Recently, an official of the Shanghai Stock Exchange (SSE) answered the questions from the reporters on the examination of the 2018 annual reports on asset-backed securities and the related regulatory work.
1. Can you give us an overview of the disclosure of the 2018 annual reports on asset-backed securities?
In recent years, with the rapid development of the asset securitization businesses of the exchanges, the continuously enriched asset products and the gradually raised awareness of risks among the investors have created higher requirements for the quality of information disclosure for asset-backed securities. In order to adapt to the demands of the market, guide all market participants in fulfilling their own responsibilities and promote the sound development of the market, the SSE issued the "SSE Guideline for Contents and Formats of Periodical Reports on Assets-backed Securities" (the "Guidelines" for short) in May 2018, so as to standardize the work in report preparation.
This year, the annual reports were disclosed for the first time after the release of the “Guidelines”. In order to ensure the effective implementation of the rules and requirements, the SSE made arrangements in the standardization of the contents, the technology realization, the market organization and other aspects. First of all, based on the specific requirements of the “Guidelines”, the SSE optimized the annual report template in accordance with the key points of the information disclosure for the major asset classes, with different focuses adopted for different classes and key points highlighted, so as to improve the effectiveness of the disclosed. Secondly, in order to give full play to the advantages of the SSE in technology and platform, the XBRL technology was adopted for the first time in compiling the annual reports, with the aim of improving the technology-based regulation by relying on the standardized and standardized information data. Thirdly, the SSE issued notices and organized special training in advance, with special personnel assigned to answer questions on a daily basis and conduct continuous supervision, so as to strengthen the understanding and knowledge of the systems and requirements in the market and improve the standardization in disclosing the annual reports.
Judging from the overall situation, the quality of the disclosure of the 2018 annual reports was significantly improved through the joint efforts of all market participants. First of all, with higher requirements for content preparation and audit of the annual reports than before, the asset management reports of the 458 special plans on the SSE recorded a ratio of 90% for timely disclosure, compared with a ratio of 95% for the trusteeship reports, with the information disclosure obligors’ awareness of compliance further raised. Secondly, relying on the systematical standards and technological innovations, the contents of disclosure were more abundant and comprehensive, with the standardization and completeness of data significantly improved and the comprehensibility of the annual reports enhanced. Thirdly, the information disclosure obligors prepared the annual reports in strict accordance with the “Guidelines” and the guide for information disclosure for major asset classes, highlighting the characteristics of different underlying assets, and focusing more on the key contents such as asset operation, changes in the entity’s credit and business participants' contract fulfillment, with more adequate pertinence and risk disclosure achieved.
2. Judging from the contents disclosed in the annual reports, what characteristics are shown in the operation of the underlying assets?
In general, the institutions participating in the special plans were able to perform their duties according to the rules and agreements. The cash return of underlying assets was in line with expectations, the collection and transfer of the cash flow were more standardized, and the credit level of the asset-backed securities was stable on the whole. The overall operation of the major classes of underlying assets showed the following characteristics:
First of all, the credit assets were generally of high credit quality. Above all, the asset operation indicators were satisfactory, as the pooled assets such as financial leasing and consumer finance were relatively scattered in the industries, with a wide regional distribution, the dispersion of debtors was high, and the indicators such as the overdue rate and default rate were stable. Secondly, the cash flow collection was sound, as the state-owned enterprises and large-sized companies took up high proportions in the bottom debtors of the underlying assets, and their operation and financial level were stable with normal repayment; the returned funds of the supply chain products were directly collected into special accounts, and the risk isolation was at a relatively high level. In addition, the credit enhancement measures in the circular buying and transaction structure of the underlying assets operated effectively, the managers were able to effectively implement the arrangements for replacement of unqualified assets and circular buying, and the credit security of the priority securities was at a high level.
Secondly, the incomes of the operating income-based assets were stable. On the one hand, the cash flow coverage was relatively high, and the credit enhancement mechanism was operating well. For example, in the infrastructure assets of public utilities such as water supply and power supply, more than 98% of the special plans saw the cash flow remain stable, and if the income was lower than expected, the deficiency payment was also implemented effectively. On the other hand, the asset service institutions were able to perform the collection and transfer duties on the whole according to the agreement, and the problem in standardized collection was improved. The proportion of those who failed to conduct the collection on time was less than 3%, and they were able to make corrections in a timely manner after being urged.
Thirdly, the real estate assets operated well. The underlying assets were mainly located in the mature business districts of first-and-second-tier cities, and the overall operation of the properties was sound. The vacancy rate was generally low, and more than 90% of the properties saw rental income or property value remain stable or increase slightly. The specific original equity holders of the special plans that might be faced with the exercise reported stable operation and financial status on the whole, and the mechanism arrangements for the sale or mortgage of the properties provided effective guarantee for the distribution of incomes in the future. Among the expired products, the success stories of transaction, disposal and withdrawal of assets set good examples in the market.
At the same time, through the analysis of the financial and operating conditions reflected in the annual reports, the SSE also noticed that the credit status of the original equity holders or important cash flow providers of a small number of special plans was weakened, and special attention should be paid to the repayment risk.
3. In the examination of the annual reports, what issues did the SSE pay special attention to?
This year, the contents of the annual reports were further deepened and broadened. During the examination, the SSE focused on the compliance issues and risk management matters in a more comprehensive manner, and the actual implementation of the mechanism arrangements for the transaction structure was also more highlighted in the corresponding regulatory work.
First of all, the SSE focused on the operation quality of the underlying assets. Centering on the core risk indicators of different types of assets, the SSE implemented the classified inspections to thoroughly monitor the specific conditions of asset operations. For example, more attention was paid to the concentration, overdue rate and default rate of the credit assets, while in the real estate assets, the SSE paid special attention to the indicators such as the occupancy rate of the underlying property and changes in valuation. If the relevant indicators were significantly abnormal, the manager would be required to supplement the disclosure of specific reasons, the impact on the distribution of incomes, the risk countermeasures and other information.
Secondly, the SSE attached importance to the actual performance and the collection and transfer of cash flow. The SSE was highly concerned about the sharp decline in actual cash flow, irregular cash flow collection, etc., and the managers were required to especially disclose the relevant reasons, the impact on the distribution of incomes and other information. If a compliance problem was found, the asset service institution would be ordered to make corrections within a time limit, and the business participants would be urged promptly to strictly isolate the assets and prevent merged risks.
Thirdly, the SSE paid attention to the changes in the entity credit of the cash flow providers. By reviewing the information about the relevant entity’s corporate governance, debt burden and solvency, etc., and analyzing the changes in the proportions of the pool injections of important cash-flow providers, as well as the operating, financial and performance records, the SSE comprehensively monitored the impact of the credit status of specific original equity holders, core debtors and credit enhancement agencies on the special plans. If an entity's credit changed adversely, the manager would be urged to check the debt repayment risks and plan and implement the risk-management-related tasks.
Fourthly, the SSE kept a close eye on the business participants’ performance of duties and fulfillment of agreements. The SSE focused on monitoring the specific work of business participants, and paid attention to the implementation of multiple guarantee mechanisms such as transaction structure and credit enhancement, so as to improve the effectiveness of credit risk mitigation and investor protection. For example, the SSE followed the fulfillment of the obligation for asset redemption when a special plan triggered the replacement of unqualified assets, as well as the timely application for unfreezing and opening new accounts when the relevant account of a special plan was frozen.
According to the relevant issues and credit risk conditions disclosed in the annual reports, the SSE inquired urged the managers or original equity holders of 70 special plans. The disclosure of the contents supplemented to or corrected in the annual reports has also been completed on the whole. The SSE will continue to strengthen the continuous regulation and take self-regulatory measures as appropriate.
4. Regarding the daily regulation and risk management of asset-backed securities, what other work arrangements has the SSE made for the future?
After the development in recent years, with the joint participation and efforts of all parties in the market, the asset securitization business has become increasingly mature and standardized. Going forward, the SSE will focus on the following tasks to further strengthen front-line regulation and risk prevention and control, and strive to promote the development of the high-quality multi-level exchange-traded bond market. First of all, the SSE will continue to improve the information disclosure system, and release the normative documents as soon as possible such as the information disclosure guide for real estate assets and guidelines for the contents and formats of interim reports on the asset-backed securities, so as to improve the standardization of the products. Secondly, the SSE will continue to strengthen the self-regulation of intermediaries, step up regulation on the problems found in regular reports, daily regulation and risk investigations, and seriously investigate the responsibilities of the market entities and their employees who are not diligent and conscientious, so as to continuously improve the effectiveness of regulation. Thirdly, the SSE will propel regulatory cooperation and risk management, enhance information sharing and communication and coordination with local agencies of the China Securities Regulatory Commission (CSRC) and relevant departments, optimize and implement the classified management mechanism, improve risk disposal procedures, intensify monitoring and early warning and timely defuse credit risks. Fourthly, the SSE will strengthen the training in the asset securitization business, summarize and solve the common problems in business development, cement the business participants’ understanding of the rules, raise the awareness of compliance in the market, and further consolidate the market participants’ responsibilities for information disclosure and risk management.