Treatment of Rights in Standardized Margin Trading

When a customer purchases shares in a margin transaction, the purchased shares are retained by the securities company as collateral. The securities company will lend them to other customers who propose to sell shares on margin or pledge them to the securities finance company to receive finance in loan trading. The securities finance company will in turn lend them to other securities companies who request to borrow shares. As a result, shares purchased by a customer in margin trading are not specifically identifiable. Similarly, it is impossible to deliver specific shares to a customer who requests settlement by way of actual receipt of purchased shares through repayment of the margin loan. Therefore, it is agreed in advance that such customers would receive the same amount of any shares of the same issue.

When a customer sells shares on margin, those shares would have been borrowed from a securities company. As a result, the customer naturally does not possess on hand the same shares as the borrowed shares. Therefore, it is agreed in advance that it would be sufficient for such customers to deliver the same amount of any shares of the same issue for settlement.

That said, when rights to receive dividend or subscription warrants (shinkabu-yoyakuken) that have been part of an issue are separated from the issue and identified as separate and freestanding rights (i.e., after the ex-rights date), if these rights have certain economic benefits, the value of the shares should be reduced accordingly. In this case, if a customer who bought shares on margin is to receive the same amount of shares of the same issue on or after the ex-rights date when he/she repays the borrowed funds, these shares will not be in the same amount as those at the time of purchase, although they will be of the same issue. This is because the rights have already been separated from the shares. Therefore, the customer should be compensated for the ex-rights portion in some way.

Similarly, if a customer who sold shares on margin is to deliver same amount of the shares of the same issue on or after the ex-rights date for settlement, the settlement would not be completed unless the customer separately compensates for the ex-rights potion.

As can be seen from the explanation above, an adjustment is required for ex-rights of the issues that are traded on margin with respect to the rights to receive dividend or other rights pertaining to stock splits, and such adjustment is referred to as the “treatment of rights in margin trading"