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As the bond market of Shenzhen Stock Exchange (SZSE) has been scaling up in recent years, the trading amount of pledge-styled repo (hereinafter referred to as “repo”) also increases and the market is paying more and more attention to the fluctuation of repo interest rate. To address the holiday effect issue, smooth the volatility of repo interest rate and further improve the repo interest rate formation mechanism, SZSE made amendments the Implementation Rules of Bond Transaction on Shenzhen Stock Exchange on April 14, 2017. The repo interest calculation method has been revised, with the interest period of repo price at maturity changed from nominal days to actual days of fund occupation. The new method will be officially implemented on May 22, 2017. For the bond repo transactions closed before that date, the repo prices are still calculated as per the original formula.
When the new method is applied, the repo quote rates of all varieties will indicate the average annual interest rate of repo funds during the actual fund occupation period, which means that the holiday factor will no longer influence the repo interest rate. When making offers, reverse repo parties do not need to consider how the actual fund occupation days will impact the repo interest rate. They, however, have to change their original way of making repo rate quotes. That is, they should make offers as per the actual annual interest rate to reflect a reasonable market rate. Otherwise, when the actual fund occupation days of a repo variety are shorter than the nominal days, the reverse repo parties who still follow the original way of quotes will have their calculated interest income at maturity cut. Meanwhile, the sell repo parties should quote and finance based on the actual annual interest rate. Or else, if still following the original way of quotes, they would face increased financing cost at maturity settlement when the actual fund occupation days of a repo variety are longer than the nominal days.
With regard to the change of interest calculation method and its influence, SZSE requires all securities traders to make sufficient publicity to investors and offer reminders in their counter systems to investors when the latter submits entrustment. Securities traders’ counter system and market information system will reveal the actual fund occupation days of repo products within 14 (included) days.
