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Other Innovative Business

We recently launched a number of capital-based intermediary businesses, such as securities-backed lending and securities repurchase, to take advantage of the opportunities arising from deregulation in the financial industry and fast-growing securities market in China.

In securities-backed lending, our clients pledge their securities to us as collateral and we use our own funds to provide lending to our clients in return for an interest. In a securities repurchase transaction, we purchase securities from clients under a repurchase agreement which provides that our clients shall buy back the securities at predetermined prices and within a specified period of time. Our securities-backed lending and securities repurchase businesses help our clients obtain short-term liquidity without a fire sale of their securities and also offer opportunities to mobilize their idle assets. The interest rate we charge for these services is generally comparable to that of our margin financing service and subject to market conditions. Subject to regulatory requirements and restrictions, we plan to gradually expand the variety of our capital-based intermediary services to better meet our clients' financing needs.

We closely follow developments in the PRC securities industry and intend to apply for the qualifications to offer innovative products and services, such as individual stock options, NEEQ market-making and interest-rate swaps, after these products are launched in the near future.

An individual stock option refers to a standardized contract designed by the stock exchange where a counterparty has the right to purchase, or sell, the underlying securities at a pre-determined price on a specified date. It is widely used as a risk management and investment management means in developed financial markets in the world. We closely follow the developments of the Shanghai Stock Exchange and are among the first batch of PRC securities firms involved in the pilot testing of individual stock options. We have committed resources and efforts in the preparation for the launch of such product, including formulating product protocols, developing suitable IT systems and preparing investors education programs. We intend to join the first batch of PRC securities firms to launch individual stock options and we believe this new product will contribute to our continued profit growth.

NEEQ market-making refers to a service offered by a securities firm such that it continuously releases two-way quotations and transacts with investors in the NEEQ system. We can earn the bid-ask spread and commission fee rebates from such service and believe that such service will expand our source of income and enhance our investment banking capability. We have committed resources and efforts to prepare for the launch of NEEQ market-making, including drafting product protocols, developing business strategies and selecting eligible companies quoted on the NEEQ. We intend to join the first batch of PRC securities firms applying for the qualification to offer NEEQ market-making service based on product launch timetable.

In an interest-rate swap, two counter-parties, usually based on a specified nominal amount, agree to exchange interest cash flows from a fixed rate to a floating rate (or vice versa) during a period to manage their interest risk exposure. We believe the introduction of interest-rate swaps will diversify our proprietary trading business and manage our finance cost. Once qualified, we intend to offer interest-rate swaps and interest rate management services to institutional clients and earn revenue from interest-rate spreads and services fees.

In addition, we focus on product innovation and intend to continue to enhance our innovative capabilities and to develop new securities products and services serving our business needs, subject to PRC regulatory requirements and restrictions.