April 25, 2018 / 3:49 AM / a year ago

China issues new rules governing tri-party repos

SHANGHAI, April 25 (Reuters) - China has introduced new temporary rules governing tri-party “pledge-style” bond repurchase agreements in a move to further develop the country’s bond market and manage risk.

Approved financial institutions, publicly-offered securities investment funds, and commercial banks’ wealth management products may participate in the tri-party repo agreements, according to statements posted on the websites of China Securities Depository and Clearing Co Ltd (CSDC) and the Shanghai Stock Exchange (SSE) late on Tuesday.

The rules 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.

Yun Xiong, partner at Leiton Capital in Shanghai, said the new rules would “dramatically” improve the liquidity of asset-backed securities.

It 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.

CSDC is the state-owned company that provides clearing services for the Shanghai and Shenzhen stock exchanges.

Reporting by Andrew Galbraith Editing by Jacqueline Wong

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