Shanghai Stock Exchange issues new rules governing tri-party repos

The Shanghai Stock Exchange has introduced new temporary rules governing tri-party "pledge-style" bond repurchase agreements in what it says is a move to further develop China's bond market. Approved financial institutions, publicly-offered securities investment funds, and commercial banks' wealth management products may participate in the tri-party repo agreements, the Shanghai Stock Exchange (SSE) said in a statement on its website late on Tuesday.
The rules were also published by the China Securities Depository and Clearing Co Ltd (CSDC), the state-owned company that provides clearing services for the Shanghai and Shenzhen stock exchanges. They detail the use of credit bonds as collateral, including a breakdown of discount rates for publicly-offered and privately-placed corporate bonds by rating.
Under the rules, the senior tranches of asset-backed securities can also be used as collateral for the first time. The stock exchange and CSDC had posted draft rules with a call for market feedback in January.
Yun Xiong, partner at Leiton Capital in Shanghai, said the new rules would "dramatically" improve the liquidity of asset-backed securities (ABS). They would also help to reduce risk compared with exchange-traded repos, which expose the stock exchange to default risk as the central counterparty, he said.
In tri-party repo agreements, the third party is only a central clearing house, with default risk borne by the other two parties. "More and more, SSE realises it is sitting on a volcano," Xiong said. Analysts at Pengyuan Credit Rating Co cautioned in a research note that the near-term development of tri-party repos would depend on factors including market acceptance of ABS-backed products.
"In the long term, because of the improved standardisation and convenience, the introduction of tri-party repos will certainly help to improve ABS liquidity. However, in the near term it should not be over-interpreted," the analysts said.