Securities Lending and Borrowing Will Not Be Exempted! New Regulations on Short-Term Trading Supervision Released—How Much Will They Impact? The Latest Analysis Is Here

Source: Securities Times website Author: Liu Yiw en

Recently, the CSRC has officially released Several Provisions on Regulation of Short-Term Trading (hereinafter referred to as the Provisions). The Provisions will enter into force starting on April 7, 2026. As supporting implementing rules for Article 44 of the Securities Law, the Provisions systematically clarify the recognition standards for short-term trading, exempted situations, and regulatory requirements. They represent an important institutional improvement in the field of trade regulation in China’s capital market.

“For ordinary investors, the new rules mean that the market’s rules of the game will be fairer and more transparent. Those attempts to conduct insider trading and short-term speculation by exploiting ambiguous areas will face stricter constraints, while long-term investments based on fundamentals will receive a better institutional environment.” Jiangsu Century Tongren Law Firm said.

Upgraded regulatory philosophy

It is reported that, compared with the earlier CSRC July 21, 2023 publication of Several Provisions on Improving Regulation of Certain Short-Term Trading (Draft for Comments), while the final version maintains strictness in supervision, it significantly enhances the certainty and operational practicality of the rules. It fully absorbs market feedback on supporting institutionalized investment, and has been substantially optimized.

Jiangsu Century Tongren Law Firm believes that the release of the Provisions is not only a technical patch, but also an upgrade of the regulatory philosophy.

First, the rules are more transparent and stable. Clear red lines and exemption lists give controlling shareholders of listed companies, directors, supervisors and senior management, as well as institutional investors stable expectations for their own trading behavior, reducing the risk of “stepping on a landmine.”

Second, support real economic entities and market innovation. Exemptions for ETF creations and redemptions, conversion of convertible bonds into equity, etc., in practice support innovative use of capital market instruments and keep corporate financing channels open.

Finally, guide value investing. By facilitating the operations of long-term funds such as social security funds, annuity funds, and foreign capital, regulators are guiding the market to shift from excessive game-theoretic price spreads to focusing on the long-term allocation value of enterprises. This is of far-reaching significance for the high-quality development of the capital market.

Dentons Law Firm believes that, as an important supporting set of rules after the revision of the Securities Law, the introduction of the Provisions marks that China’s capital market has entered a new stage in the realm of short-term trading regulation characterized by greater precision, systematization, and internationalization. In the future, compliance will not be a “constraint,” but rather the “guardrail” for market participants to move forward steadily. Against the backdrop of rules becoming increasingly clear and supervision becoming increasingly fine-grained, only by internalizing compliance awareness into the governance foundation can listed companies, directors, supervisors and senior management, and professional institutions go farther in the tide of capital market development.

Parent and child accounts included in supervision

The Provisions clearly define the applicable subjects for short-term trading and the types of securities involved.

In terms of applicable subjects, Article 8 of the Provisions clearly states that securities involved in the recognition of short-term trading include securities held by directors, supervisors, senior management personnel, and natural person shareholders. This includes securities held by their spouses, parents, and children, as well as securities held by using another person’s account.

Dentons Law Firm said that this means the “key few” not only must manage their own securities accounts properly, but also must strengthen the management of securities accounts of family members, so as to avoid violations caused by accidental or improper actions by close relatives. For securities held by the spouses, parents, and children of investors with specific identities, the Provisions explicitly states that, based on their relationship by identity, they are unconditionally deemed to be their own holdings. For securities held by other third parties that do not have a close family relationship, they must constitute “holding by using another person’s account” in order to be aggregated and calculated. In situations where the two parties involved pre-arranged the scheme, it will be difficult to obtain evidence, posing challenges to securities administrative enforcement.

It is worth noting that the Provisions clearly state that even if an investor does not have a specific identity at the time of purchase, but already has such identity at the time of sale (for example, by increasing holdings to become a controlling shareholder), its trading activities must also comply with the short-term trading system.

Scope of securities

In terms of the scope of securities, besides traditional stocks, the Provisions include “other equity-type securities” within the scope of regulation. These specifically include depositary receipts, exchangeable corporate bonds (exchangeable bonds), and convertible corporate bonds (convertible bonds), etc. Jiangsu Century Tongren Law Firm believes this means that short-term arbitrage using these derivative instruments is also subject to the “six-month reverse trading” prohibition.

Securities lending and borrowing are not an exemption

Article 6 of the Provisions adopts the form of an “exemption list,” enumerating 13 situations that do not constitute short-term trading, mainly divided into three categories.

First are business system design categories, including conversion of preference shares, conversion/redemption of convertible bonds/exchangeable bonds, ETF creations and redemptions, exercise of equity incentives, market maker quotation obligation behaviors, and so on. Second are non-trading factor categories, including judicial compulsory enforcement, inheritance, donations, and gratuitous transfers of state-owned shares, etc. Finally are regulatory equilibrium categories, including trading such as ordering repurchase/buyback for improper reduction of holdings, and trading required to maintain financial stability.

It is reported that, in the 2023 draft for comments, “conducting securities lending and borrowing according to the Interim Measures for the Supervision and Administration of Securities Lending and Borrowing Business, and lending and returning stocks or other equity-type securities” was set as an exception. However, in the 2026 new rules, this exception has been deleted.

Jia Yuan Law Firm said that this change may be due to the fact that, in practice, some shareholders of listed companies may use securities lending and borrowing business to indirectly reduce holdings—i.e., by lending their holdings through securities lending and borrowing, they indirectly achieve a “temporary transfer” of shares. Out of prudence, when determining whether it constitutes short-term trading, securities lending and borrowing lending transactions should also be viewed as “sales.”

The 2026 new rules clearly stipulate that purchase transactions arising from circumstances where the CSRC orders a repurchase, orders a buyback, or ordered entities voluntarily repurchase and reduce holdings in violation of regulations do not trigger the short-term trading provisions. At the same time, new legal transaction exemptions have been added to deal with major financial risks and maintain financial stability. Jia Yuan Law Firm said that the above exemption situations establish a logical closed loop of “illegal reduction of holdings—ordered buyback.” In the past, when shareholders were ordered to conduct buybacks, they may have worried that the buyback itself might again constitute short-term trading. The new 2026 rules completely eliminate this compliance paradox.

Introducing long-term capital

To facilitate the operation of professional institutional investors and attract more medium- and long-term funds to enter the market, the Provisions optimize the calculation method for institutional products’ holdings.

For domestic and overseas professional institutional investors that are established legally and operate independently (such as public funds, social security funds, insurance funds, private securities investment funds that meet the conditions, etc.), they are allowed to calculate the number of shares held separately by product or portfolio under a “one-code-through account.” Jiangsu Century Tongren Law Firm said this means that trades among different fund products will not be aggregated and calculated, thereby avoiding compliance issues caused by the large number of products under a single asset manager. This greatly enhances trading convenience.

Zhao Ran, non-bank analyst at China Securities Jianyin Investment, said that implementing separate calculation of holdings for situations where securities accounts are opened separately by product or portfolio—managed by professional institutions—solves the operational difficulty that previously institutional funds, due to trades among products, might trigger short-term trading restriction rules. This provides institutional convenience for long-term funds such as social security funds and pension funds to participate in the market. At the same time, while clarifying exempted situations, negative provisions are also established such as “seeking illegal benefits by taking advantage of information advantages,” reflecting an idea of placing equal weight on prudent supervision and encouraging compliance. This helps achieve a dynamic balance between facilitating market trading and preventing unlawful and noncompliant conduct.