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How China’s new bond trading rules will shake-up PB, AM

How China’s new bond trading rules will shake-up PB, AM

Chinese authorities have published new rules to tighten bond trading activities in a bid to continue its deleveraging campaign.

Jointly issued by the country’s central bank, and banking, securities and insurance regulators, the regulation is aimed at restricting leverage in the financial system.

The new rules expect financial institutions to sign written deals when conducting bond repurchase, known as repo, or bond forward transactions.

Furthermore, financial institutions must also report their financial data to the relevant regulator if their outstanding repo and reverse repo volumes exceed a certain limit.

In the case of private banks, if the outstanding volume exceeds 100% of the net asset, the data has to be reported to the China Banking Regulatory Commission.

As for asset managers, if the outstanding volume exceeds 120% of the net assets, the information has to be reported to the China Securities Regulatory Commission.

Additionally, the rules also aim to terminate an improper practice, called “Daichi”, within the bond market. This practice is similar to repo, but the transactions are made through nominee account, which is informal and oral.

TieCheng Yang, a Beijing-based lawyer at Han Kun Law Offices, told Citywire Asia the excessive leverage and misconduct within the bond market have made the industry vulnerable and increased hidden risks.

‘The new rules aim to require all the market players to strengthen internal control and risk management, improve the internal control system related to the bond transactions, and control their leverages at a reasonable level.

‘The new rules are believed to have a big impact on securities companies and the wealth management business of banks, both of which adopted higher leverage ratios in the past,’ the head of financial services group said.

A fund house, requesting anonymity, said the new rules are in place probably to allow Chinese authorities to get a better idea on the country’s leverage situation and to clamp it down if needed.

Repo has been commonly used by banks and professional investors as a leverage tool to raise short-term capital.

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