Shenzhen Stock Exchange (SZSE) recently issued the Guideline on Risk Management over the Duration of Corporate Bonds (Exposure Draft) (hereinafter referred to as “the Guideline”) and is soliciting opinions from the public. This is an act to consolidate the risk management system of the bond market, enhance market players’ (including bond issuers and trustees’) awareness and capability of active management of bond credit risk, and protect investors’ legitimate rights and interests. In accordance with the risk-oriented systematic management principle, the Guideline defines market players’ (including bond issuers and trustees’) responsibilities of risk management during risk monitoring, screening, pre-warning, elimination and handling and primarily establishes a sustainable and normalized risk management system that is centered on bond issuers and trustees, overarches the bond duration and covers all market players.
A responsible SZSE principal explained that the Guideline mainly contains the following key points. First, to strengthen market players’ practice of risk management responsibility and define a working mechanism that each performs its duties and cooperates with division of labor. The Guideline requires that bond issuers should formulate a management system for the bond principal and interest payment, ensure repayment funds in advance, perform the obligation of information disclosure, prevent and solve bond risk events, and cooperate with bond trustees and other competent institutions to carry out the tasks on risk management. Meanwhile, bond trustees should follow the risk-oriented principle to perform tasks on risk management over the duration, such as risk monitoring, classification, screening, pre-warning, elimination and handling. Other organizations of credit enhancement and credit rating etc. should work with bond issuers and trustees in risk management. As to bond investors, they should constantly evaluate the credit risk of the invested bonds to invest reasonably and safeguard their rights. Second, the Guideline, with consideration of domestic and overseas regulatory experience in risk management, tentatively states the basic standards on the classification of bond risks and classifies corporate bonds into normal, attention-required, risky and default types as per the extent of credit risk. Bond trustees should make reasonable estimates in line with the classification standard, officially determine the bond risk level by taking into account the risk evaluation and screening results, give timely feedback to bond issuers on the risk factors that would affect principal and interest payment, and urge bond issuers to solve the credit risks. As to the attention-required bond, issuers should consider the important risk matters to develop practicable measures addressing the credit risk and implement them. In terms of the risky bond, issuers and credit enhancement organizations should work out specific and feasible credit risk resolutions and handling plans and put them into practice. Third, to establish a regular and irregular risk management report system. The Guideline stipulates that bond trustees should biannually submit a report to SZSE stating the bond risk classification within their entrusted management scope and the situation of work development on credit risk management. Also, they should submit an interim report on credit risk management with regard to the important matters in risk monitoring, screening, pre-warning, elimination and handling. In addition, in terms of the situation where a bond issuer issues multiple bonds and employs different bond trustees, the Guideline requires each trustee to put more efforts on cooperate with each other to perform their respective risk management responsibility for their entrusted bonds.
The principal also said that the Guideline is a crucial move for cooperating with CSRC’s market-oriented reform in the corporate bond market, further propelling the steady and sound development of this market and guiding issuers and intermediaries to perform their duties in their respective places. The deadline for the opinion solicitation is February 10, 2017. After that, SZSE will seriously sort out the opinions of all market players, improve relevant content in the Guideline in time and then release for implementation in accordance with procedures.
