Recently, the Shanghai Stock Exchange (SSE) and China Securities Depository and Clearing Co., Ltd. (CSDC) jointly issued the “Measures for Pilot Management of Credit Protection Instrument Business of Shanghai Stock Exchange and China Securities Depository and Clearing Co., Ltd.” (the Pilot Measures for short) upon the approval of the China Securities Regulatory Commission (CSRC). The SSE also released the “SSE Guidelines on Trading Business of Credit Protection Instrument” (the Guidelines for short) and the “SSE Guide on Trading Business of Credit Protection Instrument” (the Guide for short). The above rules shall come into force from the date of issuance.
The SSE’s credit protection instrument is an effective measure of implementing the requirements of supporting the development of private enterprises put forward by the Central Party Committee and the State Council and the arrangement for the “Implementation Scheme of Bond Financing Supporting Instrument for Private Enterprises in the Exchange-traded Market” given by the CSRC. It marks a positive exploration in the credit risk sharing mechanism of the exchange, and it will offer an effective instrument for management of credit risks and help to optimize the risk pricing mechanism of the credit bond market and to facilitate the issuance of corporate bonds and the service for the real economy. The Pilot Measures and its supporting rules will steadily propel the marketized and standard development of the credit protection instrument business, perfect the relevant rules and system, and boost the high-quality development of the exchange-traded bond market through financial products’ innovation.
The Pilot Measures and its supporting rules have made clear the major contents of the credit protection instrument business in terms of its participant management, credit protection contract and voucher business procedures, post-credit-event handling mechanism, information closure, risk control and self-discipline management. The specific aspects are as follows:
The first is making clear the types of products of the exchange-traded credit protection instrument, namely the credit protection contract and the credit protection voucher. The former is non-transferable and signed between two trading parties, while the latter is transferable and set up by the voucher establishing institutions. Only credit protection contract is available at the preliminary stage of the pilot business, and the launching of the credit protection voucher business will be further notified.
The second is implementing layer-management for participants. The participants of credit protection contract include core trading companies and other investors and those of credit protection voucher include voucher establishing institutions and other qualified investors. The core trading companies and voucher establishing institutions should be filed with the SSE in advance.
The third is making clear the scope of debts under protection at the preliminary stage of the pilot business, including corporate bonds (excluding subordinated bonds), convertible bonds, enterprise bonds and other debts recognized by the SSE that are issued in China, listed for trading or transferred on the SSE or the Shenzhen Stock Exchange (SZSE), and denominated in RMB.
The fourth is standardizing the credit protection contract and voucher business procedures. Specific stipulations have been made on the participant’s qualification and filing requirement, the elements for contract declaration, the premium payment mode, the establishment procedure and transfer way of voucher, and the notice after any credit event and the settlement procedure.
The fifth is setting up the information disclosure system and the central monitoring mechanism for the credit protection instrument and perfecting the risk control management and self-regulatory measures. The business rules have made clear the requirements on the regular information disclosure, temporary information disclosure and maturity risk alert for voucher establishing institutions to effectively protect investors’ legitimate rights and interests.
The sixth is specifying the settlement arrangement after any credit event and defining the main types of credit event and the settlement method and operation process after the credit event. Credit events mainly include bankruptcy, default of payment and debt restructuring. The applicable types of credit events are stipulated by the two trading sides.
Previously, the SSE and the SZSE, the Securities Association of China, the Asset Management Association of China and the China Futures Association have jointly released the “Master Agreement (Especially for Credit Protection Contract) on Derivatives Trading in China’s Securities and Futures Markets” and organized some institutions to carry out the pilot credit protection instrument business on private enterprises, which has promoted the bond issuance of private enterprises and achieved good results. Recently, the SSE will organize the training on credit protection instrument business to guide various market participants to better take part in credit protection instrument business, boost its sound and stable development and further improve the exchange-traded bond market’s capacity of serving the real economy.