On October 18th, Caifin News (Reporter: Li Ting) Caifin News reporters today, the central bank issued a notice, clarifying the business processes, operational elements, rights and obligations of the parties participating in the Securities, Funds, and Insurance Inter-Swap Facility (SFISF) operations. It is reported that as of now, 20 securities and fund companies have been approved to participate in the convenience swap operation, with the first batch of application quota exceeding 200 billion yuan. Starting today, the central bank will officially launch operations according to the needs of participating institutions to support the stable development of the capital markets.

Caifin News reporters learned from relevant financial institutions that the central bank has entrusted ChinaBond Credit Enhancing Corporation, a primary trader in the open market, to conduct swap transactions with securities, fund, and insurance companies. The swap has a term of 1 year, with the option to apply for an extension as needed; the initial operation quota is 500 billion yuan, determined by the bidding method for each operation rate; the collateral range includes bonds, stock ETFs, CSI 300 index constituents, public offerings.Real Estate Investment Trusts among others, the discount rates are set according to the risk characteristics of the collateral, and are more favorable than the market level.

Experts analyzed to Caifin News reporters that the official launch of the swap tool will significantly enhance the financing capability of non-bank institutions, continuously bringing incremental funds to the stock market; beneficial in better leveraging the stabilizing role of institutional investors in the capital markets, alleviating the negative feedback loop of "Stock market decline-Investor redemption-Selling stocks-Stocks further decline"; and this innovative tool will help coordinate the liquidity of different markets, improving the overall liquidity environment of non-bank institutions.

Significantly enhancing the financing capability of non-bank institutions, continuously bringing incremental funds to the stock market.

Industry experts interpreted to Caifin News reporters that after the official launch of the Inter-Swap Facility (SFISF) tool, participating institutions will use the facility to exchange illiquid bonds and stocks for national bonds and central bank bills. The latter, as high-grade liquidity assets, can significantly improve the availability of repurchase financing, and the funds obtained will be used for investment in stocks, stock ETFs, and market making.

It is understood that some state-owned major banks have expressed their willingness to provide convenience for repurchase financing under the convenience swap, relaxing the credit limit requirements for institutions participating in repurchase financing. "The 200 billion yuan quota applied for by institutions is essentially central bank credit, which is potential incremental funds. Institutions will not use it all at once, and will continuously bring incremental funds to the capital markets," experts told Caixin reporters.

Institutional investors will play a better role as stabilizers in the capital markets.

Experts interpret that convenience swaps will better leverage the role of institutional investors as stabilizers in the capital markets. On the one hand, the tools are designed with countercyclical adjustment characteristics. When the stock market is oversold and stock prices are undervalued, financial institutions have a stronger willingness to buy, resulting in a larger use of the tools. However, as the stock market improves and stock liquidity recovers, the necessity of bond financing decreases, leading to a natural reduction in the tool's usage.

On the other hand, when facing investor redemption pressure, financial institutions can fund themselves by pledging bonds instead of selling stocks at a loss, easing the negative feedback loop of "stock market decline-investor redemption-stock sale-further stock market decline," suppressing herding behavior and other pro-cyclical actions, playing a role in smoothing the market and stabilizing expectations.

Innovative tools will be beneficial for coordinating the liquidity of different markets.

Experts state that in the past, the central bank mainly assumed the role of being the "lender of last resort" for banks, providing adequate liquidity support in times of bank runs.

"With the development of the financial markets and the diversification of residents' asset allocations, when necessary, the central bank needs to further provide liquidity to the capital markets." Experts candidly stated that the introduction of central bank convenience swaps is an attempt and exploration of monetary policy to support the capital markets, benefiting the overall liquidity environment of non-bank institutions.

In addition, industry experts also suggest that in the future, the central bank should continue to improve tools based on practice, coordinate the liquidity distribution of different markets, and collectively enhance the inherent stability of the capital markets.