Can’t Trade? Check Out Stock Loans

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  • Post last modified:December 30, 2015

Just as China lifts its ban on net selling, the Chinese Securities Regulatory Commission has now decided to crack down on over-the-counter (OTC) derivatives and margin financing. Alternatively, stock based loans provide similar benefits to investors seeking leverage or liquidity.

China’s securities regulatory body has been active in the last few months, putting forth new rules on selling (and hedging) after its sharp market sell-off. Attempting to curb aggressive selling, regulators have frozen IPOs, required brokerages to buy more shares than they sell, and banned short sales across a variety of securities. With Shanghai about 20% off its lows, these efforts have translated into gains in China and beyond. Given China’s problems were driven by leverage, regulators are now looking into sources of financing as areas that need oversight.

Margin financing via total return swaps, a derivative used to transfer market and credit risk of an asset from one trader to another in exchange for periodic cash flows, is currently under scrutiny due to its levered and unregulated nature. A common practice has been for traders to use these instruments as a financing vehicle for their trades.

China’s Securities Regulatory Commission went on to indicate in a press release that many financial institutions were using these derivatives as a “leveraged bet” as opposed to a risk management tool.

With these swaps under pressure, investors and traders should consider include stock loans. Cash for stock financing gives shareholders an alternative capital injection.

Share financing is gaining traction in the market due to its unique liquidity profile, advantageous cost, and rapid adoption by institutional players. New and proposed Chinese stock connect programs have increased ownership of equities, driving even more interest in borrowing against stocks.

Squadron Lending has a keen focus on stock loans. With the ability facilitate transactions around the globe, Squadron Lending has been a leader in the share financing space for over a decade…providing clients with a seamless experience across market cycles.