese telecommunication entities traded in the US that he accused of being communist Chinese military agents.
An executive order signed by the president on 12 November 2020 sought to disable trading of more than a dozen Chinese assets as of 11 January that the White House believed was indirectly financing the communist Chinese military.
Since Monday, US investors are barred from engaging in any transactions with listed securities, which includes high street names such as Huawei, including via derivatives or other indirect exposures. This means those assets are also no longer available for stock loans or as collateral.
The order stated that the People's Republic of China (PRC) is increasingly exploiting US capital to resource and to enable the development and modernisation of its military, intelligence, and other security apparatuses, which continues to allow the PRC to directly threaten the US forces overseas.
According to Trump, this includes developing and deploying weapons of mass destruction, advanced conventional weapons, and malicious cyber-enabled actions against the US.
The order left itself room to add more Chinese firms to the list, which would give US investors 60 days to close out their exposures.
As markets opened in 2021, this sparked several days of confusion as stock exchanges, clearinghouses and other market infrastructures queried regulators on certain ambiguities in the scope of the White House’s instructions.
On 4 January, Options Clearing Corporation (OCC), the world’s largest equity derivatives clearinghouse, published a memo to members stating that with immediate effect only share-reducing transactions will be allowed on outstanding stock loan and borrow positions in China Telecom Corp, China Mobile and China Unicom, which were among the firms listed on the order.
Any stock loan inventory remaining in these securities was also set to be removed on 7 January, while equity pledges for collateral purposes will receive no value.
However, a day later OCC posted another notice citing new regulatory guidance indicating that the three companies were not subject to the prohibitions, although it warned the situation was liable to change.
On 6 January, a third notice was issued to revise the revision and clarify that the all three were subject to the prohibitions after all. OCC disabled them for use in securities lending trades or as collateral pledge that same day and they were delisted before the US market opened on 11 January.
Any stock loan inventory remaining in these securities as of 8 January was also removed by the clearinghouse.
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Image: Mirko_Raatz/adobe.stock.com 