On September 26, the Shanghai Stock Exchange (SSE) and China Securities Depository & Clearing Corp., Ltd. (CSDCC) released the “Business Measures on Trading, Registration and Settlement of Pre-issuance (Trial) of Treasury Bonds” (the “Measures” for short). The issue of the “Measures” indicated that China’s treasury bonds pre-issuance business is to be released soon. Officials of the SSE and CSDCC made a detailed introduction on the background and meaning of the release of the “Measures”, as well as its major content in an interview.
Q: Please tell us about the meaning and background of launching the business of pre-issuance of treasury bonds by the SSE and CSDCC.
A: Pre-issuance of treasury bonds means the bond trading with to-be-issued book-entry treasury bonds as the target, that is, the trading between the buyer and the seller in a specified period before the official bidding and issuing of treasury bonds and with the settlement of capital and treasury bonds at the set price after the official bidding. In light of overseas experience, the pre-issuance of treasury bonds is very common in mature markets, and it is an important supporting measure to improve the market-oriented issuance mechanism of treasury bonds in the process of interest rate marketization of each country.
The business of pre-issuance of treasury bonds has the following direct effects: first, it will help to improve the price-finding function of the treasury bonds market, thus facilitating the full display of the treasury bonds market’s functions; second, underwriters of treasury bonds can sell treasury bonds in advance, which will help them to confirm the subscription intention of clients, thus enhancing the accuracy of the treasury bonds bidding and reducing the risks taken by the underwriters; third, investors can indirectly participate in the treasury bonds issuance so as to lock in investment income in advance.
In recent years, the Ministry of Finance (MOF) has actively promoted the pre-issuance of treasury bonds and improved the market-oriented issuance mechanism of treasury bonds. The SSE and CSDCC have kept close contact with relevant departments of the MOF, and they have begun to research for the pre-issuance plan of treasury bonds since the first half of last year. On March 22, 2013, the MOF, the People’s Bank of China (PBC), and the China Securities Regulatory Commission (CSRC) jointly released the “Notice on Trial Pre-issuance of Treasury Bonds”, which specified basic principles of the pre-issuance business of treasury bonds. On July 8, the MOF, the PBC, and the CSRC jointly released the “Notice on Trial Pre-issuance of 7-year Treasury Bonds”, which made clear that the 7-year treasury bonds is the first type of bonds engaged in trial pre-issuance. The “Measures”, jointly drafted by the SSE and CSDCC, has been formally released after being approved by the CSRC and the MOF, which marks that the SSE market has made preparations at the rule level, and it is ready to launch the pre-issuance business at any time.
Q: What are the major characteristics of the pre-issuance of treasury bonds launched by the SSE and CSDCC?
A: The “Notice on Trial Pre-issuance of Treasury Bonds” jointly released by the MOF, the PBC, and the CSRC has specified the basic framework of the pre-issuance business, such as time, participants, clearing, and settling principles. When designing the pre-issuance scheme, the SSE and CSDCC have widely solicited market opinions under the above-mentioned basic framework and given full play to the characteristics and advantages of the bonds market of the exchange, such as auction trading, net settlement, and T+0 intraday trading, which have all been reflected in the pre-issuance business of treasury bonds to be released soon. The SSE and CSDCC expect to establish a pre-issuing market with better liquidity and good price-finding function for benchmark treasury bonds, thus serving issuers, underwriters, and investors.
Q: What are the specific requirements for investors to access the pre-issuance of treasury bonds?
A: As the business of pre-issuance of treasury bonds adopts margin trading, it possesses characteristics of leverage trading and has relatively higher risks than the spot trading of general treasury bonds. To ensure the controllability of the trading risks of the pre-issuance of treasury bonds, the “Measures” has restricted the participants of the pre-issuance business to the following two kinds of investors: first, the securities companies, banks, fund management companies, insurance companies, and other financial institutions engaging in the SSE’s bond trading; second, other professional investors conforming to the relevant rules of the “SSE Provisional Measures for Investor Suitability Management of Bond Market”. At the same time, the “Measures” stipulates that only members of underwriter teams can conduct net selling in the pre-issuance of treasury bonds, and ordinary professional investors cannot do so, that is, they can only first buy in and then sell out. Besides, the application unit for the trading of pre-issuance of treasury bonds should be 1,000 lots (with the face value of RMB1 million) or its integral multiples. Setting such a high threshold is to ensure the stronger risk-bearing capacity of participants.
Q: In what specific ways can the participants engage in the pre-issuance of treasury bonds?
A: Market participants possessing or renting the “Participants Business Units” of the SSE can get access to the SSE’s trading system to engage in the pre-issuance of treasury bonds in the following two ways – through the system interface and through the client site. All market participants should download and install the EzSTEP order-related software from the trading-related technical support zone of the SSE's website (www.sse.com.cn), and those who need the client software can download and install the latest one released by the SSE from the SSE website. Before the formal trading, market participants should make preparations in accordance with the scheme for special test on pre-issuance of treasury bonds and the relevant technology documents and notices of tests, arrange special persons to take in charge of testing, and pass the tests according to the test scheme, as well as report the test result. Participants can consult the SSE about test matters of the pre-issuance through the phone number (021-68817667) and the e-mail (bxzheng@sse.com.cn). Other investors should entrust securities companies with participating in the trading of the pre-issuance.
Before conducting trading of the pre-issuance of treasury bonds, each settlement participant should ensure that they have opened accounts of spread margins at Shanghai Branch of CSDCC. Any failure in margins settlement due to not opening accounts for spread margins in time will be recorded and referred to in assessing settlement participants’ performance in settlement business. For more details on opening an account, please contact the Settlement Department of CSDCC Shanghai Branch. Contact person: He Zhonghui (021-38874800-8527).
Some market quotes software providers have integrated the trading quotations of treasury bonds pre-issuance into their quotation software products and investors can check the relevant market conditions of the pre-issuance of treasury bonds through such market quotes software product as the “Great Wisdom”.
Q: Are there other specific measures to control the risks of the pre-issuance business of treasury bonds?
A: Apart from investor suitability, the pre-issuance of treasury bonds will adopt the following measures to ensure that the risks are within control. First, introducing the price range control, that is, in terms of price declaration, the trading price cannot exceed RMB3 above or below the theoretically-estimated value of the very phase of treasury bonds; and in terms of yield rate declaration, the rate of return cannot exceed 75 BPs above or below the yield to maturity of the very phase of treasury bonds, which can avoid the trading of treasury bonds pre-issuance largely deviating from the reasonable standard scale. Second, setting the upper limit of market scale. The net selling volume of class-A members and class-B members of underwriter teams of treasury bonds cannot exceed by 6% and 1.5% respectively of the planned issuance amount of the very phase of treasury bonds. If the net selling balance of the market reaches 60% (the initial issuance of treasury bonds) or 100% (the continuous issuance of treasury bonds) of the planned issuance amount of the very phase of treasury bonds, the SSE can suspend the receiving of the net selling applications of the underwriting team’s members. Third, implementing the margin system. CSDCC takes the security account as the accounting unit and charges the participants for surety bond and spread margin according to the accumulative single-sided positions and the closed positions. During the trial period, the proportion of surety bond is temporarily fixed to be 10% to prevent the performance risks. Fourth, ensuring full information disclosure. During the pre-issuance of treasury bonds, the SSE will timely disclose the net selling circumstances of the pre-issuance trading of all the domestic markets at the end of each day for the convenience of market participants to control risks by themselves.
Q: Is there anything that requires special attention of the market participants in terms of the clearing and settlement of the pre-issuance of treasury bonds?
A: CSDCC implements the netting settlement system based on real bond settlement in the pre-issuance trading of treasury bonds. During the pre-issuance trading period, CSDCC will conduct clearing of treasury bonds for the trading of the pre-issuance every day but will not carry out capital clearing. On the treasury bonds bidding day, CSDCC, as a common counter party, will provide the multilateral netting settlement service based on real bond settlement for the trading of the pre-issuance.
If members of the underwriting team of treasury bonds achieve net selling in the pre-issuance of treasury bonds but have no enough treasury bonds for delivery due to the insufficient final bidding amount, the spread will be settled by cash. Besides, members of the underwriting team of treasury bonds with insufficient settlement will pay a certain amount of additional compensation to their counter parties. Judging from the opinions solicited from the markets, all market parties generally have a higher acceptance for the standard of charging 1‰ of the part not enough for settlement as the compensation for the 7-year treasury bonds. Therefore, it is planned to charge the compensation according to 1‰ of the face value of the part not enough for settlement. The SSE and CSDCC can adjust the compensation standard in accordance with the terms of different types of pre-issued treasury bonds and the market situations.
Q: When will the SSE launch the business of pre-issuance of treasury bonds?
A: According to the relevant requirements of the MOF, the PBC, and the CSRC, the 7-year treasury bonds will be the first bond type for the trial pre-issuance business. In accordance with the bond issuance plan released by the MOF at the beginning of this year, the 7-year key-period treasury bonds will be issued once a month, with the new issuance in the first month of a season and the continuous issuance in the following two months. The SSE and CSDCC plan to take the 7-year treasury to be bidden and issued on October 16, 2013 as the first type of trial bonds for the trading of the pre-issuance. That is, the pre-issuance of treasury bonds is planned to be launched on October 10, 2013.