ASIFMA asks for improvements in China’s securities lending rules

ASIFMA commented on securities lending in China in the report, “Foreign Institutional Investment in China: An Asset Management Perspective,” March 2019

We understand that China’s move to a T+2 settlement cycle for equities may take some time. Therefore, in the short term, moving to T+1 DvP for onshore equities trading would greatly help those FIIs or their custodians. It would also be helpful to implement a workable securities borrowing and lending (“SBL”) regime (with not only brokers but their affiliates, asset owners and their lending agents being allowed to engage in SBL) that would help tie FIIs over the current tight settlement timeframe and minimize the possibility of failed settlement.

An efficient SBL 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.

Although SBL is allowed under Stock Connect, it is barely used in Hong Kong because the only parties permitted to engage in SBL are exchange participants (i.e. brokers). Brokers typically do not hold stock inventory. It is their affiliates or investment managers or their lending agents (e.g. custodians), who are not exchange participants, that have stock inventory to lend. We, therefore, suggest that the aforementioned parties be allowed to participate in SBL.

In addition, more clarity on the rules on how SBL would work under each of the different access channels would be welcomed.

The current Stock Connect rules allow covered (but not naked) short selling for northbound trades subject to certain requirements. For example, the number of shares which may be short sold is limited to 1% 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% 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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