China Has New Rule for Trading Default Bonds
Updated: May 31, 2019
Under an arrangement by China Securities Regulatory Commission (“CSRC”), recently both Shenzhen Stock Exchange (“SZSE”) and Shanghai Stock Exchange (“SSE”) issued a similar rule (“New Rule”) to normalize trading default bonds through China’s securities clearance house CSDC (China Securities Depository and Clearing Co., Ltd.). The New Rule is to clear the regulatory barrier for default bonds to circulate in financial markets.
The New Rule includes provisions how to trade the default bonds, such as (1) bonds qualified to trade (“Specific Bonds”); (2) notification requirements before transactions; (3) formats and time to trade; (4) transferee qualification (suitability) requirements (typically for institutional investors); (5) disclosure obligations on transferrers; (6) obligations on intermediates in providing transaction services; (7) clearance procedures...etc.
Since in 2014 the first default bond came out in China’s exchange markets, China has explored solutions how to help bonds in default to circulate in the market. In 2018, blind auctions were experimented by some financial institutes and auction houses to facilitate trading default securities. The New Rule will normalize transactions for default bonds so they can be circulated in the market without regulatory barrier.