New securities lending law requires implementation guidance
December 06, 2011 | BY
Janice QuPilot scheme for brokerages allowing margin trading and short selling is expanded
At the end of October, the China Securities Regulatory Commission issued two laws governing the financing of securities financing companies, margin trading and short selling.
The Trial Measures for the Regulation of Securities and Loan Lending (转融通业务监督管理试行办法) (the Trial Measures) allows securities financing companies to raise funds through private borrowing or by publicly selling corporate bonds.
The Measures for the Administration of Margin Trading and Short Sale of Securities of Securities Companies (证券公司融资融券业务管理办法) (the Measures) make official a pilot scheme allowing select brokerages to engage in margin trading and short selling by expanding the scheme to other brokerages that qualify.
Despite a seemingly open door, Steven Hsu of Zhong Yin Law Firm said that potential investors still require a preparation period before entering the refinancing business because implementing rules are still needed.
The implementation guidance should address related parties and procedures such as participating stock exchanges, securities registration, settlement agencies, and who can borrow and lend securities.
“Investors need to be cautious. A prudent approached is recommended,” said Hsu.
Compared to its previous draft version, the Trial Measures have strengthened the requirements for information disclosure, relaxed refinancing market risk indicators, and clarified the confidentiality obligations of securities financing companies.
“These rules have largely diversified the channels of margin trading, which could effectively improve the insufficient trading sources of securities financing companies,” said Hsu.
He said factors that will impact refinancing businesses include the amount of underlying securities, the demand for financing and the risk-bearing capabilities of participating institutions.
Both newly-released rules have specified the conditions and requirements required to qualify and engage in margin trading and short selling, and factors that need to be considered for refinancing businesses. These include sources and uses of capital, accounts set-up and guarantees, and the examination and follow up of client's qualifications.
Hsu said: “Lawyers should carry out in-depth research on these factors, keep a close eye on the latest legislations from relevant authorities, and react in a timely manner.” JQ
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