CICC has taken action! What impact does SFISF have on securities firms? What will be bought when entering the market?

With 500 billion yuan of "ammunition" for convenience swaps in place, CICC made its first stock purchase under the SFISF tool, what impact does this have on securities firms? What will the funds entering the market buy?

On Tuesday, CICC made its first stock purchase under the "Securities, Funds, and Insurance Companies Convenience Swap" (SFISF) program. CICC stated that they will continue to use the funds obtained from the convenience swap business to further increase their stock holdings.

Yesterday, the central bank announced that in order to better play the role of stabilizing the market by securities and fund institutions, the People's Bank of China conducted the first operation of the securities, funds, and insurance companies convenience swap. The China Securities Regulatory Commission recently announced that it has approved 20 companies including CITIC and CICC to conduct SFISF operations.

Regarding the impact of SFISF on securities firms, Morgan Stanley analyzed in a report this week that there are pros and cons. On one hand, the cost of swaps and repurchases may increase profit/accounting value volatility, while on the other hand, if positive returns can be generated, it will increase the return on equity (ROE).

In terms of the direction of funds entering the market through SFISF, Morgan Stanley predicts that most securities firms will use this tool more for market-making/investing in "high-dividend blue-chip stocks" and will record most positions as "financial assets measured at fair value through other comprehensive income" (FVOCI) to reduce potential profit and loss fluctuations.

Pros and Cons of SFISF for Securities Firms

Specifically, on October 18th, the central bank and the China Securities Regulatory Commission jointly issued the "Notice on Doing a Good Job in the Securities, Funds, and Insurance Companies Convenience Swap (SFISF) Related Work," clarifying the business processes, operational elements, rights and obligations of the parties involved in the convenience swap operations.

The core of the SFISF mechanism lies in allowing securities, funds, and insurance companies to exchange qualified assets (such as AAA-rated bonds, stock ETFs, SSE 300 index stocks, etc.) for national debt and central bank bills, then mortgage the national debt to banks in exchange for cash to invest in the A-share market, with an initial operation scale of 500 billion yuan. The term of the swap facility is up to one year, but can be renewed. The exchanged assets are not included in the reported balance sheet.

Morgan Stanley conducted an analysis of the pros and cons of SFISF for securities firms:

Cons: Securities firms participating in this program need to bear the costs of swaps and repurchases, and can only hedge against a small portion, which may lead to profit and accounting value fluctuations.

Pros: However, from a positive perspective, the preferential capital treatment indicates that as long as securities firms can generate positive returns, this program is more likely to increase the return on equity (ROE).

Morgan Stanley conducted a thorough risk assessment, assuming that each securities firm's swap quota is 10 billion yuan, with a total of 20 securities firms/funds receiving over 200 billion yuan in quotas and investing in SSE 300 stocks. It is estimated that this will only reduce the risk coverage ratio of individual securities firms by 1-3 percentage points. Even with a slight decrease in the risk coverage ratio, the expected ratio by the first half of 2024 is still far above the regulatory requirement of 100%. A quota of 100 billion yuan is equivalent to only 1-4% of the assets for the covered securities firms

Targeting "High Dividend Yield" in the Market

What will SFISF funds buy when entering the market? JP Morgan predicts:

Most securities firms will make more use of this plan to trade/invest more in large-cap high dividend stocks, and will record most positions under FVOCI to reduce potential profit and loss fluctuations. Therefore, the potential impact on earnings may be manageable, and securities firms may indirectly benefit from the increase in average daily trading volume (ADT) and the improvement in market performance.

In addition, CICC also believes that the potential positive direction is high dividend yield:

High dividend yield is the direction encouraged by policies, and corresponding listed companies are the main targets for arbitrage. Policy favors the direction of high dividend yield in the broader market. On one hand, high dividend yield targets have lower risks and lower volatility, making it easier for market participants to choose high dividend yield targets for arbitrage after obtaining liquidity through SFISF; on the other hand, stock repurchases, increased holdings, and re-lending also encourage listed companies to support stock prices in an arbitrage manner