The Shanghai Stock Exchange (SSE) recently issued the “Notice of Relevant Issues for Imposing Risk Alerts on Corporate Bonds” (the “Notice of Risk Alerts” for short) and the “Notice of Amending Article 6 of ‘SSE Interim Measures for Investor Suitability Management of Bond Market’” (the “Notice of Amending Measures” for short), in a bid to propel the standardized growth of the corporate bond market, and protect legal rights and interests of investors, especially small and medium-sized ones. An official of the SSE answered the following questions about the two notices in an interview.
Q: Please introduce the backdrop for the promulgation of the above two notices.
A: The SSE corporate bond market has experienced gradual development in recent years, with the number and volume of listed bonds both reaching new highs. Meanwhile, the market and the regulatory authority have attached more importance to credit risks of corporate bonds, and relevant sides are exploring and perfecting regulatory measures on preventing credit risks. Upon approval by the China Securities Regulatory Commission, the SSE, according to market conditions, has formulated the “Notice of Risk Alerts” to impose risk alerts on some companies with certain potential risks, with a final aim of maintaining the normal order of the bond market and preventing the spread of corporate bonds’ credit risks to small and medium-sized investors with vulnerable risk tolerance.
Recently, China Securities Depository and Clearing Corp. Ltd. (SD&C) has decreased the discount coefficient of standard bonds for some corporate bonds according to Item 7 of Article 6 in the “Management Measures on Conversion Ratio of Standard Bonds (Amended in 2013)”. The SSE has always attached importance to bond risks resulted from pledge of corporate bonds, and it has amended some articles of the “SSE Interim Measures for Investor Suitability Management of Bond Market” (the “Interim Measures” for short) to prevent the spread of relevant risks to small and medium-sized investors with vulnerable risk tolerance. The amended “Interim Measures” has re-stipulated the scope of the corporate bonds that ordinary investors can invest in, so as to conform to relevant stipulations of pledged bonds made by SD&C.
Q: Please introduce the main contents of the two notices.
A: The “Notice of Risk Alerts” has 15 articles, which specify the standards for risk-alert bonds, risk-alert measures, procedures for imposing risk alerts, issuers’ information disclosure obligation, member units’ duties, exchange’s regulatory measures, conditions for revoking risk alerts, and sanction measures for violating the “Notice of Risk Alerts”.
The “Notice of Amending Measures” only amends Article 6 of the “Interim Measures” by imposing more restrictions on the scope of the corporate bonds that ordinary investors can invest in, so as to control risks.
Q: What effects will the “Notice of Risk Alerts” exert on the secondary market?
A: The “Notice of Risk Alerts” is a supplementation to the existing arrangement for the SSE’s bond trading system. Given the conditions of the existing bonds on the SSE, few bonds will involve risk alerts according to the “Notice of Risk Alerts”. Thus, the implementation of the risk alert measures has limited influence on the bond market. In a long run, formulation and implementation of relevant systems will contribute to protecting rights and interest of individual investors and propelling the sound growth of the bond market.
Besides, to minimize the market influence of the “Notice of Risk Alerts” after its release, the time for implementing the notice will not start from its release day, but is on a certain date as specified in the notice. In addition, relevant circumstances listed in Article 1 of the notice will not have retrospective effects, that is, risk alerts will not be imposed on the corporate bonds which involved such circumstances before the implementation of the notice.
Q: Please explain the credit rating in Item 1 of Article 1 in the “Notice of Risk Alerts”.
A: The credit rating mentioned here is facility rating of bonds, excluding corporate rating of bond issuer. A risk alert will be imposed on the corporate bond traded in the auction trading system whose facility rating is below AA.
Q: How can we judge the bonds with double ratings as rating is mentioned in both of the two notices?
A: If a bond has two ratings, the lower facility rating or corporate rating at the same time point will prevail.
Q: Please explain about the timing method of the starting point for calculation involved in Item 2 of Article I in the “Notice of Risk Alerts”.
A: Briefly speaking, based on “this year”, the “last fiscal year” means the “last year”, and “the year before the last fiscal year” refers to “the year before the last year”. In the situation involved in this clause, the listed company concerned is recorded with loss for “the year before the last year”, and the prediction on the financial report issued “this year” also indicates loss for the “last year”. As for timing method of the starting point for calculation, in principle, “the year before the last year” should not be regarded earlier than the year of the first annual report disclosed after the listing of the corporate bonds.
For example:
Listed in February 2014, corporate bonds A are recorded with loss in its first annual report after listing (namely, the annual report for 2013), which was disclosed in April 2014. In this case, “the year before the last year” starts from 2013. If loss is again reflected for the same corporate bonds in the prediction on the annual financial report for 2014, which is supposed to be released in January 2015, a risk alert will be imposed on the corporate bonds after release of this prediction in 2015.
In another case, listed in May 2014, the company issuing corporate bonds B should disclose its first annual report in 2015, with the year for the annual report being 2014. Then, “the year before the last year” should be counted as starting from 2014. In this case, the need for imposing a risk alert should be judged upon at the beginning of 2016.
Q: What is required of in implementation of the specified measures in the above 2 notices for the member units?
A: All the measures on risk alerts in the “Notice of Risk Alerts” should be implemented by the member units. This means requirements as follows:
First, the member units should carry out necessary investor suitability management according to the “Notice of Risk Alerts”, including verification on assets of clients and signing of the Risk Disclosure Statement.
Second, the member units need to be technologically prepared, in order to lay restrictions on continuing to buy bonds with risk alerts by the investors not meeting the requirements in the “Notice of Risk Alerts”.
Third, for the investors meeting relevant conditions and willing to continue to buy bonds with risk alerts, the member units should remind them of full and all-round risk alerts, establish and maintain data on the investors and relevant filing systems, as well as report and update the name-list and account information of relevant investors through the website of the SSE, according to the methods and channels of information report for professional bonds investors.
Fourth, through channels such as the business departments, company websites, and the online trading system, the member units should launch publicity and explanation for the “Notice of Risk Alerts”, inform investors of relevant arrangements for risk alerts of corporate bonds, as well as investment risks of bonds with risk alerts.
The “Notice of Amending Measures” further narrows down the scope of the corporate bonds that can be bought by ordinary bond investors on the basis of the “Interim Measures”, and the member units should be responsible for the implementation of relevant measures.
In order to provide reference for the member units to conduct suitability management and control over buying bonds with risk alerts, the SSE will send or release information about relevant suitability management and the list of cooperate bonds with risk alerts. Besides, the SSE will launch corresponding data interface, so as to help the member units to conduct linking-up for the technological system.
Q: When will the measures on risk alert in the “Notice of Risk Alerts” be terminated or revoked?
A: A measure on risk alert will be terminated automatically when listing of the corporate bonds with risk alerts is suspended or terminated. If the circumstance prescribed in Article 1 in the “Notice of Risk Alerts” no longer exists for corporate bonds with risk alerts, the issuer may apply for revoking the risk alert to the SSE. The SSE will later make a decision on whether to revoke the risk alert upon further judgment.
Q: Is the “Notice of Risk Alerts” applicable to bonds issued by non-listed companies or enterprises?
A: The “Notice of Risk Alerts” is applicable to all SSE-listed corporate bonds issued by listed companies or other corporate-system legal persons. However, it is not applicable to convertible corporate bonds or exchangeable corporate bonds listed and traded on the SSE. Besides, enterprise bonds issued by non-corporate-system legal persons and listed and traded on the SSE should abide by the “Notice of Risk Alerts”.
