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Shenzhen Stock Exchange Improves Stock Pledged Repo Mechanism To Foster A Better Market Environment For Risk Alleviation

Date 22/01/2019

On January 18, 2019, authorized by the CSRC, SZSE published the Notice on Stock Pledged Repo Transaction Issues (hereafter the Notice) to earnestly implement the State Council Financial Stability and Development Committee's requirements of preventing and mitigating stock pledge risks for listed companies and to encourage and help market participants to proactively control such risks. The Notice came into effect on the same day when it was published.

The Notice makes the following two primary arrangements: First, optimizing the extension arrangement of default contracts. Where a fund raiser defaults on a contract and it is necessary to extend the contract to mitigate its credit risks, the accumulative repo term, which has reached or is going to reach 3 years, may exceed 3 years after extension upon mutual consensus of the trading parties. By inventory extension, fund raisers bear smaller repayment pressure. Second, making special arrangements for new stock pledged repos used to reduce pledge risks. Where funds raised through new stock pledged repos are all used to settle default liabilities, some of the existing provisions shall not apply. Specifically, a single investor and the whole market no longer have to follow the upper limits on pledge ratios, assets management plans are not forbidden in stock pledged repos with performance promises any more, and the upper limit on pledge rate is lifted. The purpose of all these measures is to reduce the liquidity pressure on fund raisers by relaxing the conditions for refunding. Meanwhile, the Notice demands market member institutions to prudently evaluate the credit risk of fund raisers and their ability to fulfill a contract, and constantly maintain sound management of stock pledged repo risks.

According to related officials from SZSE, all parties have made vigorous efforts to reduce stock pledge risks of listed companies, particularly the listed private companies, in recent days. The Notice is aimed to create a favorable market environment for alleviating stock pledge difficulties of listed companies, support parties of concern to implement alleviation measures and solve the financing difficulties confronting private enterprises. Next, SZSE will continue to highlight the importance of risk prevention and mitigation and stable market operation. We will proactively adopt market-oriented mechanism to relive stock pledge risks and collaborate with other parties to prevent and control major financial risks.