ASIFMA proposes workable sec lending regime in China
20 March 2019 Hong Kong
Image: Shutterstock
The implementation of a workable securities lending regime in China would be helpful, according to the Asia Securities Industry & Financial Markets Association (ASIFMA).
In the ASIFMA report—Foreign Institutional Investment in China—it was cited that it would help to implement a workable securities lending regime with not only brokers but their affiliates, asset owners and their lending agents being allowed to engage in securities lending.
Such a regime would be helpful if it could help tie Foreign Institutional Investors (FIIs) over the current tight settlement timeframe and minimise the possibility of a failed settlement, ASIFMA explained.
Additionally, adopting international standards with respect to block trading, short selling, margin financing, derivatives documentation, the disclosure of interest and short swing profits are some of the other areas that FIIs would like to see China move towards for equities investment and trading.
ASIFMA noted: “An efficient securities lending environment helps enhance overall equity market efficiency, enable efficient hedging to better manage risks and protect against fail trades that may arise due to the tight settlement timeframe.”
“Brokers/exchange participants who know that a settlement failure may occur because of operational constraints before it happens would benefit from being able to take action to avoid this failure, such as temporarily borrowing shares from the account of its affiliates to prevent a settlement failure.”
According to ASIFMA, although securities lending is allowed under stock connect, it is barely used in Hong Kong because the only parties permitted to engage in securities lending are exchange participants.
It was therefore suggested that investment managers or their lending agents (for example custodians) who have stock inventory to lend but who are not exchange participants should be allowed to participate in securities lending.
As well as this, more clarity on the rules on how securities lending would work under each of the different access channels would be welcomed by ASIFMA.
Meanwhile, in terms of short selling, the report highlighted that the current Stock Connect rules allow covered (but not naked) short selling for northbound trades subject to certain requirements.
ASIFMA added: “For example, the number of shares which may be short sold is limited to 1 percent of the total number of the same shares held by Hong Kong investors on a trading day (calculated in real time throughout the trading day) and no more than 5 percent cumulatively over 10 successive trading days (calculated at the end of each trading day).”
“These limits are not known until after the market closes and therefore, in practice, it would be difficult to engage in short selling.”
In the ASIFMA report—Foreign Institutional Investment in China—it was cited that it would help to implement a workable securities lending regime with not only brokers but their affiliates, asset owners and their lending agents being allowed to engage in securities lending.
Such a regime would be helpful if it could help tie Foreign Institutional Investors (FIIs) over the current tight settlement timeframe and minimise the possibility of a failed settlement, ASIFMA explained.
Additionally, adopting international standards with respect to block trading, short selling, margin financing, derivatives documentation, the disclosure of interest and short swing profits are some of the other areas that FIIs would like to see China move towards for equities investment and trading.
ASIFMA noted: “An efficient securities lending environment helps enhance overall equity market efficiency, enable efficient hedging to better manage risks and protect against fail trades that may arise due to the tight settlement timeframe.”
“Brokers/exchange participants who know that a settlement failure may occur because of operational constraints before it happens would benefit from being able to take action to avoid this failure, such as temporarily borrowing shares from the account of its affiliates to prevent a settlement failure.”
According to ASIFMA, although securities lending is allowed under stock connect, it is barely used in Hong Kong because the only parties permitted to engage in securities lending are exchange participants.
It was therefore suggested that investment managers or their lending agents (for example custodians) who have stock inventory to lend but who are not exchange participants should be allowed to participate in securities lending.
As well as this, more clarity on the rules on how securities lending would work under each of the different access channels would be welcomed by ASIFMA.
Meanwhile, in terms of short selling, the report highlighted that the current Stock Connect rules allow covered (but not naked) short selling for northbound trades subject to certain requirements.
ASIFMA added: “For example, the number of shares which may be short sold is limited to 1 percent of the total number of the same shares held by Hong Kong investors on a trading day (calculated in real time throughout the trading day) and no more than 5 percent cumulatively over 10 successive trading days (calculated at the end of each trading day).”
“These limits are not known until after the market closes and therefore, in practice, it would be difficult to engage in short selling.”
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