Reporting Mechanism for Convertible Bonds’ Program Trading Established for Convertible Bond Market’s Trading Order

05 Feb 2021

Today, the Shanghai Stock Exchange (SSE) issued the Notice of Matters Concerning the Reporting on the Program Trading of Convertible Corporate Bonds (the “Notice” for short) to establish the reporting system for the program trading of convertible bonds. The Notice will come into effect starting on March 29, 2021.

In 2020, a small number of convertible bonds recorded active trading with significant price fluctuations, which drew much attention in the market. In the trading of active convertible bonds, the proportion of program trading continued to rise, with the market influence increasingly expanded. On December 31, 2020, the China Securities Regulatory Commission (CSRC) issued the Measures for the Administration of Convertible Corporate Bonds (the “Measures” for short).

In order to implement the requirements of the Measures, maintain the normal trading order of the convertible bond market, prevent potential trading risks, and protect legitimate rights and interests of investors, the SSE has issued the Notice to clarify the requirements for the administration of the reporting on the program trading of the convertible bonds by focusing on the establishment of the information reporting system.

First, the Notice stipulates the scope of the program trading investors, including the clients of the members, the members, and the investors such as securities investment fund management companies and insurance institutions that directly use the Participant Business Unit (PBU) in trading (hereinafter referred to as “Other Institutions”). Second, the Notice clarifies the reporting methods, as the clients of the members should report to the members to whom they entrust the trading, with the members to further report to the SSE, and the members and Other Institutions should directly report to the SSE. Third, the Notice specifies the content of the information reporting, including the information such as the investor’s identity, securities account, source of funds and trading strategies. Fourth, the Notice requires the investors to ensure that the reported information is true, accurate and complete, and the SSE can use on-site and off-site means to supervise and inspect the reporting on the program trading of convertible bonds as needed for self-regulation.

The SSE has established the reporting mechanism for the program trading of convertible bonds in accordance with the new Securities Law, with a view to enhancing market transparency and regulatory accuracy, and accumulating beneficial experience for the follow-up implementation of relevant practices market-wide. Going forward, the SSE will actively urge all market participants to strictly implement the requirements of the Notice, vigorously and steadily advance relevant tasks, maintain the trading order in the convertible bond market, and ensure the stable and healthy development of the convertible bond market.

The SSE has answered the questions on the Notice of Matters Concerning the Reporting on the Program Trading of Convertible Corporate Bonds as follows.

Q1: Can you brief us on the background and purposes of the Notice?

A: In 2020, a small number of convertible bonds recorded active trading with significant fluctuations in price, which drew much attention in the market. The regular supervision shows that the trading volume of the active convertible bonds traded by program trading investors has reached a certain proportion, with the market influence continuously increased. There are two main purposes for the issuance of the Notice. The first purpose is to implement the requirements of the new Securities Law and the Measures for the Administration of Convertible Corporate Bonds (the “Measures” for short). Article 45 of the new Securities Law stipulates that “any program trading conducted through the trading orders automatically generated or placed by the computer programs shall comply with the regulations of the State Council's securities regulatory authorities and be reported to the stock exchange.” In accordance with the requirements of the new Securities Law and the Measures, the Notice specifies the implementation methods and content of the reporting by the investors of program trading of convertible bonds. The second purpose is to further regulate the administration of the program trading of convertible bonds. As a self-regulatory institution, the exchange is responsible for maintaining the trading order in the market, ensuring stable operation of the market, guaranteeing fair trading opportunities for investors, and preventing and defusing market risks. The establishment of the program trading administration mechanism focusing on the market participant reporting system is conducive to making the management of trading in the convertible bond market more regulated and transparent.

Q2: What types of investors need to conduct the reporting?

A: There are the following types of investors who shall conduct the reporting. The first type includes the clients of the members. The second type includes the members and the investors such as securities investment fund management companies and insurance institutions that directly use the Participant Business Unit (PBU) in trading (hereinafter referred to as “Other Institutions”). The third type includes other investors specified by the SSE. Among them, the clients of the members should report to the members to whom they entrust the trading; the members and Other Institutions should directly report to the SSE.

In specific operations, the investors who meet the following circumstances should fulfill their reporting obligations: first, the investors of program trading place the orders in a highly automated manner, as the core elements of the order such as the securities code, buying or selling, order volume and order price, and the time of placing the order are all automatically determined by the computer. Second, the investors of program trading place the orders at a fast rate by placing more than 10 orders within 1 second more than 10 times in a day. Third, the investors of program trading use the self-developed or other customized software. Fourth, there are other circumstances that need to be reported as identified by the exchange. The investors who use the client software with certain automated functions provided by the members in trading and do not meet the abovementioned conditions do not need to conduct the reporting.

Q3: What are the specific requirements for the timing of the reporting in the Notice? Should the program trading of convertible bonds conducted before the implementation of the Notice be reported?

A: Before conducting the program trading for the first time, the clients of the members should report to the members to whom they entrust the trading, and the program trading can be conducted after the reporting. The members should check the information submitted by their clients and report to the SSE within 3 trading days.

If the members and Other Institutions conduct the program trading of convertible bonds for the first time, they should report to the SSE 3 trading days in advance.

The Notice will come into effect starting on March 29, 2021. The investors who have conducted the program trading of convertible bonds before the implementation of the Notice should complete the information reporting in accordance with the provisions of the Notice within 30 trading days after the implementation of the Notice.

Q4: Can you brief us on the specific content of and requirements for the reporting?

A: The reporting should contain the following content: first, the information such as the investor’s identity, securities account and member institution; second, the information such as sources of funds; third, the information such as trading strategy, software name, and developer;fourth, the contact person and contact information. The members and Other Institutions should report information about clients and their own program trading of convertible bonds through the “Members/Securities Institutions – Special Section of Members/Securities Institutions – Regulation of Members - Letters - Work Letters” on the website of the SSE.

Q5: If there is a delay in reporting or failure to report as required, what impact will it have on investors?

A: As needed for self-regulation, the SSE may adopt on-site and off-site means to supervise and inspect the reporting on the program trading of convertible bonds by the members and Other Institutions. First, for the SSE members and Other Institutions, the SSE may take self-regulatory measures in accordance with the business rules. Second, for the clients of the members, the members should perform their responsibilities for management of clients and urge their clients to conduct the reporting in accordance with the requirements of the Notice. If the clients refuse to fulfill the reporting obligation, the members may reject their entrustment of program trading according to the securities trading entrustment agency agreement.

Attachment: Notice of Matters Concerning the Reporting on the Program Trading of Convertible Corporate Bonds