Short-swing trading in crosshairs

With a stricter grip over insider trading and short-term speculation through enacting new regulations on short-swing trading, the A-share market will see its transparency and fairness levels further improved, helping to boost investor confidence and attract more long-term capital inflows, experts said.

Their comments came after the China Securities Regulatory Commission's rules on short-swing trading took effect on Tuesday. The 12-article regulations define buying and selling the same company's securities within a six-month period as short-swing trading.

Shareholders holding 5 percent or more of shares in a listed company or a company trading at the National Equities Exchange and Quotations — as well as directors, supervisors and senior management — are all subject to the new provisions.

The scope of securities involved in the new provisions includes shares, depositary receipts, exchangeable corporate bonds, convertible corporate bonds and other securities of an equity nature.

Tian Lihui, a professor of finance at Nankai University, said people have different understandings regarding securities with equity characteristics. The clearer definition provided by the new regulations has now closed the loopholes for indirect trading through derivatives, leaving no blind spots or gray areas in the regulatory scope, Tian said.

The new rules clarify that shares issued both domestically and overseas are aggregated, while holdings by overseas investors through different channels are also added up.

This means that foreign investors' securities held through different channels must be calculated together, said Dong Ximiao, chief economist at Merchants Union Consumer Finance.

This practice will close the loophole of making short-swing trading through separate accounts and cross-border operations, reflecting the top regulator's emphasis on comprehensive regulation. This can be interpreted as the CSRC's clear stance of leaving no ambiguous areas and strictly preventing regulatory arbitrage, Dong said.

Exemption scenarios and special arrangements for professional institutional investors have been included in the new provisions.

Yuan Shuai, deputy head of the investment department at the China City Development Academy, said 13 types of exemption scenarios have been specified, including preferred stock conversion, ETF subscription and redemption, equity incentive exercises and judicial enforcement. This reflects the regulator's emphasis on market efficiency while strengthening supervision, which will avoid undue restrictions on compliant transactions, Yuan said.

The holdings of mutual funds, social security funds and pensions are calculated individually for each product, said Fu Yifu, a researcher at Jiangsu Su Merchants Bank. This will make it more flexible for long-term funds to adjust their portfolios, increasing their willingness to allocate while diversifying their investment styles.

"In general, the new regulations strictly control the 'critical few'. Listed companies will see the space for insider arbitrage compressed. Their internal control and compliance requirements will be enhanced, further regulating their corporate governance," Fu said.

"But at the same time, restrictions on long-term funds are further relaxed. With unified regulatory standards and little room for regulatory arbitrage, market fairness and efficiency will be enhanced, thus supporting the long-term sound development of the capital market," he added.

Experts from China Securities said that the new provisions have reduced institutional costs for medium and long-term capital to enter the market.

Social security funds and pension funds will be further facilitated to enter the A-share market, they said.

Regulations regarding short-swing trading will prevent insiders from using their information advantages to "jump the queue", or make earlier investment moves, said Dong of Merchants Union.

The provisions position all market participants — especially small and medium-sized investors who cannot operate through complex financial instruments — on a relatively fair information starting line.

Strict short-swing trading restrictions will force major shareholders, directors, supervisors and senior management to focus more on the long-term value creation of the company rather than short-term fluctuations in share prices.

"When the 'critical few' in the market become more long-term oriented, the speculative atmosphere in the overall market will diminish," said Dong.