Asset managers have failed to embrace securities borrowing in China despite the establishment of a central counterparty, with complexity in posting assets as collateral cited as not conducive to market development.
A pilot programme was launched at the end of February, with China Securities Finance Corporation (CSFC) as the central counterparty and 11 brokerages approved to borrow securities on behalf of institutional clients.
But the scheme has met a lukewarm response so far, with just 630,000 shares from two listed firms on the Shanghai Stock Exchange (SSE) – China Minsheng Bank and Shanghai Pudong Development Bank – borrowed via CSFC on March 29.
CSFC is co-owned by the China Securities Depository and Clearing Corporation (CSDCC), SSE and the Shenzhen Stock Exchange. It plays the role of market supervisor-cum-trade repository, whereby all sec-borrowing activity must be submitted to it by brokerages.
It also sets transaction details such as tenors and borrowing fees. There are five tenors: 3-day, 1, 2 and 3 weeks and 26 weeks. CSFC, for example, pays 2% to sec-lenders who make part of their portfolio available to lenders for 26 weeks, and in turn charges borrowers 3.5% for the same tenor.
Asset managers and insurers are not currently allowed to participate in securities financing (they will be in future) and therefore must be represented by brokers when dealing with the CSFC.
But large institutional investors holding securities at CSDCC need to transfer them out of their custodian accounts to lend them out. Managers seeking to borrow must act similarly to use their securities as collateral for loans.
“Unlike in the West where securities are often held in a nominee account, referencing the name of the stock broker, in China securities of investment funds are often held in a joint-account held by both the investment manager and the custodian bank.,” says a Beijing-based general manager at the custodian division of a big four state-owned commercial bank.
He says this process of transferring securities out of a joint-account for collateral and margining purposes is complicated operationally.
One factor that could spark interest in CSFC’s sec-borrowing programme is to expand the list of eligible stocks for shorting. Only 90 securities on China's two exchanges are currently eligible for borrowing by institutional investors against collateral for a fee.
Moreover, some sources have suggested there is a legal ambiguity that overhangs sec-lending In China, borne of the fact that custodian banks not only perform fund accounting duties, but also supervise the safe-keeping of assets for end-investors.
There are questions as to what extent custodians, which are accountable to both the securities and banking regulators, should be held accountable for assets used for sec-lending margining.
Asked his view on the topic, Andy Ng, head of HSBC Securities Services for China based in Shanghai, tells AsianInvestor: “The real challenge revolves around how to define the ownership/responsibility of the custodian bank over the assets in the dedicated client collateral securities/cash accounts maintained at the CSDCC for securities borrowing."
This fiduciary duty for custodian banks has been made clear in revisions to China’s Securities Investment Funds Law, which are due to be implemented from June 1.