The Studies Of Funds Management About Security Company’s Margin Trading

The China Securities Regulatory Commission (CSRC) approved margin and short selling business on pilot basis on March19,2010. Six securities firms made the approved list, thus signaling the official launch of the margin and short selling business in the Chinese stock market. One year passed, another19firms were added to the list. Collectively, they have created a business with26.122billion yuan in balance, and nearly2.5billion in total revenue.The paper argues that margin and short selling business increases the firms’ revenue and improves their revenue structure mainly in two ways. One, it broadens the business scope of the securities firms. Specifically, it provides the securities firms with a stable source of interest income due to trading financing as well as fees for securities lending (spread income/net interest income), therefore changing the overall business mix of the firms. Secondly, it enhances the company’s commission income to some extent, given the size of the margin trading. In other words, the main revenue source of the margin and short selling is twofold. Similar to traditional brokerage business, margin and short selling can create commission income. By charging the investors an interest rate that is higher than the firms’capital cost, it also generates spread income. In order to maximize this income, therefore, the firms should first minimize the cost of their fund and increase the fees as much as possible with clients’acceptance. Margin and short selling business is an important innovation in China’s stock market. The fund management of this business is of great significance to the overall revenue of the securities industry.Starting from this point, the paper explores the ways in which business fund cost can be reduced and business income can be increased, as far as margin and short selling is concerned. Effective fund management under the precondition of meeting investors’business demands can be achieved. It is based on the current circumstance in which financing business is holding its leading position and the interest rate is under upper-limit supervision in China. And the research shall also use the latest market data to carry out an empirical study, making every effort to pursue the research’s novelty, rigorousness and applicability.This paper is composed of five sections. The first section, the introduction, depicts the background and the significance of the research. It reviews varies researches on margin and short selling from home and abroad, and clarifies the structure of the research and the methodology. Further, it makes known both the novelty and the possible limitations of this research.The second section analyzes the margin and short selling business models in US, Japan and Taiwan, and reviews the development history and current situation of the margin and short selling in China.The third section, also the core of this paper, analyzes the profit model of the margin and short selling business. I argue that all firms should reduce business fund cost and look for effective approaches to increase the business income of margin and short selling. First of all, starting from analyzing the business income of security companies’margin and short selling, the composition and variation trend of the income of securities margin and short selling business are grasped. Secondly, the factors which have affects on security companies’margin and short selling are systematically analyzed from two ends-business income sources and cost expenditures under China’s current margin and short selling business model. In the end, the paper makes clear the approaches for increasing the business income in combination of the analysis results.The forth section completes the building of a fund management model for the margin and short selling business. Starting from increasing business income, the paper defines the idea of building a fund management model and analyzes the factors which have affects on leveraged buyout amount, including credit line, the range of underlying and mortgaged securities and its conversion rate, available free margin balance, margin proportion and market quotation, etc. So the key factor that affects funds demand is determined as market quotation so as to build a fund management model. An empirical analysis is also provided. Based on the result of the empirical analysis, the discussion is done for the ability of self-arising of the scale of the margin and short selling business. Security companies are suggested to adjust short-term business strategies and increase long-term business strategies in compliance with the market quotation in order to eventually realize the stability and growth of the scale of the margin and short selling business.The fifth section reviews the paper and looks into the new demands incurred by the future development trend of the business.