A Study Of Dynamic Loan-to-value Ratios Of Stock Pledged Repos

The Stock pledged repo has been launched since the year2013. The numbers of securitieswho set up this business and clients who do the transactions are growing so rapidly and the grossscale of this product is increasing steadily. So far, stock pledged repos has been a newly arisenimportant loan-typed transaction, which served a lot for both founding and consummatingsecurities`financing platform and made remarkable contributions in carrying out theresponsibilities for serving the real economy together with the pre-existing securities repurchaseagreement and off-board stock pledged transactions which have been launched by banks and trusts.Moreover, the stock pledged repos have been providing SMEs a brand new financing channel, andrelieving their financing problems.As other stock pledged transactions, stock pledged repos are facing to various risks, includinginterest rate risks, market risks caused by volatility of stock prices, as well as risks of event factorsuch as tender offers. To these issues, when securities set the loan-to-value ratios properly, theyalso have to use other risk management measures, Such as adding termination requirements intothe contract. In China, the contract of stock pledged repos often set performance guarantee ratioand levels of warning line and open line. When the performance guarantee ratio goes lower thanthe warning line, the lenders will judge that whether it is lower than the warning line or not. If theratio goes between the warning line and the open line, the lenders will require the clients to addstock pledged or cash; otherwise when it goes lower than the open line, the lender can request tocome into effect the repurchase agreement or formulate a new buy-back deal. If the borrower doesnot answer the request, the lender will start the procedure of default disposal. Obviously, differentlevels of warning and open lines may affect the loan-to-value ratios`proper settings. In addition,setting the loan-to-value ratio properly may also benefit both two counterparties, which can notonly guarantee the securities more interests within a controllable range, but also refrain thefinancer from an excessively high financing burden. Therefore, this paper will discuss the problemwhen with termination requirements, how to determine stock pledged repos`loan-to-value ratio. Firstly, this paper builds a pricing model of stock pledged repos under both stock cover andcash cover manners based on the borrowers`cash flow analysis, then gets dynamic relationshipson stock pledged repos among loan-to-value ratios, predetermined termination lines, maturity date,repos interest rate, fees and so on, that depict the loan-to-value ratios in a theoretical way, and howdifferent cover ways affect the loan-to-value ratio. This also may provide securities technicalsupport of adjusting loan-to-value ratio according to certain cases of volatility. Secondly,theoretical loan-to-value ratios of samples with different maturity dates are computed by thesedynamic relationships, in which samples are taken from constituent stocks of Shanghai-Shenzhen300and SZSE SME300Price indexes in China. In the end, under different management targetsand maturity dates, these theoretical loan-to-value ratios are compared to practical ratios publishedby ZhongHang Security, and empirically investigates risk coverage levels of these theoretical andpractical loan-to-value ratios based on Kupiec’s idea. Empirical results and comparative analysisin this paper show that most theoretical loan-to-value ratios with different positions are higherthan practical ones, while theoretical and practical loan-to-value ratios have the same riskcoverage level with supplementary cashes terms, and the risk coverage level of theoreticalloan-to-value ratios are lower than practical ones under replenishing stocks terms. Therefore theloan-to-value ratios of stock pledged repos should be integrated with theoretical and practicalloan-to-value ratios by financial institutes’ management target, and securities could develop stockpledged repos with shorter maturities by dint of adjusting loan-to-value ratios dynamically, whichcan not only control risk but also reduce the repurchasing costs.