While uncertainty shrouds Chinese plans to launch a new centralised securities lending platform, in response to burgeoning appetite for short selling, it seems likely that the Chinese New Year will bring a more centralised approach to at least some parts of the Greater China region.
A new body, the China Securities Finance Corp, was set up in October last year to borrow securities or cash from asset managers, banks or insurance companies, and lend securities or cash to brokers. Under a present pilot programme in China, qualified brokerages can margin trade or short sell from a restricted list of underlying stocks for up to six months, only using their own cash or securities. While regulators have been cautious about providing further details, an expanded programme could come to fruition as soon as March.
Last year, Hong Kong Exchanges and Clearing (HKEx) revealed it was contemplating setting up its own central stock borrowing and lending facility.
A spokesperson for the bourse at the time said it would “explore the feasibility” of a central platform. Hong Kong Chinese-language newspaper Sing Tao Daily reported HKEx was looking to allow both institutional and retail investors to use the platform.
As of 17 January, the Hong Kong market had US$4 billion of stock on loan against a supply of US$12.3 billion, according to Data Explorers, a provider of securities lending performance measurement services.
Taiwan may also move in the direction of a centralised platform. As of 17 January, US$240 million of Taiwan-listed stock was on loan against a supply of stock lending programmes of US$523 million, made up primarily of holdings of international intuitional investors.
“There is still plenty to be worked out in China,” said one Hong Kong-based sell-side source. “One reason for proposing a centralised sec lending market is to allow exchange-traded funds to be able to lend their shares. While there is a lot of conjecture at the moment, it is very difficult to determine what shape the new platform will take.”
Some sources expect the situation to become clearer in after the Chinese New Year. The China Securities Regulatory Commission (CSRC) has already approved around 25 brokerages for the programme and is thought to be considering more applicants.
In a move that would further relax China’s stance on foreign investment, earlier this week, the CSRC revealed it was considering making it simpler for SMEs and non-state-owned companies to list in Hong Kong.
China’s centralised approach has been borrowed from a number of emerging markets, including Brazil and Indonesia. While in the western world, securities lending markets have evolved over time, new emerging countries often decide to set up a central market from scratch for easier monitoring and regulation.
The Indonesian Clearing and Guarantee Corporation (KPEI) began to offer intermediary and guarantor services for securities borrowing and lending transactions in 2001. According to KPEI, transaction volume in 2011 was 29,797,500 trades from 98 participants.
Brazil created its own centralised securities lending market in 1996. Brazilian exchange group BM&FBovespa acts both as a counterparty and guarantees settlement. The borrower undertakes to pay the lender a mutually agreed fee, as well as the transaction fee charged. Title is transferred to the borrower, who undertakes to return all dividends to the refunded lender together with the securities when the agreement expires. According to BM&FBovespa, in December the service saw US$85 billion and 121,897 trades from 89 participants.