Recently, the Shanghai Stock Exchange (SSE) and China Securities Depository and Clearing Co., Ltd. (CSDC) issued in the market the “Notice on the Matters Concerning Providing Transfer and Settlement Services for Specific Bonds during Listing Period” and the “Notice on the Matters Concerning Providing Transfer and Settlement Services for Specific Non-publicly Offered Bonds during Listing Period” (hereinafter collectively referred to as the Notices). An SSE official answered the questions about the relevant background and main contents of the Notices.
Q1: Can you brief us on the main background and significance of making transfer arrangements for the specific bonds?
A: In recent years, the corporate bond market on the SSE has achieved great development, with the overall operation stable and the risks controllable at present. However, a small number of risk events and default cases occurring recently showed that it is difficult for the existing trading mechanism and arrangements to meet the market participants' demand for trading, transfer and risk disposal of related bonds, which has, to some extent, led to the problems such as loss of liquidity and difficulty in risk pricing, and is not conducive to defusing and dealing with credit risks. In order to effectively meet the market demand and help defuse and deal with the credit risks, the SSE has worked with the CSDC to formulate and publish the Notices after fully studying and learning from the international market practices, make the institutional arrangements for transfer that are in line with the characteristics of specific bonds and meet the demand for market-based settlement and disposal of risks, create market conditions for all parties involved in risk management, provide a practice facility for exploring the establishment of a market-oriented and rule-based mechanism for dealing with default, and lay a solid foundation for preventing and defusing financial risks.
Q2: What are the specific bonds referred to in the Notice?
A: The specific bonds referred to in the Notices are the relevant bonds listed on the SSE but failing to meet the repayment obligations as agreed or containing high redemption risks, mainly including the bonds that have defaulted on redemption, and other related bonds issued by the issuers with bond defaults. Except the circumstances of unsuitable transfers, the specific bonds shall in principle be transferred in accordance with the relevant provisions of the Notices.
If there are the aforementioned relevant circumstances, the bond issuer or the trustee shall promptly issue an announcement to confirm the start date of the transfer and the arrangements for the transfer in accordance with the provisions of the Notices.
Q3: What are the characteristics of the transfer arrangements for the specific bonds?
A: Considering the pricing basis, transfer demand and other factors, the transfer institutional arrangements for the specific bonds are special in the following aspects: first of all, the specific bonds will have the letter “H” before their ticker symbols with the original securities codes unchanged; secondly, the transfer of the specific bonds will only be arranged on the SSE’s integrated electronic platform for fixed-income securities; thirdly, the transfer of the specific bonds is quoted at full price, the settlement in full is implemented for each transaction, and the registration and settlement institution will no longer provide the accrued interest data; fourthly, there are no price limits for the transfer of the specific bonds, and the investors can negotiate the transfer prices according to the actual situations; fifthly, the investors holding a certain specific bond in the amounts lower than the minimum amount for placing an order can sell all at a time.
Q4: Which investors can participate in transfer of specific bonds?
A: According to the relevant provisions on the investor suitability in the Notices, only qualified institutional investors who meet the requirements of the SSE’s “Measures for Administration of Investor Suitability in the Bond Market” may transfer specific bonds, and the non-qualified institutional investors who have held the specific bonds may choose to continue to hold or sell them.
Generally speaking, the investors holding the specific bonds need to be deeply involved in default treatment, and it may take a long time to defend their rights. The final actual payment is also difficult to predict. Therefore, the specific bonds are more suitable for the qualified institutional investors with higher risk appetite, stronger risk tolerance and familiarity with bond products and related legal systems as well as certain experience in dealing with bond risks, to participate in the investment.
Q5: What duties and obligations should the intermediaries perform in the transfer business of the specific bonds?
A: The securities businesses shall earnestly perform their duty of investor suitability management, ensure that the specific bond transferees meet the SSE’s requirements for investor suitability management, and make sure that the transferees sign the risk disclosure statement for transfer of the specific bonds.
The securities businesses and the trustees of the specific bonds shall offer support and assistance in the relevant processes such as the investors’ search for the counterparties, communication and negotiation for the transfer and fulfillment of the disclosure obligation, so as to make the transfer successful. The securities business agencies should also provide necessary technical support for investors to participate in the transfer of specific bonds, and especially the non-qualified institutional investors who intend to sell the specific bonds should have access to necessary services and assistance.
Q6: What are the special arrangements for the transfer of the specific bonds that have applied for selling back, or defaulted on amortization or payment of interest?
A: In selling back the bonds in default, the specific bond shares that have applied for selling back can be transferred with the separation from the bond shares that are not declared for selling back. At present, the transfer and settlement system has yet to be adjusted to achieve the above-mentioned separated transfer. Before the adjustment is completed, the specific bond shares that have been declared for selling back can be transferred after the holder applying for the cancellation of the application for selling back.
As the specific bond shares are the carriers of the rights and the underlying assets of the transfer, if the default on amortization or interest payment occurs, it may be more acceptable to the market for the transferee to take the unpaid portion and the entire equity for the portion to be repaid in the future, but the specific circumstances shall be differentiated based on the actual disposal of the risks. Therefore, the issuer or the trustee should issue an announcement to clarify the relevant matters of the rights carried by the specific bond shares before the start date of the transfer of the specific bond.
Q7: What supporting measures will the SSE mainly take in the next step?
A: In the near future, the Shanghai Stock Exchange will focus on the adjustment of the transfer mechanism for specific bonds except for special circumstances, and guide market participants in effectively making technical and business preparations according to the Notices, so as to ensure the smooth and orderly operation of the transfer business. At the same time, we will continue to advance the adjustment to the transfer system for the specific bonds, and strive to realize the separated transfer function for selling back the default bonds.
Going forward, the SSE will further strengthen the research on the system for transfer of the bonds with defaults or high risks, optimize relevant business arrangements, and continuously develop and improve the market-oriented and law-based mechanism for dealing with bond defaults.