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The volatility of pledge-style repo rates has increasingly become a market concern as turnover of repo transactions (repo) increases along with the constant expansion of the exchange bond market in recent years. In order to further enhance the interest-bearing mechanism for repo, smooth out volatility of repo rates and solve the “holiday effect” problem, Shenzhen Stock Exchange (SZSE) has recently amended the SZSE Detailed Rules for the Implementation of Bond Trading by changing the number of the interest-bearing days for the repurchase price from nominal days to the actual days of funds outstanding. The repurchase price for repos entered into before that date will still be calculated according to the former formula.
After the change, the quoted repo rate of various products will represent the average annualized rate of funds outstanding based on actual days. Meanwhile, the holiday factor will have no effect on the repo rate (for example, assuming that the prevailing market rate is 3 percent, the rate quoted by the market participant is 3 percent, and the number of actual days of funds outstanding for Thursday overnight repo is 3 days, then the repo interest is 3%×3/365.) When quoting rates, market participants will no longer need to consider the effect of the actual days of funds outstanding on the repo rate. They will need to adjust their existing rate quoting habit and quote actual annualized rates to reflect the actual rate level of the market. In response to this change, the SZSE requires the brokerage counter system to issue an alert to investors when investors quote rates and also requires the brokerage counter system and the quotation system to disclose the actual days of funds outstanding for all the repo products with repo terms of no more than 14 days.
According to an official from the SZSE, in order to further disclose changes of repurchase prices and help market participants correctly interpret the exchange repo rate, the SZSE has recently published the end-of-day weighted average repo rate, and will further publish real-time weighted average repo rate through the quotation system after the completion of technical renovation.
Assuming that 3 overnight repos are entered into at an annualized rate of 9 percent, 1 percent and 2 percent during a trading day with trading value of RMB 100 million, RMB 200 million and RMB 700 million, respectively, then the end-of-day trading value weighted average rate will be 2.5 percent [9%×1/(1+2+7)+1%×2/(1+2+7)+2%×7/(1+2+7)=2.5%]. Similarly, real-time weighted average rate will reflect the weighted average rate of all repos executed from market opening to a specified point in time during a given trading day. Market participants can check the end-of-day weighted average repo rate through the SZSE’s official website (http://www.szse.cn/main/ints/sjtj/zqzyshgjy/, or http://www.szse.cn/main/ints/深交所固定收益信息平台-数据统计).
