PRC banks should take cautious approach when trading bonds on exchanges
November 09, 2010 | BY
Janice QuListed commercial banks can now make bond transactions on domestic bourses
Commercial Chinese banks should raise their risk control capacity and be wary of underlying risks in different transactional mechanisms, say counsel
The China Securities Regulatory Commission (CSRC), People's Bank of China and the China Banking Regulatory Commission issued the Circular on Issues Relevant to Pilot Participation of Listed Commercial Banks in Bond Trading on Stock Exchanges (Zheng Jian Fa [2010] No.91) (中国证券监督管理委员会、中国人民银行、中国银行业监督管理委员会关于上市商业银行在证券交易所参与债券交易试点有关问题的通知(证监发[2010]91号) on October 27.
With this, the regulators have given the green light to listed local banks, allowing them to make bond transactions on domestic stock exchanges. The approval is expected to raise the share of direct financings and ends a 13-year restriction on banks from trading bonds on exchanges.
According to Fanny Yi, a Shanghai-based senior partner of AllBright Law Offices, the move would increase the trading volume of all types of bonds and enlarge the scale of financing. “It would also expand the channels for the utilisation of banks' funds,” she said.
“For the same type of bond products, the yield rate on the exchange bond market could be slightly higher than that on the interbank market, which could optimise asset allocation,” said Yi. She pointed out that the transaction system of the exchange market is “substantially different” from that of the interbank market.
On the stock exchange market, the China Securities Depository and Clearing Corporation (CSDCC) will be the central counterparty in bond transactions.
“The real parties of the transactions are unknown to each other, which would make it difficult for banks to judge the other party's credibility and control the capital flow,” said Yi. “Therefore, it would increase the risks associated with the transaction for the banks and require stronger risk control capability.”
In addition, the custody and settlement also differ. CSDCC uses the end-of-day net settlement method while an approach of real-time gross settlement is adopted by the China Government Securities Depository Trust & Clearing, the clearing institution of the interbank market. “Thus, banks need to provide corresponding support in terms of custody and settlement,” notes Yi.
Observers also commented that the purpose of the trial programme was to balance the country's financing structure, as the ratio of direct financing is too low. They believed the participation of commercial banks in the exchange market would expand the types of bonds and enlarge the scale of transactions. These would be helpful to improve channels for direct financing.
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