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In order to implement the decision and deployment of the Party Central Committee and the State Council on supporting the development of private enterprises, and fulfill the requirements of the government work report on improving the bond financing support mechanism for private enterprises, the Shanghai Stock Exchange (SSE) has recently launched a pilot of portfolio credit protection contract (CDX) with approval of the China Securities Regulatory Commission (CSRC), with a view to supporting enterprise financing in a market-oriented manner.
The first two CDX pilot products are "CSI-SSE CDX Portfolio for Private Enterprises" and "CSI-SSE CDX Portfolio for Large Issuers". China Securities Index Co., Ltd. is the portfolio manager. The reference entity of "CSI-SSE CDX Portfolio for Private Enterprises" is a package of quality private enterprises. They are mostly large private issuers with good liquidity and high industry diversification, covering nearly 60 billion yuan of outstanding debt of private enterprises. The portfolio reflects the overall credit risk level of private enterprises on SSE, provides the market with accurate hedging tools for investment in bonds of private enterprises, and facilitates private enterprises' bond financing through credit protection. The "CSI-SSE CDX Portfolio for Large Issuers" contains 100 reference entities with high credit ratings. The bond issuance by component entities accounts for about 20% of the outstanding credit bonds on SSE, covering major industries related to the national economy and people's livelihood, such as public utilities, transportation, energy, construction, etc. The reference entities of the portfolio are highly representative and can serve as a measure of overall market risk for market participants in carrying out credit risk protection and credit risk disposal.
On July 18, the first two CDX pilot products were available for trading and pricing. On the first day of trading, market institutions such as China Merchants Securities, Huatai Securities, CITIC Securities, CITIC Construction Investment, CICC, Guotai Junan, Shenwan Hongyuan, Guangfa Securities and Mingyi Private Equity were actively involved in trading and quotations. Nine institutions completed 29 transactions, with a total nominal principal of 650 million yuan. Based on two-way quotations and transaction prices, China Securities Index Co., Ltd. developed the CDX credit curve to guide market participants' transactions and valuations.
In November 2018 and December 2019, the SSE launched the pilot of credit protection contracts and credit protection certificates, respectively. The pilot was carried out smoothly and orderly and played a positive role in supporting the financing of private enterprises. So far, 26 institutions have been listed as core dealers of SSE credit protection contracts and 21 as creators of SSE credit protection certificates. 154 credit protection contracts are reached, with a total notional principal of 8 billion yuan. 70 credit protection certificates are created, with a total notional principal of 4.3 billion yuan. Of this, 4.8 billion yuan is to create credit protection tools for private enterprises, and 25 billion yuan is to support bond financing of private enterprises.
To further enhance the ability of the SSE bond market to serve the real economy, improve the risk pricing mechanism of the credit bond market and play the role of market-oriented credit enhancement, the SSE has launched the CDX pilot under the guidance of the CSRC based on the sound operation of credit protection contracts and credit protection certificates business. CDX can offer a package of credit protection to bond issuers, including quality private enterprises, which is complementary to a single credit protection contract. CDX has the following characteristics: First, high transaction efficiency. After completing a CDX transaction, investors can realize risk protection for multiple reference entities, thus saving transaction costs. Second, good diversification effect. Since the portfolio consists of a package of reference entities, it can effectively reduce concentration and diversify risk.
Next, the SSE will fully stimulate the enthusiasm of market players under the unified leadership of CSRC, support and encourage more qualified financial institutions to participate in the business of credit protection tools, alleviate the financing difficulties of private enterprises and MSMEs in a market-oriented manner, and further enhance the ability of the SSE bond market to serve the real economy.
