Source: Brokerage China Author: Yang Qingwan

What stocks will this 50 billion yuan fund buy? From the perspective of the winning bid rate, this innovative policy tool combines the functions of market support and profit attributes of non-bank institutions. Winning brokerages can use borrowed funds to replace higher-cost proprietary funds and then buy stocks or stock etfs.

According to a top brokerage proprietary trader, in the case of low valuation, buying high dividend yield dividend assets still has a margin space, apart from that, it is more likely to continue its own investment style and preferences, operationally tends to increase holdings of ETFs, and will not blindly increase positions, specific decisions depend on market conditions.

High dividend assets are the preferred choice.

Recently, China International Capital Corporation has made its first stock purchase under the interexchange convenience, Guotai Junan has also submitted a package of stock portfolios for the first batch of pledged assets under the interexchange convenience, completed the first batch of treasury bond repo transactions on October 23, and will use borrowed funds to increase holdings of stocks and stock etfs in the future.

A top brokerage proprietary trader believes that after the A-share market undergoes a rapid repair rally after a crazy rise, there is a high probability of opening the next stage of volatile market conditions, there are still divergent views in the short term, at the current point in time, the funds involved in exchange convenience operations are more likely to buy high dividend dividend assets.

On one hand, this innovative tool of interchange convenience comes with the mission of stabilizing the market and boosting confidence, although it is operated by the winning brokerages themselves, the risk of buying into a single stock is relatively high, brokerages are inclined to increase holdings of ETFs, fund companies even more so, the recent listing of CSI A500 ETF has seen significant inflows of funds, serving as an example.

On the other hand, the first convenient bid rate for interest rate swaps is 20bp, plus the repurchase agreement interest rate of national bonds or central bank bills in the interbank market. The cost of funds borrowed by financial institutions that bid for the first time does not exceed 2.5%. Therefore, the dividend yield of pan-redemption assets still has some attractiveness. From the perspective of interest spread, these assets are still the preferred allocation.

Increasing holdings of stocks for hedging, improving market liquidity.

Recently, the central bank announced that the scale of the first convenient swap operation was 50 billion yuan, equivalent to one quarter of the initial application quota of 200 billion yuan. After the rapid rise of A-shares before the National Day, although the valuation has been repaired to a certain extent, financial institutions that previously missed or had low positions still have the motivation to increase their shareholdings.

As for what stocks will be bought with this 50 billion yuan in funding? A senior investment manager at a brokerage believes that the bidding brokerage can use borrowed funds to replace self-owned funds with higher costs. As for what stocks or stock ETFs to buy, it varies depending on their own investment style and preferences. What was bought before is likely to be purchased now as well.

But regardless of which stocks are bought, from the perspective of the cost of integrated funds, it helps improve the net capital utilization rate of brokerages and enhance the ROE level in the medium to long term.

The above-mentioned top brokerage self-employed individuals mentioned that the convenient swap is a form of financing by exchanging securities, which is equivalent to financial institutions 'leveraging' into the market. Moreover, the convenient swap conducts related proprietary investments, market-making trading, and equity assets held, which are not included in the calculation range of 'proprietary equity securities and their derivatives/net capital'. They are also not included in the total on-balance sheet assets, market risks, and half of the required stable capital.

However, although the leverage level is limited, market investment risks cannot be ruled out, so there is a need for hedging. According to regulations, part of the financing funds related to convenient swaps can be used for hedging the market risk of directional investments in convenient swaps. In principle, it should not exceed 10% of the financing funds.

In addition, the funds funded through convenient swaps can also be used for stock market-making trading. Brokerages also have the incentive to borrow low-cost funds to expand market-making businesses and improve market trading liquidity.

Counter-cyclical adjustment tools take effect.

It is understood that the brokerage's proprietary position is not high at the moment, and the swap convenience limit applied by top institutions is more like a credit limit and not used up at once. The decision to increase stock holdings at what time point still depends on the market conditions.

A knowledgeable person from a listed brokerage firm stated that after the crazy rise at the end of September, there have been changes in the brokerage's proprietary positions. Some brokerages choose to take profits or miss the market. If there is a need to stabilize the market, they may choose to buy stocks immediately. However, considering sustainability, increasing or adjusting positions depends on market conditions, based on the brokerage's own judgment of the timing for stock investments.

Therefore, the swap convenience can be seen as a counter-cyclical adjustment tool. When the market is oversold and the stock prices are low, the operational scale will increase due to the stronger willingness of financial institutions to participate; whereas when the stock market improves and stock liquidity recovers, the necessity of swap financing decreases, and the operational scale of the swap convenience will also decrease.

Editor/Lambor