Margin trading and securities lending, also known as credit trading, allows investors to purchase or sell listed securities with borrowed money or securities from stock exchange’s member securities firms by pledging collaterals to the latter. Margin trading and securities lending has a financial leverage effect as it enables investors to magnify their purchasing or selling power by borrowing money or securities from securities firms.

With the approval of the CSRC, a pilot program for margin trading and securities lending was launched on 31 March, 2010 to allow selected eligible securities firms to conduct the business. Margin trading and securities lending helps improve the price discovery mechanism in China’s capital market, increases liquidity of the securities market and provides a new trading option for investors.

Before investors conduct margin trading and securities lending, securities firms will investigate their credit records and obtain information about their identities, property, income, securities investment experience and risk appetite, etc. Only those who meet the relevant provisions of regulatory authorities and the requirements of securities firms can open accounts and participate in margin trading and securities lending.  

The scope of securities that can be used for margin trading and securities lending is specified by stock exchanges according to relevant rules and then made public to the market. Securities firms determine the securities for margin trading and securities lending business within the list of securities announced by stock exchanges. Investors are only allowed to select the securities for margin trading and securities lending within the scope permitted by securities firms.

A margin system is introduced to margin trading and securities lending. Before borrowing money or securities from securities firms, investors are required to deposit an initial margin with the securities firms. Designated securities can be used as margin. In such case, securities firms will calculate the value of the securities at a conversion rate based on the market value of the securities. Stock exchanges specify the scope and the maximum conversion rate of the securities that can be used as margin, while securities firms determine the securities to be used as margin within the scope specified by the stock exchanges and the conversion rate of such securities. 

A mark-to-market system is also introduced to margin trading and securities lending in order to control investors’ credit risk. Securities firms calculate on a mark-to-market basis the ratio of the value of collateral provided by investors to their debt. When the ratio is below the minimum maintenance collateral level, securities firms will issue a margin call requiring investors to make up the shortage within a specified period. Securities firms will force liquidation and dispose of investors’ collateral if investors fail to make good the deficiency within the required period or fail to repay debt when it is due.

For specific rules on margin trading and securities lending, please see  Implementing Rules of Shenzhen Stock Exchange on Margin Trading and Securities Lending.