On the 18th, the People's Bank of China (PBOC) official website displayed that the PBOC and the China Securities Regulatory Commission (CSRC) jointly issued the "Notice on Doing a Good Job in Securities, Fund, and Insurance Company Swap Facilitation (SFISF) Related Work," clarifying the business processes, operational elements, and the rights and obligations of both parties involved in the swap facilitation operations. Currently, there are 20 securities and fund companies approved to participate in the swap facilitation operations, and the first batch of application quotas has exceeded 200 billion yuan.
The SFISF is currently a swap transaction conducted by the PBOC, entrusting specific primary dealers in open market operations (China Bond Credit Enhancement Company), to carry out swap transactions with securities, fund, and insurance companies that meet the conditions set by the industry regulatory authorities. The swap term is one year, with the possibility of extension based on circumstances, and the swap rate is determined by the bidding of participating institutions. The available collateral includes bonds, stock ETFs, constituents of the Shanghai-Shenzhen 300 Index, and public REITs, with the discount rate set according to the risk characteristics of the collateral in different tiers.
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It is crucial to correctly understand the essence of the newly established SFISF and its significance to the capital market, which helps to discern right from wrong and better perform effective quantitative processing of this policy, thereby avoiding misunderstandings that may lead to risks and losses.
The newly established SFISF is closer to providing the capital market with a new "extracorporeal" reservoir and refueling station. Securities firms, funds, and insurance companies can pledge qualified securities with relatively low liquidity rates to the PBOC-enttrusted China Bond Credit Enhancement Company at a predetermined discount rate, in exchange for highly liquid cash equivalents such as national bonds and central bank bills, and pay the swap rate based on bidding.
Obviously, the essence of this tool is a credit default swap for specific assets, which will undoubtedly provide effective liquidity for the capital market and help activate market risk transactions and optimize market resource allocation. For example, securities firms and others can pledge temporarily inactive qualified securities to the central bank through the swap facilitation, obtaining not only the liquidity of assets that can be quickly cashed but also the funds borrowed can be reinvested in the market to improve market liquidity. At the same time, this will also expand the central bank's market radius and coverage, allowing the central bank to perceive market fluctuations through multiple channels, and help the central bank better improve price control tools, and enhance the central bank's monetary policy sensitivity and adaptability.
Given that the transaction targets of this swap facilitation tool are all risky assets, SFISF will not directly lead to changes in the central bank's balance sheet, and naturally, it will not directly lead to the issuance of base money. Instead, it is more about the delivery of asset swaps on the asset side of the central bank, changing the risk probability distribution structure of this part of the central bank's assets.
So, can SFISF immediately improve the liquidity of the capital market and promote market liquidity risk governance? The situation may not be simple. From the market operation mechanism of SFISF, SFISF has costs, which are composed of the discount rate of the collateral, the swap rate, and the liquidity of the money market. Only when the marginal discount rate of the collateral + the marginal swap rate, etc., is higher than the seven-day reverse repurchase rate but significantly lower than the pledge financing rate of commercial banks, etc., will securities firms and others have the motivation and willingness to conduct SFISF transactions.
At the same time, the marginal discount rate of the collateral and the marginal swap rate, etc., are affected by capital market transaction activities and investor expectations, and are also related to the central bank's marginal risk preference. The central bank's marginal risk preference is ultimately linked to the credit evaluation of the Ministry of Finance in the market.
It can be seen that the SFISF operation means that while increasing the possibility of asset liquidity for securities firms, funds, and insurance companies, it also strengthens the market constraints on the issuance of base money and the hard constraints of government credit. Therefore, while SFISF helps to dredge market liquidity and promote market liquidity risk governance, it is also subject to the risk of market liquidity exposure. It has a clear pro-cyclic transaction characteristic in its operation mechanism, that is, the lower the liquidity exposure risk, the lower the marginal discount rate of the collateral, and the marginal swap rate will also decrease, and the financing cost of securities firms and others through SFISF and other financing will be lower; on the contrary, the higher the liquidity exposure risk, the higher the marginal discount rate and swap rate of the collateral, the higher the financing cost of SFISF, and the lower the financing willingness of securities firms and others.

Therefore, for SFISF to truly improve the market's liquidity risk governance capabilities, activate market liquidity, and promote market risk transactions, it fundamentally depends on the investment value of the capital market's securities. SFISF mainly plays a role in adding flowers to brocade in this regard. Therefore, market investors must be clear that what drives the market's liquidity governance capabilities is the value creation of market credit enhancement and the revaluation of risk asset values. SFISF does not add new market credit, and its main role is to reduce the marginal cost of market credit enhancement.To address this, the immediate priority is to provide institutional and systemic conveniences for businesses and residents to repair their impaired balance sheets. It is essential to truly reduce the burden of daily economic activities for businesses and households through recuperation and recovery. At the same time, structural reforms and opening up should be used to expand the market activity space for businesses and households, and to improve the marginal return on investment for both sectors. Only by exhausting the potential of incremental policies to activate micro-level vitality can we provide more credit enhancement points for SFISF. Only by boosting the expectations of the capital market will securities firms and others be more willing to use this swap facility to free up liquidity.
SFISF, like a warm current, flows from the outside in, benefiting the somewhat low market sentiment and alleviating the anxiety of all parties about the suppression of market liquidity. To better utilize SFISF, it is imperative to allow the private sector to repair their impaired balance sheets through recuperation and recovery, and to open up stable expectations for people through structural reforms.