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To improve the business of collateralized repo of bonds, approved by the China Securities Regulatory Commission (CSRC), the Shanghai Stock Exchange (SSE) issued the “Notice of Revision to Some Articles Related to Bond Trading in ‘SSE Trading Rules’ and ‘SSE Detailed Rules for Implementation of Bond Trading’” on April 14, 2017, and the new rules for the collateralized repo of bonds will officially take effect on May 22, 2017. The revision of the rules is an important move to improve the rate formation mechanism for the collateralized repo of bonds.
The adjustments in the new rules mainly involve 2 aspects: the first is revising the interest-bearing rule for the collateralized repo, as the number of the interest-bearing days is changed from the nominal days of the repo term to the actual days of the outstanding funds, so as to eliminate the drastic volatility of the repo rates caused by the factor of holidays and weekends under the rule of the number of nominal interest-bearing days, and at the same time the number of interest-bearing days in a year is shifted from 360 days to 365 days; the second is modifying the calculation method of the closing price for collateralized repo, as it is altered from the volume weighted average price of all transactions in 1 minute before the last transaction on the very day to that in 1 hour, in a bid to improve the stability of the closing prices of repos.
The implementation of the new rules will help the investors better participate in the repo market on the SSE, as it will be easier for the investors to offer prices in their repo trading, with the quotes based on the actual capital interest rates in the market, instead of the adjustments made according to the difference between the actual days of the outstanding funds and the nominal days for the repo funds; it will also help address the sharp fluctuations of the repo rates and enhance the stability of the repo rates on the SSE.
For example, let’s assume that the actual annualized interest rate of the funds is 3% and a 1-day repo will be conducted on May 25 (Thursday). The first settlement date of the funds is May 26 (Friday), the due date is May 26 (Friday), the due settlement date is May 31 (The market is closed from May 27 to 30 for the weekend and the Dragon Boat Festival holiday), the nominal number of days for the repo is 1, but the actual number of days for the outstanding funds is 5 (May 26 to 30); according to the former rules, the number of interest-bearing days is equal to the nominal days, hence 1 day, and with other price-affecting factors not taken into account, investors need to adjust the offered repo rate to 15% (3% * 5), in which case, the investors’ quotes will have much higher interest rates than the normal level in the market; but in the calculation based on the new rules, the number of interest-bearing days is equal to the actual days of outstanding funds, 5 days in this case, and the investors will only need to offer prices with the actual annualized interest rate, that is, 3%.
In another example, let’s assume that a 4-day repo will be conducted on May 26 (Friday). The first settlement date of funds is May 31 (Wednesday, the first trading day after the Dragon Boat Festival), the due date is May 31, the due settlement date of funds is June 1 (Thursday), the nominal number of repo days is 4, but the actual number of days of outstanding funds is 1; according to the former rules, the interest-bearing days is 4, and with other price-affecting factors not taken into account, investors need to adjust the offered repo rate to 0.75% (3% / 4), in which case, the investors’ quotes will have much lower interest rates than the normal level in the market; but in the calculation based on the new rules, the number of interest-bearing days is 1, and the investors will only need to offer prices with the actual annualized interest rate, which is still 3%.
Because of the extensive influence of the new rules for the collateralized repo, the SSE has organized various forms of publicity and training in the market and required its member units to make effective efforts in promotion and step up investor education so as to ensure that the investors understand the changes and impacts of the new rules and effectively protect the legitimate rights and interests of the investors.
