China margin trading regulations revised

June 13, 2015

China Daily

Regulator forms working group with global index provider MSCI for inclusion of A shares

The rules covering investors’ use of margin trading and short selling were relaxed on Friday in a draft document released by the China Securities Regulatory Commission.

Deng Ge, the CSRC spokesman, told a news conference that the CSRC will drop restrictions that are no longer compatible with the current conditions involving margin trading, a practice that allows investors to borrow money to purchase stocks, and short selling, which allows them to borrow securities to sell.

The revised rules scrap a requirement that investors wanting to use these methods must trade with the same securities brokerage for more than six months, as well as a requirement that the clearing and settlement capital must be placed in escrow with a third-party financial institution.

Deng said that the overall risks of margin trading and short selling are manageable, but he urged securities firms to maintain a “prudent” balance between the scale of their business in these areas and their capital.

Under the current rules, adopted in 2006, the duration of margin trading and short selling contacts is fixed at six months. Investors are forced to clear their positions when the contracts expire even if the markets are not in their favor.

Several securities firms were penalized by the CSRC earlier this year for illegally extending the contract duration for clients, which enabled some investors to delay repayment of margin debt.

Now such contracts can be rolled over, a move that analysts said reflects the regulator’s desire to satisfy long-term investment demand and curb short-term speculation and market volatility.

Leveraged margin trading has been seen as a major factor in pushing the A-share market to a seven-year high, with the benchmark Shanghai Composite Index more than doubling during the past year. The value of outstanding margin loans extended by securities firms to investors has exceeded 2 trillion yuan ($322.16 billion).

In a separate announcement on Friday, the CSRC confirmed that it will establish a joint working group with global index compiler MSCI Inc to discuss the inclusion of A shares in its benchmark index for emerging markets.

The CSRC said that it is working with MSCI to address remaining issues about market access and other technical details.

MSCI said on Wednesday that it had delayed including stocks listed on the Chinese mainland in the benchmark index after international investors expressed concerns over barriers to entry in the Chinese capital market.

Deng said that the regulator aims to facilitate the inclusion of A shares “as soon as possible”.