CSRC Suspends Short-Selling; A-Share Market Turning Point?

In response to market concerns and to maintain market stability, the China Securities Regulatory Commission (CSRC) announced the suspension of the securities lending business, further strengthening the counter-cyclical adjustment of short selling. The news has attracted widespread attention in the market.

On July 10th, the CSRC issued an announcement stating that it has legally approved the application of China Securities Finance Corporation to suspend the securities lending business, which will be implemented starting from July 11, 2024. Existing securities lending contracts can be extended, but they must be settled no later than September 30th.

At the same time, the approval was given for the securities exchanges to increase the margin ratio for short selling from no less than 80% to 100%, and for private securities investment funds participating in short selling, the margin ratio was increased from no less than 100% to 120%, which will be implemented starting from July 22, 2024.

This follows the regulatory tightening of the securities lending business in March this year, which "prohibited the lending of restricted shares through securities lending and the short selling of restricted shares by shareholders." The implementation of these concentrated market rescue measures once again demonstrates the CSRC's determination to maintain the stable and orderly operation of the market.

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Suspension of Securities Lending Business

Starting from July 11th, the securities lending business has been put on hold.

Following the CSRC's announcement of the suspension of the securities lending business, the three major exchanges in Shanghai, Shenzhen, and Beijing quickly followed suit, collectively announcing that they will adjust the margin ratio for short selling transactions.

According to the "Notice on Adjusting the Margin Ratio for Short Selling Transactions" issued by the three major exchanges in Shanghai, Shenzhen, and Beijing on July 10th, when investors sell short, the margin ratio for short selling must not be lower than 100%. Among them, if the investor is a private securities investment fund, the margin ratio for short selling must not be lower than 120%.

For short selling contracts that have not been settled before the implementation of this notice, the margin ratio requirements will still be executed according to the original regulations, and the extension will apply to the requirements of this notice. This notice will be implemented starting from July 22, 2024.Regarding the suspension of the securities lending business, the China Securities Regulatory Commission (CSRC) stated that the adjustments made this time have clearly stipulated the legal extension and the new-old separation arrangements for the existing business, which helps to prevent business risks and maintain the market's stable and orderly operation.

Public information shows that margin trading is one of the important foundational systems of the capital market, playing a positive role in curbing irrational fluctuations, promoting the balance of bulls and bears, price discovery, and attracting medium and long-term capital into the market.

China established the securities lending system around 2013, on the one hand, to provide the necessary funds and securities sources for margin trading; on the other hand, it also provided means for regulatory authorities to strengthen daily supervision and take counter-cyclical regulatory measures in a timely manner.

Since August 2023, the CSRC has taken a series of measures to strengthen the supervision of securities lending and securities lending business, including restricting the lending of shares allocated to strategic investors, increasing the margin requirements for securities lending, reducing the market-oriented agreed reporting transfer efficiency of securities lending, and suspending the addition of new securities lending scale, etc.;

In parallel with this, the CSRC also requires securities companies to strengthen the management of customer trading behavior and continue to increase the regulatory enforcement efforts against illegal and irregular behaviors such as improper arbitrage through securities lending transactions.

This year, the supervision of the securities lending business has continued to tighten, with the CSRC requiring a comprehensive suspension of the lending of restricted shares since January 29; starting from March 18, securities lending transactions have been changed from T0 to T+1.

In the document "Opinions on Strictly Controlling the Admission to Listing and Raising the Quality of Listed Companies from the Source (Trial)" issued this year, it is particularly pointed out that major shareholders, directors, and senior executives are prohibited from participating in derivative transactions with the company's stocks as the underlying assets, and the lending of restricted shares through securities lending, and the selling of restricted shares by shareholders through securities lending are prohibited to prevent the use of "tools" to circumvent the reduction, and the "effective prevention of circumventing the reduction" regulations are given.

What is the market impact?

This year, with a series of regulatory measures taking effect, the scale of securities lending and securities lending has both decreased significantly.

Wind data shows that as of July 9, the balance of securities lending in the A-share market was 31.838 billion yuan, a decrease of 55.53% from the end of last year's 71.597 billion yuan; the balance of securities lending was 29.604 billion yuan, a decrease of 73.19% from the end of last year's 110.417 billion yuan.In fact, the significantly reduced scale of short selling and securities lending has noticeably diminished its impact on the market. Data indicates that as of the end of June 2024, the scale of short selling accounted for approximately 0.05% of the circulating market value of A-shares, and the daily short selling sales volume as a percentage of A-share transaction volume has dropped from 0.7% to 0.2%. This has also created conditions for the suspension of securities lending business.

On the first day of the suspension of securities lending business, which was the closing of July 11th, the Shanghai Composite Index was at 2970.87, with a daily increase of 1.07%.

Regarding the China Securities Regulatory Commission's (CSRC) announcement to suspend securities lending business and to generally raise the margin rate for short selling, market participants including the Chief Economist of Qianhai Open Source Fund, Yang Delong, and the non-bank financial team of Hua Chuang Securities, believe that the CSRC has announced a series of significant policy benefits. Undoubtedly, this demonstrates the regulatory authorities' care and support for the stock market, which has a positive effect on boosting investor confidence.

An investment consultant from a leading brokerage firm in East China stated that the suspension of securities lending business indicates an improvement in market fairness. Now, the regulatory authorities are paying more and more attention to the voices of ordinary investors. The suspension of securities lending puts different market participants on the same starting line, allowing for fair investment by all.

Currently, the CSRC, based on market conditions, is strengthening daily supervision and counter-cyclical adjustments, gradually becoming a norm. By severely cracking down on improper arbitrage and other illegal and irregular behaviors, it ensures the stability and development of market operations.

It is worth mentioning that this year, the CSRC has further strengthened the adaptability and specificity of regulation over algorithmic trading. The new "National Nine Articles" explicitly propose to introduce regulatory provisions for algorithmic trading and to strengthen supervision over high-frequency quantitative trading.

At the same time, the CSRC continues to enhance the monitoring of algorithmic trading, organizing stock exchanges to study and formulate four types of monitoring indicators for abnormal instantaneous declaration rates, frequent instantaneous cancellations, frequent price manipulation, and large-volume transactions in a short time. A trial operation began in April this year, and algorithmic trading investors who frequently trigger the indicators have been urged and reminded to promote the standardization of their trading behaviors. In line with the principle of treating domestic and foreign capital equally, the CSRC has strengthened discussions and communications with Hong Kong to study the methods and paths for the implementation of the northbound algorithmic trading reporting system.

Since the beginning of this year, the overall algorithmic trading in the securities market has been stable with a slight decline, and some positive changes have occurred in trading behaviors. By the end of June, there were more than 1,600 high-frequency trading accounts in the entire market, a decrease of over 20% year-on-year, and behaviors that touch the abnormal trading monitoring standards have decreased by nearly 60% in the past three months.

The series of policies and measures by the CSRC aim to enhance the inherent stability of the capital market, boost investor confidence, promote the stable operation of the A-share market, and foster high-quality economic development.