On October 18, Cailian Press released news that the focus of the capital market today is on the promotion of convenient swaps, including the release of detailed rules, the unveiling of a list of 20 brokerage firms and fund companies, the determination of the first batch of 200 billion yuan application quota, and the arrangement and subsequent operations of this liquidity tool, leaving endless room for imagination in the market.

The list is out, with 17 brokerage firms and 3 fund companies in the spotlight. CSRC has replied to 20 brokerage firms and fund companies, requesting reasonable determination of application quotas, to be implemented after approval by the central bank. The brokerage list includes: CITIC Securities, China International Capital Corporation, Guotai Junan Securities, Huatai Securities, SWHY, GF Securities, Caitong Securities, Everbright Securities, Zhongtai Securities, Zheshang Securities, Guosen Securities, Orient Securities, Galaxy Securities, China Merchants Securities, East Money Information Securities, China Securities Co.,Ltd., Industrial Securities; with only 3 fund companies, including Huaxia Fund, E Fund, and Jiashi Fund, these 20 institutions are authorized to carry out SFISF operations.

At the same time, 20 brokerage firms and funds have announced their active participation in various aspects of facilitating the swap.

ChinaBond Credit Enhancement Corporation will evidently play a recurring role. The central bank has entrusted specific open market business primary dealers, specifically this ChinaBond Credit Enhancement Corporation, to conduct swap transactions with securities, fund, and insurance companies that meet the industry regulatory conditions. The swap term is 1 year and can be extended based on the situation. The swap rate is determined by the bidding of participating institutions. Eligible collateral includes bonds, stocks ETF, CSI 300 component stocks, and public REITS, with discount rates set according to the risk characteristics of the collateral. Funds obtained through this tool can only be invested in the capital markets for stocks, stock ETF investments, and trading.

The central bank and CSRC require institutions to reasonably determine the application quota in accordance with the 'Notice on Doing the Relevant Work of Securities, Fund, and Insurance Companies for Swapping Convenience' and other business arrangements, combining with their own development strategies and risk tolerance, and implement it after approval by the central bank.

In the eyes of industry professionals, the rapid introduction of detailed operational rules for convenient tools swap, without occupying existing quotas, exceeds market expectations.

A practical guide: clarify the business processes in three segments.

For the details of this SFISF that the industry and the industry are concerned about, the "Notice on Improving the Exchange Convenience Related Work of Securities, Funds, and Insurance Companies" and the CSRC's specific implementation notices to participating institutions are comprehensively clarified. The business process is as follows:

(1) Swap operation. The People's Bank of China determines the swap fee rate and winning bid results for SFISF operations through public bidding, then, through a specific primary market trader, ChinaBond Credit Information Corporation, swaps Treasury bonds or interbank Treasury vouchers to the winning securities, funds, and insurance companies via bond lending. Financial institutions participating in SFISF operations should provide eligible and sufficient collateral to ChinaBond Credit Information Corporation within 10 working days after winning the bid and complete the transaction.

(2) Institutional financing. Securities, funds, and insurance companies can only finance the Treasury bonds or interbank Treasury vouchers obtained through SFISF in the interbank market through repurchase agreements. Securities, funds, and insurance companies manage special quotas for SFISF Treasury bonds or interbank Treasury vouchers, and related transactions are not included in bond repurchase balances or interbank market bond lending scales, relaxing relevant operational indicators.

(3) Institutional investment. The funds obtained by securities, funds, and insurance companies through repurchasing SFISF Treasury bonds or interbank Treasury vouchers can only be used for investing in the capital market, limited to stocks, stock ETF investments, and market making. With the future approval of the People's Bank of China and the CSRC, the investment scope can be appropriately expanded.

Dry goods 2: Focusing on the six major operational details of mutual convenience.

Focusing on the details, 'Notice on Facilitating the Interchange of Securities, Funds, and Insurance Companies.'

1. Interchange period: The SFISF period is 1 year, which can be terminated early; extension is possible with application and approval.

2. Interchange amount: The initial SFISF operation quota is 500 billion yuan, which may be further expanded as needed. Within the quota, the single operation amount is reasonably determined in conjunction with the demand of participating financial institutions.

3. Interchange rate: Determined through single-price (Dutch auction) bidding.

4. Collateral range and discount rate: The collateral range includes AAA-rated bonds (including ABS), stock ETFs, stocks, public REITs, etc.; based on market development and business needs (e.g., initial operation), the China Securities Regulatory Commission may adjust the collateral range in consultation with the People's Bank of China. The collateral discount rate (discount rate-exchanged national debt or exchange central bank note face value-collateral market value x 100%) is set based on risk characteristics in different categories, generally not exceeding 90%. China Chengxin Credit Enhancement Company and relevant participants such as securities, funds, and insurance companies monitor the collateral and reasonably set replenishment lines (not less than 75%).

5. Interest repayment: The interest on the national debt or exchanged central bank notes lent in SFISF operations is still owned by the People's Bank of China. If national debt or exchanged central bank notes pay interest during the SFISF period, securities, funds, and insurance companies should promptly transfer the interest funds to the People's Bank of China on the interest payment date.

It is worth noting how the market and the industry can know the actual situation of SFISF. It is understood that after each SFISF operation, the central bank will release a trading announcement to disclose relevant operational information.

Dry goods three: CSRC clarifies the regulatory arrangements involving the four major brokerages.

It is worth noting that brokerage firms participating in the convenient swap of financing funds should follow the principle of "special use for special funds and closed management", carry out proprietary investments and market making trading through a dedicated account filed with the stock exchange, to ensure that the funds are directed in accordance with policy requirements. Some of the financing funds can be used to hedge market risks in the direction of convenient swap investments, generally not exceeding 10% of the size of the financing funds.

Specifically in terms of operational details, with the approval of the People's Bank of China and the CSRC, the following four regulatory arrangements are implemented for brokerages:

(1) For participating in the swap of government bonds, central bank bills, and financing activities through the interbank market, it shall not occupy the scale of bond lending in the interbank market, and shall not be included in the balance of bond trading reverse repurchase.

(2) The government bonds and central bank bills involved in the swap shall not be included in the calculation range of the "non-equity securities and their derivatives/net capital" part of proprietary trading; equity assets held for proprietary investments and market making trading shall not be included in the calculation range of the "equity securities and their derivatives/net capital" part of proprietary trading.

(3) The pledged assets submitted for participating in the swap shall be calculated for various risk control indicators based on the current proprietary positions, without the need to adjust to "frozen or pledged" status. The government bonds, central bank bills, and equity assets held for proprietary investments and market making trading after the repo financing is not included in the total on-balance sheet assets, and the market risk and required stable capital are halved. Investments that meet the criteria, after internal evaluation by the company, can be included in other equity instruments accounting.

(4) Starting from the month of participating in the convenient swap, the provisions of the "Regulations on the Calculation Standards for Risk Control Indicators for Securities Companies" can be applied, and the calculation standards for various risk control indicators.

Of particular note is the CSRC requirement for brokerage firms to ensure that the various risk control indicators comply with regulatory requirements during the process of participating in the convenient swaps.

In addition, securities firms should establish a special team and designate a senior company executive to coordinate and take overall responsibility for the smooth operation of the swap facility, which involves swap, financing, investment, and other aspects. The company should ensure adequate staff, system preparation, fund operation and asset allocation, investment management, and bookkeeping management to ensure the smooth implementation of related operations.

Institutions are not allowed to engage in illegal activities using the swap facility.

The People's Bank of China and the China Securities Regulatory Commission will guide relevant institutions to actively participate in SFISF operations, make good use of fund tools, provide support and protection, and jointly promote the long-term healthy and stable development of the capital markets. As part of the regulatory requirements, approved institutions are required to conduct swap-related transactions on designated trading venues within approved limits and must not engage in illegal activities using the swap facility. During the swap process, any significant issues or problems should be promptly reported to the People's Bank of China and the China Securities Regulatory Commission.

It is noteworthy that brokerage firms participating in the swap facility must implement special management of related financing and investment activities, establish effective tracking, monitoring, and supervisory mechanisms, effectively isolate them from existing operational business, and effectively prevent conflicts of interest, insider trading, and other illegal activities.

Regulatory requirements dictate that brokerage firms must effectively strengthen comprehensive risk management, carefully evaluate market conditions, prudently decide on the scale and trading strategies of participating in swap facilities, prudently manage asset allocation and risk exposure to ensure that their market and liquidity risks are measurable, controllable, and bearable. In the event of significant issues or problems during the swap process, they should promptly report to the relevant regulatory authorities.

Reporters have learned that as an institutional arrangement, the swap facility will better play the role of stabilizing the capital markets for institutional investors. On the 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, resulting in a larger use of the tool; whereas when the stock market improves and stock liquidity recovers, the necessity of swap financing declines, leading to a natural reduction in the tool's usage.

On the other hand, in the face of investor redemption pressure, financial institutions can fund themselves by pledging swaps instead of selling stocks at a low price, mitigating the negative feedback loop of 'stock market decline - investor redemption - stock sale - further stock market decline,' restraining pro-cyclical behaviors like the 'herd effect,' and playing a role in smoothing the market and stabilizing expectations.

Editor/Lambor