2023 Margin Margin Research Report

Chapter 1 Industry Overview

Margin financing and securities lending is a securities trading method in which investors borrow funds to buy securities (margin financing transaction) or borrow securities and sell them (securities lending transaction) by providing collateral to securities companies qualified for margin financing and securities lending business . At the same time, it also includes financing and securities lending transactions by financial institutions to securities companies. The margin financing and securities lending system is widely used around the world. As a basic credit transaction system, it provides investors with a way to increase leverage and improve investment flexibility.

The advantages of margin financing include:

Leverage effect: margin financing and securities lending can allow investors to use less of their own funds to control larger securities positions, thereby amplifying investment returns.
Flexibility: Margins can help investors invest and trade more flexibly without having to pay out full capital or hold full security positions.
Long-short trading: margin trading allows investors to go long or short, thereby earning money on the ups and downs of the market.

However, margin financing and securities lending also have certain risks:

Interest cost: Margin financing and securities lending need to pay the interest cost of borrowing, which increases the investment cost.
Leverage risk: Margin financing and securities lending magnify the investment income while also amplifying the risk of investment loss. When the market fluctuates against the trend, investors may face greater losses.
Risk of forced liquidation: When the value of margin trading and securities lending positions falls to a certain level, securities companies may require investors to call for additional margin or force liquidation, resulting in investors losing funds.

Therefore, when using margin financing and securities lending, investors need to carefully assess the risks and use them reasonably to ensure that they operate within the scope of compliance. At the same time, securities companies need to strictly follow regulatory requirements when providing margin financing and securities lending services, and provide sufficient risk warnings and investor education to protect the legitimate rights and interests of investors.

Chapter 2 Transaction Guidelines, Business Model and Regulation

2.1 Forms of margin financing and securities lending

There are two main forms of margin financing and securities lending:

(1) Financing transactions

It refers to the trading behavior in which investors pay a certain margin to a securities company and borrow (borrow) a certain amount of funds to buy stocks. The margin submitted by investors to securities companies can be cash or securities that can be used as margin. In the future, after the securities company grants credit to the investor, the investor can buy the securities in the list of financing targets announced by the stock exchange and the securities company within the credit line. The securities purchased by financing and other capital securities in the investor's credit account shall serve as collateral for the debts owed by the securities company as a whole.

Funding deals offer investors a new way to trade. If the security price rises in line with investor expectations, raising funds to buy securities, and then selling the securities at a higher price to repay the arrears can magnify profits; if the security price does not meet investor expectations, the stock price falls, raising funds to buy securities, and then selling Losses will be magnified when securities are repaid in arrears. Therefore, financing transactions are a kind of leveraged transactions, which can magnify investors' profits or losses. Participating in financing and securities lending transactions requires investors to have strong securities research capabilities and risk tolerance.

(2) Securities lending business:

It means that investors pay a certain margin to the securities company as a whole as collateral for their debts to the securities company. Securities lending provides investors with a new way of profit and a way to avoid risks. If investors expect the price of securities to fall, they can borrow securities and sell them, and then buy and return the securities at a lower price to make a profit; or sell them through securities lending to hedge against price fluctuations of the securities they already hold for hedging.

2.2 List of elements of margin financing and securities lending products

(1) Key elements

Stock conversion rate: It is also called collateral conversion rate, which is only used by ordinary investors in margin financing and securities lending. In margin financing and securities lending, brokerages require customers to use collateral as collateral before lending funds or stocks. . Generally, the conversion rate of cash is 100%; the conversion rate of stocks is 70%-80%. ST stocks and suspended stocks cannot be used as collateral, and the conversion rate is zero.
Margin ratio: refers to the ratio of the margin paid by investors to the amount of financing and securities lending transactions, which is specifically divided into the ratio of financing margin and the ratio of securities lending margin. The margin ratio is used to control the magnification of the investor's initial capital, and the margin delivered for each financing and securities lending transaction for investment must meet the margin ratio. In the case of a certain amount of investor's margin, the higher the margin ratio, the smaller the scale of securities companies financing and securities lending from investors, and the lower the financial leverage effect.
Maintenance guarantee ratio: refers to the ratio between the value of the customer's collateral and its margin financing and securities lending debt. The calculation formula is: maintenance guarantee ratio = (cash + sum of market value of securities in the credit securities account) / (margin purchase amount + amount of securities sold by securities lending × market price + sum of interest and expenses)

(2) Other elements

The term of margin financing and securities lending, guaranteed securities, underlying securities, available balance of margin financing and securities lending margin, interest rate of margin financing and securities lending, repayment methods of margin financing and securities lending, etc.

2.3 Operation process

Source: Qianji Investment Bank iFinD

2.4 Trading Strategies

(1) Financing long-term trading strategy: Investors believe that the stock price of a certain underlying security has an upward trend, and they can purchase the underlying securities through financing to carry out leveraged financing to amplify investment returns. After investors buy securities with full positions, if they find trend trading opportunities and want to continue to increase their positions, they can increase their investment scale through financing purchases.

(2) Short-selling strategy of securities lending: Investors believe that the stock price of a certain underlying security has a downward trend. They can sell the underlying securities through securities lending, borrow stocks from securities companies and sell them, and buy the securities after the stock price falls to obtain the stock price. Falling earnings.

(3) ETF leveraged trading strategy: After conducting in-depth research on a specific ETF, investors who wish to buy the ETF to obtain investment income can use financing trading tools to amplify the investment income.

(4) Quantitative hedging strategy: Investors buy stocks and sell index ETFs at the same time. If the stock you buy "outperforms" the index, even if the stock price falls, investors may still obtain relative returns (Alpha returns).

(5) Long-short hedging strategy: Investors buy a basket of stocks (ranging from 50-300 stocks), and sell another basket of stocks at the same time. If bulls "outperform" shorts, investors can obtain Alpha income.

(6) Intraday trading strategy: Investors buy stocks and sell stocks at the same time. From the next day, investors can use short-term fluctuations in the day to conduct frequent transactions, and can obtain price difference benefits.

(7) Convertible bond arbitrage: If investors find that the price of the convertible bond is "cheaper" than the underlying stock, they will buy the convertible bond, sell the underlying stock through securities lending, and obtain stable arbitrage income.

2.5 Profit Model

(1) Financing rate and bond lending rate: The profit of margin financing and securities lending transactions is closely related to the financing rate and bond lending rate. The higher the financing rate and bond lending rate, the higher the cost of margin trading and securities lending transactions, and the corresponding reduction in the profits of securities companies.

(2) Financing interest: Securities companies provide financing services to customers and charge certain financing interest. Financing interest is one of the main sources of income for securities companies. The amount of financing interest charged depends on the financing amount and financing interest rate.

(3) Interest on borrowing securities: In addition to providing financing services, securities companies also provide securities lending services for customers and charge certain interest on borrowing securities. Bond interest is one of the main sources of income for securities companies. The amount of interest charged on the loan depends on the amount of the loan and the interest rate on the loan.

2.6 Policy Supervision

Margin financing and securities lending is a financial transaction activity supervised by the government. Its industry authority is the China Securities Regulatory Commission ("CSRC"), and its margin financing and securities lending department is responsible for the supervision and management of the margin financing and securities lending market.

The China Securities Regulatory Commission is responsible for formulating and revising laws, regulations, rules and systems related to margin financing and securities lending, and implementing functions such as supervision, review, approval, and punishment. In practice, the China Securities Regulatory Commission will also formulate policy documents and standardize management behaviors related to the margin financing and securities lending market, and at the same time carry out supervision and inspection of the margin financing and securities lending market.

Chapter Three Industry Development, Driving Factors and Risk Management

3.1 Industry Development

On March 30, 2010, the Shanghai Stock Exchange and the Shenzhen Stock Exchange issued announcements respectively, stating that the margin financing and securities lending trading system will be officially opened on March 31, 2010, and the margin trading and securities lending transactions of pilot members will be accepted. The margin financing and securities lending business was officially launched.

With the rapid development of my country's capital market and the continuous improvement of the legal system of the securities market, the legal conditions for securities companies to carry out pilot margin financing and securities lending business have matured:

On October 27, 2005, the 18th Standing Committee of the Tenth National People's Congress approved and passed the newly revised "Securities Law", which stipulates that securities companies can provide margin financing and securities lending services for customers;
On June 30, 2006, the China Securities Regulatory Commission issued the "Administrative Measures for the Pilot Program of Margin Margin and Securities Lending of Securities Companies" (effective from August 1, 2006). On August 21 of that year, the "Implementation Rules for the Pilot Program of Margin Trading and Securities Lending" was announced;
On April 23, 2008, Articles 48 to 56 of the "Regulations on the Supervision and Administration of Securities Companies" published by the executive meeting of the State Council provided specific regulations on the margin financing and securities lending business of securities companies;
On October 5, 2008, the China Securities Regulatory Commission announced the launch of a pilot program of margin financing and securities lending;
On October 31, 2008, the China Securities Regulatory Commission issued the "Interim Regulations on the Examination and Approval of the Business Scope of Securities Companies", which came into effect on December 1 of that year;
On January 8, 2010, the State Council approved in principle the pilot program of margin financing and securities lending, which marked that the margin financing and securities lending business has entered a substantive start-up stage;
On March 19, 2010, the China Securities Regulatory Commission announced the first batch of six pilot securities firms for margin financing and securities lending;
On March 30, 2010, the Shanghai and Shenzhen Stock Exchanges formally issued notices to six pilot brokerage firms that they will accept margin trading and securities lending transactions from brokerage firms on March 31, 2010. The margin financing and securities lending transaction officially entered the market operation stage;
As of December 31, 2012, according to statistics, there were 74 securities companies engaged in margin financing and securities lending business, and more than 500,000 investor credit securities accounts were opened.

According to statistics, from 2015 to 2022, the scale of China's margin financing and securities lending market will grow from 1.4 trillion yuan to 4.4 trillion yuan, with an average annual compound growth rate of 19.2%. Among them, the balance of financing accounts for a relatively large proportion, but the growth rate of the balance of securities lending is relatively faster.

The trading methods and varieties of margin financing and securities lending business are constantly enriched. At present, the types of margin financing and securities lending transactions in my country cover A shares, B shares, small and medium-sized board stocks and GEM stocks. The trading methods mainly include financing purchases, securities lending sales, and short selling There are many ways to buy back. In terms of trading varieties, with the rise of the technology sector and the new economic sector, the varieties of margin financing and securities lending transactions are also constantly enriched, such as bond financing and financing.

3.2 Industry Drivers

The capital market is an important carrier of margin financing and securities lending, and its development plays a very important role in promoting margin financing and securities lending. The capital market refers to a financing channel with trading tools such as securities and futures as the carrier, and its main purpose is to provide financing and risk transfer.

In our country, the development of the capital market began in the 1990s. With the rapid growth of China's economy and the deepening of reform and opening up, my country's capital market has gradually been standardized and improved, including the securities market, futures market, and inter-bank bond market. These markets provide a broad space and rich trading varieties for margin financing and securities lending.

Among them, the securities market is the most important trading place for margin financing and securities lending. The securities market includes the Shanghai Stock Exchange, Shenzhen Stock Exchange and the New Third Board Market. These markets continue to grow and develop, providing a broad market space for margin financing and securities lending. At the same time, the opening and standardization of the securities market has also attracted more and more investors into the market, promoting the trading activity and liquidity of the market.

Therefore, service fees, interest income and investment income are the main profit drivers in the margin financing and securities lending market. These factors interact together to promote the development of the margin financing and securities lending market. As the market continues to evolve, so will the drivers of profit, and market participants need to keep up with market changes to maintain market competitiveness and profitability.

3.3 Risk Management

Table common industry risk factors

Source: Asset Information Network Qianji Investment Bank

Common risks of margin financing and securities lending include:

(1) Market risk: The assets of margin trading and securities lending transactions are stocks, and the stock market price fluctuates greatly, which may have adverse effects on the transaction parties. Especially in the case of large fluctuations in the stock market, the risks of margin trading and securities lending transactions are more obvious.

(2) Leverage risk: Margin trading uses leverage, that is, a small amount of principal is used to control a larger asset scale, so leverage risk may arise. When losses occur in margin trading and securities lending transactions, the amount of losses will be larger than normal transactions.

3.4 List of domestic securities companies

Source: Asset Information Network Qianji Investment Bank

3.5 Introduction of leading domestic companies

(1) CITIC Securities Co., Ltd.: Founded in October 1995, it was listed on the Shanghai Stock Exchange in 2003 and listed on the Hong Kong Stock Exchange in 2011. It is China's first A+H-share listed securities company. The business scope of CITIC Securities covers securities, funds, futures, foreign exchange, commodities and other fields. Through comprehensive financial services with full licenses, it fully supports the development of the real economy and provides domestic and foreign corporate clients, institutional clients, high-net-worth clients, and retail clients. Various financial services solutions.

(2) Guotai Junan: Over the entire course and multiple cycles of the development of China's capital market, it has always been customer-centric, deeply cultivated the Chinese market, and provided various financial services to a large number of enterprises, institutions and individual customers, establishing an all-round industry leader status. From 2011 to 2021, Guotai Junan's operating income has ranked among the top three in the industry for 11 consecutive years. While committed to achieving high-quality growth and leading scale, it also focuses on profitability and risk management. Since 2008, Guotai Junan has been awarded the Class A AA regulatory rating by the China Securities Regulatory Commission for 15 consecutive years, which is the highest rating ever obtained by a Chinese securities company.

(3) China Galaxy Securities Co., Ltd. is a leading comprehensive financial service provider in China's securities industry. The company has a unique history, brand and shareholder advantages, a wide business network and a leading customer base in the industry, as well as comprehensive business strength, providing think tank consulting, wealth management, investment banking, Investment management, international business and other comprehensive financial services. Committed to becoming a leading investment bank and a systemically important securities financial institution in the Asian capital market.

Chapter 4 Future Outlook

The margin financing and securities lending market has a large room for development in the future, and our outlook for its future is as follows:

Innovative financial products and services: With the rapid development of financial technology, more innovative financial products and services may appear in future margin financing and securities lending. For example, a margin financing and securities lending platform based on blockchain technology may provide a more efficient, secure and transparent transaction experience while reducing transaction costs.
Tighter regulation: With the changes in the financial regulatory environment, margin financing and securities lending may face more stringent regulatory requirements in the future to protect the rights and interests of investors and maintain market stability. This may include regulatory requirements for funds and collateral, restrictions on margin trading and securities lending transactions, and strengthening of risk management and risk control measures.
Increased investor risk management awareness: In the future, investors may pay more attention to risk management, including reasonable control of leverage ratios in margin trading and securities lending transactions, understanding the risks of collateral, and familiarity with relevant trading rules and systems. Investors may pay more attention to the risks and returns of margin trading and securities lending transactions, and make wise investment decisions based on their own investment goals and risk tolerance.
Intensified market competition: With the intensified competition in the financial market, the margin financing and securities lending business may face more competitive pressure. Securities companies and financial institutions may continue to launch more competitive margin financing and securities lending products and services, including lower interest rates, more flexible trading methods and better customer experience, in order to attract more investors.
Expansion of cross-border margin financing and securities lending business: With the continuous increase of international investment and capital flow, cross-border margin financing and securities lending business may be further expanded. Investors may conduct cross-border transactions of funds and securities between different countries and regions through margin financing and securities lending business, so as to realize more investment opportunities and capital allocation.

In short, future margin financing and securities lending may face constant changes and developments in terms of financial technology, regulatory environment, investor risk management, market competition and cross-border business. Investors and financial institutions need to pay close attention to market dynamics and regulatory changes, rationally use margin financing and securities lending tools, and conduct effective risk management to maximize the role of margin financing and securities lending in the capital market. At the same time, investors also need to enhance risk awareness, fully understand the risks and rules of margin trading and securities lending transactions, and make wise investment decisions to protect their own rights and interests.

In addition, margin financing and securities lending may face more attention in terms of sustainable investment and social responsibility in the future. With the popularity of environmental, social and governance (ESG) investment concepts, investors may pay more attention to the environmental and social impacts of companies involved in margin trading and securities lending transactions, as well as related governance structures and risk management. The margin financing and securities lending business may provide more innovative products and services in terms of ESG investment and socially responsible investment to meet investors' needs for sustainable development and social responsibility.

Cover Photo by Wance Paleri on Unsplash