Stock collateral repo trading launched
Last Updated:2013-07-11 14:13 |
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Followed by stock repo business, recently security companies usher in another innovative benefit for major business. On June 24, Guosen, CITIC, Haitong and other securities traders formally launched pledge-style repo business after completing various system tests.


Obvious business comparative advantages

After the formulation of Method for the Trading, Depository and Clearing of Stock-Pledged Repo (Trial) jointly by Shenzhen Stock Exchange, Shanghai Stock Exchange and CSDCC in May, the stock-pledged repo business is almost certain. It refers that eligible capital melt-in parties finance to eligible capital melt-out parties with stocks or other securities as pledge and both parties agree to return the capital in the future.

Compared with previous convention-style repo, stock-pledged repo is of obvious merits. "Convention-style repo requires the listed companies to transfer the stocks to securities traders, while the stock-pledged repo needs not transferring ownership and involves no stocks rights alteration. This is beneficial to the capital melt-in parties with additional short-term mobility and unwilling to passively reduce stocks", said Chen Wen, analyst of Great Wall Securities.

Since all the restricted stock, foreign stock and ban-lift restricted stocks held by directors, supervisors and senior executives can be used as object securities for stock-pledged repo, this vitalizes the original stocks held by 5 percent major stock holders and remedies the defects of the convention-style repo.

"Seeing from transaction cost, stock-pledged repo needs not going through notarization and pledging formalities in notary offices and depository and clearing corporations, and owns relatively low cost with a financing term as long as 3 years," stated Chen Wen.

Before securities traders are allowed to begin stock-pledged repo, stock right pledge repo has already existed, with banks, trust companies and other institutions as main market subjects, and the operation patterns include commercial banks' stock pledge loans and pledge-type trust plans, etc.

"Compared with stock rights pledged financing business by banks and trust companies, the advantages of securities traders lie in their direct mastering of listed companies resources, relatively prominent merits in judging and controlling risks of securities market. It is estimated that its financing rate is higher than that of banks while the financing cost is lower than that of trust companies", said Chen Jiangang, Sinolink Securities analyst.

As for securities traders, customers do not face any utilization limitations in stock rights pledged financing capitals, while banks and trust companies have to examine the use of funds when handling such business, which grants securities traders more obviously advantages.

Performance growth of beneficial securities traders

According to the research report recently issued by Sinolink Securities in 2012, listed company's stocks were pledged for 1954 times while 71.1 billion stocks are pledged for stock rights. Calculated by the closing price of underlying securities, the market value of pledge of stock right is approximately RMB 610 billion yuan; calculated at a pledge rate of 40 percent, the financing scale of pledge of stock rights is about RMB 240 billion yuan.

"Followed by securities margin trading, stock-pledged repo is expected to be another important channel to increase securities traders' income, the interest income brought by this business in particular," stated Chen Wen.

In accordance with relevant regulations, the capital melt-out parties include the securities traders, the integral capital management plans controlled by the securities traders or directional asset management customers, the integral capital management plans controlled by the capital management subsidiaries under securities traders or directional capital management customers. This means securities trader, as the capital melt-out party, is able to participate in such business by use of self-owned capitals and issuing finance products, the win-win of capital management plan and stock-pledged repo business is expected to be achieved.

Chen Jiangang thought that in the future, listed companies with outstanding bank investment capacity and large reserve, and security companies which collect money by capital management products with relatively strong products sales ability will show more advantages in this business.

Though the prospect of stock-pledged repo is positive, any potential risks should also be prevented. "At present, this business is still at its early stage and the risk preventive mechanism needs to be further perfected. Recently, the correction and downward trend of market shows obviously; therefore, securities traders should determine their business scale based on their risk tolerance during pledge financing," said Chen Wen.

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