China Said to Ease Control on Brokers' Proprietary Trading

  • Regulator issued notice scrapping net long rule, people say
  • CSRC cancels rules as stock market stabilizes after slump

China has canceled a rule requiring brokerages to hold daily net long positions in their proprietary trading accounts as the nation’s stock market stabilizes following its summer slump, according to people with knowledge of the matter.

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The China Securities Regulatory Commission has issued a notice saying it’s easing control over the brokerages’ proprietary accounts amid a gradual stabilization in equities, according to the people, who asked not to be identified as the circular hasn’t been made public. The CSRC will allow the market to resume self-regulation and it will resume routine monitoring of securities institutions, the people cited the notice as saying.

The net long rule was instituted as the government tried to stabilize a stock market that plunged in June after a boom that began in late 2014. With the Shanghai Composite Index now having gained more than 20 percent from its August low, regulators are withdrawing from an unprecedented government campaign to prop up shares. The CSRC lifted a five-month freeze on initial public offering last week.

The regulator didn’t immediately reply to questions faxed by Bloomberg News on the rule change, which was reported by the Wall Street Journal earlier. Shares of brokerages including Citic Securities Co., the nation’s largest, reversed morning losses in Shanghai. Citic closed 1 percent higher after dropping 2 percent earlier. Everbright Securities Co. gained 3.9 percent.

“This is no doubt positive to brokerages as the move will help them better adjust portfolios and improve returns,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said by phone. Proprietary trading has increased over the past years to between 40 percent and 50 percent of brokerages’ revenues, he added.

Equity and equity derivatives positions within Citic Securities’s proprietary trading accounted for 56 percent of the Beijing-based firm’s net capital as of June 30, down from 91 percent at the beginning of the year, according to its semi-annual report.

Among measures to limit the impact of short selling, which regulators blamed for the rout, a group of 21 domestic brokerages pledged in July not to reduce any proprietary investments in the equity market as long as the Shanghai Composite stayed below 4,500. The index closed at 3,616.11 on Tuesday.

In August, brokerages including Citic Securities temporarily stopped short selling by clients after the Shanghai and Shenzhen exchanges introduced a measure requiring investors who borrow shares to wait a day to repay the loans.

— With assistance by Jun Luo, and Steven Yang

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