To propel the long-term sound growth of the exchange-traded bond market and further improve the risk management on collateralized repo of bonds on the exchange-traded market, China Securities Depository and Clearing Co., Ltd. (CSDC), the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) have co-released and implemented the “CSDC, SSE and SZSE Guidance for Risk Control on Trading and Settlement in Collateralized Repo of Bonds” (the “Guidance” for short). For a long time, CSDC, the SSE and the SZSE have attached great importance to risk management on collateralized repo of bonds. The promulgation of the “Guidance” is one of the major measures for optimizing the risk management on collateralized repo of bonds on the exchange-traded market.
Since the end of 2015, according to the general deployment of the 2015 Central Economy Work Conference of 2015 on strengthening the supply-side structural reform and boosting the campaign of “reducing production capacities, decreasing inventories, deleveraging, lowering costs and improving deficiencies”, the risk management on collateralized repo of bonds have been continuously cemented and improved by CSDC, the SSE and the SZSE in several aspects to prevent and lower the systematical risks of the exchange-traded bond market. (1) The dynamic adjustment of pledged bonds’ conversion rate has been launched and steadily pushed forward to further enhance the refined risk management of pledged bonds. (2) The “Management Measurers on Standard Bonds’ Conversion Rate (Value)” and the “Guidance for the Admittance Standard of Collateralized Repo’s Qualification and the Sampling Business of Standard Bonds’ Discount Factor” have been newly revised and promulgated to greatly lower the discount factors of credit bonds, especially low-grade credit bonds. (3) The three-party bonds evaluation has been introduced to further improve the effectiveness of the mark-to-market management on guarantees for pledged bonds. The above risk management measures contributed to improving and cementing the risk control of pledged bonds, realizing the refined management on credit risk, price risk, liquidity risk and concentration risk of pledged bonds, playing a major role in curbing and lowering repo lever and optimizing the in-storage structure of pledged bonds, and accomplished the goal of supporting superiority and limiting inferiority, achieving refined management and preventing systematical risks.
As management on collaterals and repo financing entities are two indispensable aspects in the risk management on bonds repo, apart from the above bonds management measures, efforts should be made to further strengthen management measures on repo financing entities and participating institutions, in a bid to solve an array of problems such as imperfect risk management system of participating institutions, weak risk control on clients, insufficient management measures and means and imperfect risk control indicator system of the collateralized repo business of bonds. Thus, CSDC, the SSE and the SZSE have studied to formulated the “Guidance”, which put forward specific requirements of risk control for trading participants, settlement participants and financing entities in the financing repo business according to three trading and settlement modes (i.e., brokerage, custody and proprietary trading). The “Guidance” aims to guide participating institutions including securities companies and custodian banks to strengthening the risk management on investors, further define risk control indicators such as entry of investors and use rate of standard bonds, repo lever and concentration degree of in-storage, and build a comprehensive and effective risk management system of bonds repo covering investors, participating institutions, and trading and settlement institutions, so as to ensure the long-term sound growth of the exchange-traded bond market.
While drafting the “Guidance”, CSDC, the SSE and the SZSE carried out a wide and thorough market survey and made full problem-oriented data calculation according to the market conditions, which met the need of strict risk management and considered the affordability and acceptability of the market. Since the “Guidance” solicited public opinions on September 9, the market participants generally acknowledged its regulations and held that it would be conducive to guiding participating institutions to build and improve risk control systems and facilitate the long-term sound development of the market. CSDC, the SSE and the SZSE have absorbed rational suggestions and opinions from the market participants.
In order to leave enough time for the market participants for business adjustment and necessary business-related technical preparations, the “Guidance”, in light of the market opinions, has given different arrangements of transitional periods to the market for different risk control regulations, and specified the arrangements in the release notice. Next, CSDC, the SSE and the SZSE will organize the market to implement all the work items for the “Guidance”, sponsor market trainings and guide participating institutions to deeply understand and comprehensively implement the “Guidance”.
