| China: Margin trading rules for Shanghai and Shenzhen released |
Aug. 23, 2006 ¨C The Shanghai and Shenzhen stock exchanges have released new rules that detail procedures for their trial runs of margin trading in both exchanges that are expected to begin as early as next month.
Margin trading, which is a mechanism that allows investors to buy and sell on the exchange by borrowing money or securities from securities firms, is expected to generate more liquidity for China¡¯s stock markets, China Daily said in its report.
According to the new rules, time limits for margin trading have been set at six months and if clients fail to repay borrowed funds or securities within the time limit the securities firm will issue a margin call that forces the investor to either add more cash to the account or liquidate the stock.
Investors will be allowed to margin trade up to 50% of their initial investments in margin accounts, but no specifications were released for a minimum amount required to open such an account.
Stock must have traded on the exchange for at least three months, completed the share reform, and have at least 4,000 shareholders before they can be margin traded.
For stocks to be purchased with borrowed money, the amount of free float stock on the market must come to at least 100 million shares or must have a value of at least RMB 500 million.
If an investor wants to borrow a particular stock for short selling, the amount of free float stock being traded on the market must total at least 200 million shares or must have a market value of at least RMB 800 million.
Only the top five or top six securities firms in China will be awarded the license to margin trade on behalf of their investors and they will be given a combined quota of between RMB 10 billion and RMB 12 billion of funds to lend to investors. The value of securities they will be allowed to loan will be less than that.
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