June 12, 2018 / 11:35 AM / 8 months ago

China calls on brokers to end zero-fee bond underwriting

HONG KONG, June 12 (IFR/Reuters) - Chinese regulators have called on the country’s brokers to stop underwriting bond deals for free and warned they would probe what they considered to be “unfair practices” that risked disrupting markets.

The June 11 notice sent to securities firms by the Securities Association of China (SAC), a self-regulatory body under the China Securities Regulatory Commission (CSRC), was seen by IFR - a Thomson Reuters publication - and also reviewed by Reuters.

Deal fees have been under pressure in China and across Asia which can encourage brokers to offer less - or to work for free - to keep in with key clients and to maintain their standing in underwriting league tables.

Regulators however fear brokers who work for free might not conduct the same level of due diligence as those whose costs are at least being covered.

In the notice, the SAC said it had reviewed 697 deals conducted from October 2017 through March 2018, and found 52 of them, or 7 percent, carried no fee. A further 62 deals paid the underwriters 0.1 percent or less of the proceeds raised.

The SAC said that when brokerages are marketing bond issues, they need to be “market orientated, adhere to legal principles,” according to the notice. It added that the SAC and CSRC were highly focused on “market disrupting behaviour” and would severely punish those who engage in such behaviour.

The SAC did not immediately respond to a request for comment. Reuters also contacted the CSRC for comment.

While bond underwriting fees vary by country and by the type of deal, bankers consider a rule of thumb for Asia to be fees of 0.5 percent or less for the highest-rated borrowers and up to 2 percent for more esoteric transactions.

On average, the deals surveyed by the SAC earned brokers a fee of 0.44 percent. Chinese companies have long been considered by foreign bankers in the region to be very cost conscious when it comes to fees. The SAC said competition in mainland markets had only added to pressure on payouts for onshore deals.

The SAC, which began collecting fee data last October, said it would issue separate warnings to those securities firms which had underwritten a large number of low-fee deals.

It added that it would, when necessary, work with the CSRC to conduct on-site inspections to probe whether adequate and proper due diligence had been performed for bond issues. (Reporting by Ina Zhou of IFR, Engen Tham and Shanghai newsroom in SHANGHAI; Writing by Jennifer Hughes; Editing by Christopher Cushing and Jane Merriman)

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