Bourse carrying out tests to determine if participants technically prepared for the test.
A cyclist passes the Beijing Stock Exchange in Beijing. The one-year old bourse steps up efforts to perfect market functioning, experts said on Tuesday that there could be an official launch of margin trading and securities lending on the Beijing Stock Exchange.
Their comments came after the BSE ran a test over the weekend to examine whether market participants are technically prepared to provide margin trading and securities lending services, a key preparatory step before the exchange can kick off such services.
As the second test is expected to take place on Saturday, experts said margin trading and securities lending could be launched on the exchange later this year or early next year.
Participants include the BSE itself, as well as brokers and market infrastructure providers, such as China Securities Depository and Clearing Corp Ltd.
Margin trading refers to investors borrowing money from brokers to purchase securities in anticipation of price increases. The short sale allows investors to borrow securities from brokers to make a short sale to capitalize on expected price declines or risk hedging purposes.
Such a margin lending mechanism is widely used in international capital markets to help investors use leverage to amplify gains and improve market liquidity and pricing efficiency. There are margin trading and securities lending systems adopted by the Shanghai and Shenzhen bourses.
The anticipated launch of margin lending on the BSE will mark a milestone in the exchange's efforts to grow into a mature bourse with comprehensive market functions while supporting investors in developing diversified trading strategies and improving risk management, according to experts.
An analyst at Shenwan Hongyuan Securities said that margin lending is expected to help attract more capital to the Beijing exchange and give investors more tools to hedge against risks.
Liu said the risks associated with margin lending should be well understood. It is important for investors to manage liquidity risks when lending to clients because of the fact that leverage can amplify returns but aggravate losses.
After market players upgrade their technical systems, formulate relevant internal rules and apply for related trading access, the BSE said it will officially kick off margin trading and securities lending.
According to the chairman of the BSE, Zhou Guihua said last month that the bourse will make margin trading and securities lending effective as soon as possible as part of its efforts to perfect trading mechanisms.
The exchange said it would publish the lists of stocks that are eligible for margin lending and securities that can be used as collateral in margin accounts.
To perform margin trading, investors need to make sure the collateral they deposit with the broker is not less than the value of securities they buy. The collateral for securities lending should be no less than half of the value of securities they short, the BSE said.
The preparation for the launch of the margin lending system is part of the BSE's efforts to improve its overall functioning.
The bourse launched its first market index - BSE 50 - on November 21, and eight publicly offered funds tracking the index launched sales on November 29. The commissions it charges for stock trading have been halved this month, and the bourse has halved their commissions by 0.025 percent of the transaction value.
The exchange may soon see its first initial public offering of a company with a foreign controlling stake. Suzhou Ovodan Foods Co Ltd, an egg manufacturer with nearly 90 percent of the stake held by China Egg Products ApS, passed the IPO review on Thursday.