Margin trading regulations revised

Regulator forms working group with global index provider MSCI for inclusion of Ashares

The rules covering investors’ use of margin trading and short selling were relaxed on Friday ina draft document released by the China Securities Regulatory Commission.

Deng Ge, the CSRC spokesman, told a news conference that the CSRC will drop restrictionsthat are no longer compatible with the current conditions involving margin trading, a practicethat allows investors to borrow money to purchase stocks, and short selling, which allowsthem to borrow securities to sell.

The revised rules scrap a requirement that investors wanting to use these methods musttrade with the same securities brokerage for more than six months, as well as a requirementthat the clearing and settlement capital must be placed in escrow with a third-party financialinstitution.

Deng said that the overall risks of margin trading and short selling are manageable, but heurged securities firms to maintain a “prudent” balance between the scale of their business inthese areas and their capital.

Under the current rules, adopted in 2006, the duration of margin trading and short sellingcontacts is fixed at six months. Investors are forced to clear their positions when the contractsexpire even if the markets are not in their favor.

Several securities firms were penalized by the CSRC earlier this year for illegally extendingthe contract duration for clients, which enabled some investors to delay repayment of margindebt.

Now such contracts can be rolled over, a move that analysts said reflects the regulator’sdesire to satisfy long-term investment demand and curb short-term speculation and marketvolatility.

Leveraged margin trading has been seen as a major factor in pushing the A-share market to aseven-year high, with the benchmark Shanghai Composite Index more than doubling duringthe past year. The value of outstanding margin loans extended by securities firms to investorshas exceeded 2 trillion yuan ($322.16 billion).

In a separate announcement on Friday, the CSRC confirmed that it will establish a jointworking group with global index compiler MSCI Inc to discuss the inclusion of A shares in itsbenchmark index for emerging markets.

The CSRC said that it is working with MSCI to address remaining issues about market accessand other technical details.

MSCI said on Wednesday that it had delayed including stocks listed on the Chinese mainlandin the benchmark index after international investors expressed concerns over barriers to entryin the Chinese capital market.

Deng said that the regulator aims to facilitate the inclusion of A shares “as soon as possible”.

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