SSE Officially Issues Detailed Rules for Trading of Convertible Corporate Bonds and Guidelines for Self-regulation to Promote High-Quality Development of Convertible Bond Market
In order to implement the requirements of the Measures for the Administration of Convertible Corporate Bonds further regulate the business activities of convertible corporate bonds (hereinafter referred to as convertible bonds) of listed companies, promote the high-quality development of the convertible bond market, and protect the legitimate rights and interests of investors, the Shanghai Stock Exchange (hereinafter referred to as the SSE) has, under the overall guidance of the China Securities Regulatory Commission (CSRC), drafted the Shanghai Stock Exchange Detailed Rules for the Implementation of Trading of Convertible Corporate Bonds (hereinafter referred to as the Detailed Trading Rules) and the Guidelines No. 12 of the Shanghai Stock Exchange for Self-regulation of Listed Companies — Convertible Corporate Bonds (hereinafter referred to as the Guidelines for Self-regulation), and solicited public opinions. Overall, the market players showed great support for the institutional framework and main content of these rules, and put forward some comments and suggestions. After careful deliberation, the SSE absorbed and adopted some suggestions and officially issued relevant rules on July 29, 2022.
In light of the characteristics of convertible bonds, the Detailed Rules for Trading optimize the trading mechanism, strengthen trading supervision, and enhance risk prevention and control of convertible bonds while providing reasonable pricing space. By preventing excessive speculation, this can promote the healthy and long-term development of the convertible bond market. Its main contents include: First, to clarify the price limits. For convertible bonds on their first day of listing, it sets up and down price limits of -43.3% to 57.3%, and implements two levels of intraday temporary suspension mechanism, namely 20% and 30%. For the next day onwards, a 20% up and down price limit is implemented. Second, to add the criteria for abnormal fluctuations and severe abnormal fluctuations. In combination with the adjustment of the price limits, it adds the criteria for abnormal fluctuations and severe abnormal fluctuations of convertible bond prices. Depending on the degree of abnormal fluctuations of convertible bonds and regulatory requirements, the SSE may request listed companies to disclose announcements on abnormal fluctuations or conduct the suspension verification. Third, to strengthen trading supervision. According to the characteristics of convertible bond trading mechanism and the need to prevent speculation, it adds the types of abnormal trading behavior and further clarifies the supervisory requirements. Fourth, to add a special mark. The "Z" mark is added before the abbreviations of a convertible bond on its last trading day to fully alert investors about the risks and effectively protect their legitimate rights and interests. Fifth, to adjust the relevant terminology according to the bond trading rules, such as changing "auction trading" to "trading through matching".
Focusing on information disclosure, the Guidelines for Self-regulation further improve the listing, conversion, redemption, sell-back and other business and information disclosure behaviors of convertible bonds. For new situations and problems that arise in practice, it regulates in a targeted and systematic manner, and protects the interests of investors through a variety of measures. Based on public consultation, the SSE absorbed and adopted suggestions such as improving the conversion price modification process to fully respond to market concerns. The main contents of the Guidelines for Self-regulation include: First, to enhance information disclosure requirements. Companies are required to make pre-disclosure 5 trading days before the conditions for redemption or conversion price modification are expected to be triggered, and hold a meeting of the Board of Directors on the same day of such triggering events to respond immediately to the issues about redemption and modification of conversion price. To clarify investors' expectations, any failure to fulfill the examination procedure or the information disclosure duty as required will be deemed as not exercising the right of redemption or not modifying the conversion price. Second, to introduce more reasonable periods for redemption and selling back. The preparation for sell-back should be no more than 15 trading days, so as to accelerate the return of investors' funds. Companies are required to allow sufficient time for investors to trade and convert after the redemption decision, and 3 trading days for investors to continue converting after the cessation of trading of convertible bonds, thus reducing unnecessary losses to investors. Moreover, the Guidelines for Self-regulation retain the original provisions on targeted convertible bonds, and make corresponding institutional arrangements to strictly supervise short-swing trading, implement the responsibility of intermediaries and strengthen risk alert. Meanwhile, the SSE has revised the format of announcements on convertible bonds on the Main Board and the STAR Market, and added new formats for announcements on abnormal fluctuations and severe abnormal fluctuations in convertible bond trading, so as to facilitate listed companies' accurate understanding and application of convertible bond business rules, prepare announcements in a standardized manner, and improve the pertinence and effectiveness of information disclosure regarding convertible bonds.
In addition, to promote the implementation of the above institutional arrangements, the SSE will recently take the following measures. First, to strengthen the supervision of abnormal trading behaviors. According to the Detailed Trading Rules, the SSE will improve internal monitoring standards will be established. It will strengthen the research and analysis of program trading behavior, examine and develop monitoring indicators for program trading. Those triggering abnormal or severely abnormal fluctuation indicators will be subject to strict regulatory measures. The requirements for mandatory suspension of trading will be implemented. Second, to implement the management responsibility of member clients. Members will be urged to strengthen monitoring and surveillance of the front end of convertible bond trading. The SSE will take timely measures against members who fail to fulfill their duties and conduct off-site or on-site inspections if necessary. Third, to strengthen the disclosure of supervisory information. The list of key convertible bonds to be monitored will be disclosed through official websites, WeChat, Weibo and other channels in a timely manner.
These institutional arrangements do not involve the adjustment of financing policies in the primary market, do not affect the normal play of the financing function of the convertible bond market, and will not weaken the service support to the real economy, especially small and medium-sized private listed companies. Next, the SSE will continue to implement the guidelines of "building the system, non-intervention, and zero tolerance", adhere to the reform in accordance with market principles and rule of law, and consolidate the institutional foundation, maintain the trading order, strengthen daily supervision and resolutely crack down on illegal activities under the unified deployment of the CSRC, so as to constantly promote the high-quality development of the convertible bond market and better play its function in serving the real economy.