Securities lending business is a type of financial service that allows investors to borrow securities from brokers or other intermediaries, and use them for short selling, hedging, or arbitrage. Securities lending business can increase the liquidity and efficiency of the capital market, as well as provide income for the lenders and borrowers.
However, securities lending business also involves risks and costs, such as default, collateral, and interest. Therefore, securities lending business requires strict regulation and supervision to prevent market manipulation, insider trading, and systemic risks.
How Does China Regulate Securities Lending Business?
China has been developing and regulating its securities lending business since 2010, when it launched the pilot program of margin trading and short selling. Since then, China has issued various rules and guidelines to govern the securities lending business, such as the Measures for the Administration of Securities Lending Business, the Guidelines for the Risk Management of Securities Lending Business, and the Notice on Further Strengthening the Supervision of Securities Lending Business.
According to these rules and guidelines, China has adopted a tiered and differentiated regulatory approach for the securities lending business, based on the types and qualifications of the market participants, the sources and uses of the securities, and the duration and scale of the transactions. China has also established a comprehensive and dynamic supervision system for the securities lending business, which includes information disclosure, risk monitoring, margin management, and penalty measures.
Why Does China Further Strengthen the Supervision of Securities Lending Business?
On January 29, 2024, the China Securities Regulatory Commission (CSRC) issued a notice on further strengthening the supervision of securities lending business, which aims to improve the quality and efficiency of the securities lending business, and to prevent and resolve potential risks and problems.
The notice specifies the following aspects of the supervision of securities lending business:
- Standardizing the market behavior: The notice requires the market participants to abide by the laws and regulations, and to conduct the securities lending business in a fair, honest, and orderly manner. The notice also prohibits the market participants from engaging in illegal or irregular activities, such as false trading, market manipulation, insider trading, and information leakage.
- Optimizing the market structure: The notice encourages the market participants to diversify the sources and uses of the securities, and to expand the scope and depth of the securities lending business. The notice also supports the market participants to innovate the products and services of the securities lending business, and to enhance the market competitiveness and vitality.
- Enhancing the risk management: The notice urges the market participants to improve their risk management capabilities and mechanisms, and to adopt prudent and effective measures to control the risks and costs of the securities lending business. The notice also instructs the market participants to strengthen their internal control and compliance, and to report and disclose the relevant information in a timely and accurate manner.
- Strengthening the regulatory coordination: The notice calls for the market participants to cooperate and communicate with the regulators and the self-regulatory organizations, and to implement the regulatory requirements and guidance. The notice also warns the market participants that the regulators and the self-regulatory organizations will intensify their supervision and inspection, and will impose strict penalties for any violations or misconduct.
How Does the Supervision of Securities Lending Business Affect the T+0 Strategy?
The T+0 strategy is a trading strategy that involves buying and selling the same securities on the same day, using the securities lending business. The T+0 strategy can take advantage of the price fluctuations and arbitrage opportunities in the market, and can generate higher returns and lower risks for the investors.
However, the T+0 strategy also faces some challenges and limitations, such as the availability and cost of the securities, the settlement and clearing procedures, and the regulatory restrictions. Therefore, the T+0 strategy requires careful planning and execution, and is not suitable for all investors.
The supervision of securities lending business affects the T+0 strategy in several ways, such as:
- Reducing the supply and increasing the cost of the securities: The supervision of securities lending business may limit the sources and uses of the securities, and may increase the margin and interest requirements for the securities lending business. This may reduce the supply and increase the cost of the securities for the T+0 strategy, and may affect the profitability and feasibility of the strategy.
- Increasing the risk and uncertainty of the transactions: The supervision of securities lending business may impose stricter rules and standards for the market behavior, and may enhance the risk monitoring and management of the securities lending business. This may increase the risk and uncertainty of the transactions for the T+0 strategy, and may affect the stability and reliability of the strategy.
- Facing the regulatory pressure and scrutiny: The supervision of securities lending business may prohibit or restrict some illegal or irregular activities, and may intensify the supervision and inspection of the securities lending business. This may expose the T+0 strategy to more regulatory pressure and scrutiny, and may affect the compliance and reputation of the strategy.
Therefore, the supervision of securities lending business may pose a turn for the T+0 strategy, and may require the investors to adjust and optimize their strategy accordingly.