Previously, the People's Bank of China established the Securities, Fund, and Insurance Company Mutual Convenience (SFISF) system. In order to ensure the smooth operation of the tool, on October 18th, the People's Bank of China (referred to as the "central bank") and the China Securities Regulatory Commission jointly issued the "Notice on Relevant Work of Securities, Funds, and Insurance Companies Mutual Convenience (SFISF)" to clarify the business processes, operational elements, and rights and obligations of the parties involved in the mutual convenience operations.

Currently, 20 securities and fund companies have been approved to participate in the mutual convenience operations, with the first batch of approved quotas exceeding 200 billion yuan. Starting today, the central bank will formally launch operations based on the needs of participating institutions to support the stable development of the capital markets. Industry experts analyze that the 200 billion yuan quota applied for by institutions is essentially a credit granted by the central bank, representing potential incremental funds. Institutions will not use it all at once and will continue to bring incremental funds to the capital markets.

Reporters learned from relevant financial institutions that the joint notification from the central bank and the China Securities Regulatory Commission clearly defined the business processes, tool elements, and rights and obligations of the parties involved in the mutual convenience. The central bank entrusted ChinaBond Credit Information Co., Ltd., a primary market maker, to conduct swap transactions with securities, fund, and insurance companies. The swap term is 1 year, with the option to apply for an extension as needed; the initial operation quota is 500 billion yuan, and the rate for each operation is determined by bidding; the collateral range includes bonds, stock ETFs, CSI 300 component stocks, and publicly offered.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.

Mutual convenience can greatly enhance the financing capabilities of non-bank institutions and continue to bring incremental funds to the stock market. Participating institutions will swap illiquid bonds and stocks for national bonds and treasury bills through the mutual convenience, with the latter serving as high-grade liquid assets, significantly improving the accessibility of repurchase financing, with the funds obtained used for stock and stock ETF investments and market making. It is understood that some state-owned large banks have expressed willingness to facilitate related repurchase financing under mutual convenience, relaxing credit limit requirements for participating institutions in repurchase financing.

As an institutional arrangement, mutual convenience will better play the role of institutional investor stabilizer in the capital markets. On one hand, the tool is designed with countercyclical adjustment characteristics. When the stock market is oversold and stock prices are undervalued, financial institutions have a stronger willingness to buy, leading to a larger volume of tool usage; while when the stock market improves and stock liquidity recovers, the necessity of swap financing decreases, naturally reducing the tool usage.

On the other hand, when facing investor redemption pressure, financial institutions can raise funds by pledging swaps instead of selling stocks at low prices, alleviating the negative feedback loop of "stock market declines - investor redemptions - stock sell-offs - further stock market declines", suppressing pro-cyclical behaviors such as herding effects, and playing a role in smoothing the market and stabilizing expectations.

The convenience of swaps is an important tool innovation for the central bank, which is beneficial for coordinating the liquidity of different markets. In the past, the central bank mainly assumed the role of the "lender of last resort" for banks, providing sufficient liquidity support in case of bank runs. With the development of the financial markets and the diversification of residents' asset allocation, it is necessary for the central bank to further provide liquidity to the capital markets when needed. The introduction of swap facilities is an attempt and exploration of monetary policy to support the capital markets, which helps improve the overall liquidity environment of non-bank institutions. Industry experts also suggest that in the future, the central bank should continue to improve tools on the basis of experimentation, coordinate the liquidity distribution among different markets, and collectively enhance the inherent stability of the capital markets.

Editor/Rocky