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Margin Transactions and Loans for Margin Transactions



What is Margin Transactions?

In margin transactions, an investor trades stocks after (1) depositing a certain amount of collateral (margin requirements) with a securities company and (2) borrowing funds for purchasing stock or stock certificates for sale. Margin transactions help investors to expand their trading volumes by enabling them to purchase stock which value is in excess of their available funds, or to sell stock that they do not own. Thus, margin transactions broaden and strengthen stock trading and contribute to the smooth circulation of stocks and the fair stock prices formation.

Margin transactions is used, for example, when an investor considers that the stock price of a certain issue will rise or decline sharply in a short period of time.

  • When it is expected that the stock price will rise, an investor borrows funds for purchasing stock from a securities company (margin buying), and if the stock price rises as expected within a term of repayment (6 months), the investor sells the stock, repays the funds borrowed (reversing transaction) and receives the margin. The investor may also receive the stock certificates(actual receipt)by procuring funds separately and depositing it with a securities company.
  • Conversely, when it is expected that the stock price will decline, an investor borrows stock certificates from a securities company and sells them (margin selling). If the stock price declines as expected within the term of repayment(6 months), the investor buys back the stock, returns it to a securities company and receives the margin. The investor may also receive the equivalent money to stock certificates sold by procuring stock certificates separately and offering them to a securities company (actualdelivery).

Apart from the purpose of obtaining margins as described above, an investor can use margin transactions as a means for hedging. In other words, in the event that, although an investor expects that the stock price in hand may decline, the stock is not to be sold for some reasons, such as that convertible bond is within its convertible period or that it is a publicly-offered stock just purchased, the investor can avoid loss with hedging sale by using margin transactions.

There are two types of margin transactions, standardized margin transactions and negotiable margin transactions. In standardized margin transactions, interest rate on loans or terms of repayment are determined by stock exchanges, and a securities company can borrow funds for purchasing and stock certificates for sale needed to settle transactions from a securities finance company (loans for margin transactions).

In negotiable margin transactions, the conditions of margin transactions may be decided freely in negotiation between a securities company and its customer. However, securities companies cannot use "Loans for margin transactions" for settlement of negotiable margin transactions.
(Loans to securities companies for negotiable margin transactions = Loans for Negotiable Margin Transactions)


What is Loans for Margin Transactions?

Loans for margin transactions is a system in which a securities finance company receives a certain amount of margin (margin requirements) from a securities company, which is a general trading participant of stock exchanges (3) and lends funds or stock certificates necessary for margin transactions (4). This is executed through the clearing facilities of stock exchanges. Loans for margin transactions is authorized only for the securities finance companies with a license given by the Prime Minister. We, Japan Securities Finance Co., Ltd. conduct loans for margin transactions through the stock exchange in Tokyo, Sapporo, and Fukuoka.


Transaction structure

JSF receives loan applications for each issue from a securities company on the trading date of standardized margin transactions(5).To execute the loan, JSF, in place of the securities company, delivers funds or stock certificates to clearing facilities of stock exchanges(6). The stock certificates purchased (collateral stock certificates for loans) or proceeds from sale (collateral money for stock loans) are received by JSF(7), and then each collateral is appropriated.

Standardized margin transactions and Loans for margin transactions

Figure:Standardized margin transactions and Loans for margin transactions