To promote the development of the bond market and increase the liquidity of various bonds and asset backed securities (ABS), the Shanghai Stock Exchange (SSE) officially releases the “SSE Provisional Measures on Trading of Collateralized Agreed Repo of Bonds” and relevant guidelines today (February 16), marking the formal launch of collateralized agreed repo of bonds.
An SSE official introduces that the SSE’s existing collateralized repo of bonds adopts the trading settlement mechanism of auction and guaranteed delivery, and takes the standard bond system for accounting of the value of pledged bonds, which has provided the market with an effective liquidity management instrument. However, some bonds and ABSs can only be engaged in spot trading and cannot go through repo financing. Agreed repo is a helpful supplement to the SSE’s current collateralized repo of bonds, which can provide various bonds with more flexible repo trading and settlement mechanism, help to expand the investment group of corporate bonds and asset securitization products, and enhance the liquidity of the secondary market.
Agreed repo is a standard product of the exchange-traded market and a kind of collateralized repo traded between trading parties through independent negotiation. Its major systematical arrangements and features are as follow:
The first is the investor suitability management system. The participants of agreed repo should be eligible and qualified investors, and they should sign the master repo agreement before engaging in the business. In addition, brokerage clients of securities companies should sign the risk disclosure statement. At the beginning of the business, the financing party is temporarily limited to financial institutions and the wealth management products issued by them. Other qualified investors can only lend out money, with the scope of the financing party to be adjusted later according to their business situation.
The second is the trading time. The application time for agreed repo is from 09:30 to 11:30 and from 13:00 to 15:15 every trading day. The extension of the trading time to 15:15 can leave room in advance for investors’ demands for after-hours trading and position management.
The third is the trading settlement method. The pledged bonds for agreed repo include various bonds, ABSs, and other fixed income products traded or transferred on the SSE. The type, conversion ratio, repo time limit, interest rate, and other trading elements and methods of the pledged bonds for repo are decided by the trading parities through independent negotiation. But the repo term cannot exceed 365 days. Once the agreed repo is concluded, China Securities Depository & Clearing Corp., Ltd. (CSDC) will provide real-time non-guaranteed delivery service for each order.
The fourth is the duration and expiration management. Agreed repo offers functions of changing pledged bonds and continuing after expiration. During the duration for repo, both parties can change the pledged bonds or terminate them in advance through negotiation. When the repo expires, the sell repo party can choose to settle after expiration or to continue after expiration. In the case of continuing after expiration, netting settlement can be conducted for the receivable fund for continuing and the payable fund for expiration of the sell repo party, thus enhancing the fund use efficiency.
The fifth is the risk control and default disposal. The disposal for repo default is mainly decided by market participants through independent negotiation. If an agreement on pledged bonds disposal has been made between the trading parties, CSDC will provide a quick disposal channel, disposing of the pledged bonds by either canceling the registration of pledge or non-traded transferring to the observant party. The SSE will strengthen self-regulation over malicious default behaviors.
An SSE official says that the launch of agreed repo will help to increase the liquidity of the secondary bond market and promote the sound development of the corporate bonds and asset securitization market. The SSE will further improve the market infrastructure, earnestly promote innovation in trading products and trading mechanisms of bonds, strengthen the investor protection mechanism, and promote the steady development of the bond market.