What exactly is "Securities Lending and Borrowing" all about?


In 2024, the Chinese market hit a low of 2666.33, stirring fear. Amidst volatility, "securities lending" emerged as a key term, but what is it?

What is Securities Lending and Borrowing?

Securities lending and borrowing is like wanting to sell something in the market to make a profit when you don't actually have the goods in hand. So, you go to a large warehouse (China Securities Finance), borrow some goods to sell. Once the goods are sold, you use the money earned to buy the same goods to return to the warehouse, and the profit margin is your earning. Imagine, if you have a concert ticket that you can't sell immediately, but you know someone willing to borrow it to show off, and then return the same ticket or the money equivalent to you, meanwhile you could also earn some interest. This is somewhat similar to how securities lending and borrowing works in the stock market. It allows those holding stocks to "lend" them out to those who want to short sell (bet that stocks will fall) but don't have the stocks on hand. In this process, the person borrowing the stock has to pay a certain fee, while the original stockholder can earn extra income.

Mutual Fund Companies and Securities Lending: Using Investors' Money to Short Sell?

Recently, public mutual funds have frequently made headlines, with rumors that many fund companies are short selling the market through securities lending and borrowing services, even claiming that over 80% of the fund’s holding value is being lent out for short selling. Some netizens joke that this is like fund companies eating the investors' rice while breaking their cooking pot. Is it really so? Upon thorough investigation, the reality is not as exaggerated. The regulations from the China Securities Regulatory Commission are clear, with specific upper limits for various funds participating in securities lending and borrowing, nowhere near the claimed 80%. In fact, according to the latest data, the overall market value of securities lent by funds accounts for only 5.33% of the fund size, and the main purpose of such operations is to generate additional income for the fund holders, not to short the market. As for the rumors about ETFs being used as tools for short selling, they do not hold up to scrutiny either. In reality, the percentage of ETF securities lending and borrowing is within reasonable bounds, far from the alleged large-scale market short selling. Therefore, these rumors about fund companies short selling through securities lending are more misunderstandings and exaggerations than reflections of the market reality. However, given the recent downturn in the A-share market, it's understandable why fund companies, collecting high management fees and securing profits regardless of market conditions yet still incurring annual losses, are criticized by stock and fund investors.

New Rule: Changing Securities Lending and Borrowing from T+0 to T+1, What's the Impact on the Market?

On February 2nd, China Securities Finance announced a new regulation changing the operation of securities lending and borrowing from T+0 (return the same day) to T+1 (borrow today, return tomorrow), effective from February 19th to March 1st, 2024. Although this change seems minor, it has significant implications for the market: it increases market transparency expectations, helps reduce speculative behavior in the short term, and promotes healthy market development.

China Securities Finance Notice

A-shares Fall Below 2700 Points: Shadow of Securities Lending and Borrowing?

When A-shares fell below 2700 points, many began to speculate whether this was related to securities lending and borrowing. Indeed, stock market fluctuations are influenced by various factors, with securities lending and borrowing being just one of them. However, last Friday's unjustifiable sharp decline always needs a reason, and thus, securities lending and borrowing has become an outlet for venting feelings by a wide range of netizens, leading to widespread criticism of various fund companies. Ultimately, A-shares have indeed shaken the confidence of almost everyone. It's hopeful that before the Spring Festival arrives, the stock market can bring some good tidings and allow for a prosperous celebration. Here, Transaction Encyclopedia wishes everyone a happy early New Year.

Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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