On April 4, SZSE officially issued the Guidelines for Credit Protection Instruments of Shenzhen Stock Exchange (hereinafter referred to as the "Guidelines") and the Business Guide No. 1 - Credit Protection Contracts of Shenzhen Stock Exchange (hereinafter referred to as the "Guide"). SZSE spokesperson answered questions from reporters on issues of market concern.
Q1: What are the main content of the Guidelines and the Guide?
In January, SZSE and CSDC jointly published the Pilot Measures on Credit Protection Instruments Management of Shenzhen Stock Exchange and China Securities Depository and Clearing Corporation Limited (hereinafter referred to as the "Pilot Measures"). The Guidelines and the Guide newly issued are supporting rules of the Pilot Measures. They further clarify the management requirements on credit protection instruments and the operational procedures of credit protection contract business, thus effectively guiding investors to participate in the credit protection instrument business and effectively promoting the development of related business in a routine manner.
On the basis of the Pilot Measures, the Guidelines further clarifies and standardizes the credit protection instrument business from aspects such as participant management, credit protection contract and receipt business process, follow-up processing mechanisms of credit events, information disclosure, and risk control. The Guidelines includes the following content. First, for participant management, it clarifies the requirements for contract core traders and receipt creation institutions, the requirements for filing documents, and the filing process. Second, for the contract business, it explains the contract reporting elements, and standard protection rates etc. Third, for the receipt business, it further defines the content requirements of the receipt creation manual, receipt transfer reporting methods and elements, and the relevant arrangements for suspending and resuming the transfer. Fourth, for the settlement arrangement after credit events, it further clarifies determination method of the credit event decision date, settlement time scheduling, content requirements for the settlement notice, and determination methods for the physical settlement amount and cash settlement amount. Fifth, for information disclosure, it further defines the disclosure arrangements, disclosure requirements on receipt creation, content requirements on the annual reports from receipt creation institutions, and disclosure requirements on major receipt and contract issues. Sixth, for risk control, it explains SZSE's related arrangements for risk control and the supervision and management for market participants.
At the outset of this pilot project, only the credit protection contract business has been launched. The Guide further clarifies the operational procedures of the credit protection contract business from the operational level, including pre-business preparation, business processes, and settlement arrangements and information disclosure after credit events. Besides, a trading confirmation template and reference templates for the credit event notice, public information notice and settlement notice are included. The relevant guidelines for the credit protection receipt business will be released separately according to the time of the business launch.
Q2: Please introduce the progress of SZSE's credit protection instrument business and the role it has played.
Since last year, SZSE has earnestly implemented the instructions of the CPC Central Committee and the State Council on providing market-oriented support for private enterprises to raise funds through issuing bonds. We actively promote the credit protection instrument business pilot and issue support tools for private enterprises' bond financing in accordance with the CSRC's arrangements in the Implementation Plan for Support Tools of Private Enterprises' Bond Financing in the Exchange Markets. In the early state of the pilot, the form of credit protection contracts is adopted, with all the reference entities being private enterprises. The contracts and the reference entities' debts are issued simultaneously, which has improved investor activeness in subscription, lowered the financing cost of private enterprises, and delivered positive results. By far, there are 16 closed deals of credit protect contracts in the SZSE market, with the contract scale totaling CNY180 million, which activates a debt financing scale of CNY2.2 billion for private enterprises.
Recently, SZSE introduced the first credit protection contract based on asset-backed securities. On March 15, 2019, JD.com launched on SZSE the "JDD - CITIC Securities No. 7 JD Baitaio Accounts Receivable Creditors' Rights Asset-backed Special Plan" whose issuing scale amounts to CNY1.5 billion (of which the intergrade scales CNY60 million). By selling credit protection contracts to some intergrade investors, CITIC Securities has enhanced such investors' subscription confidence, which boosts the successful launch of the asset-backed special plan.
Q3. Which investors are entitled to participate in the SZSE credit protection contracts?
SZSE applies the investor suitability management measures to the contracting market players and implements layered management. The standard of investor suitability of both contracting trading parties is the same as that of investors of protected debts of entities provided for in the SZSE Bond Market Investor Suitability Management Measures.
As per the layered management standard, contracting market players are categorized as key dealers and other market players. Key dealers could enter into contract with all investors, while other market players could only contract with key dealers. A market player need to satisfy certain conditions and file an application at SZSE before becoming a key dealer. For securities companies with derivatives business qualifications authorized by CSRC, SZSE shall directly approve their application provided that their application documents are complete.
Q4. What are the issues to pay attention to if a market player wants to participate in the credit protection contracts?
First, a market player need to conduct the business in accordance with laws and regulations, use a standard agreement template, and comply with the requirements on risk control. Both contracting counterparties may make a supplementary agreement to the transaction confirmation letter and make additional statement and explanation in the supplementary terms, subject to laws and administrative regulations, departmental regulations, standardization provisions, and SZSE business rules. Changes directly made to the transaction confirmation letter are not allowed.
Second, a market player need to file for record to the SZSE as required in different stages. At the initial stage, the transaction is conducted off-line. After both parties sign a transaction confirmation letter off-line, the key dealer should tender the confirmation letter to SZSE prior to 12:00 on the next trading day after the letter is agreed upon. Besides, in case of early termination of the contract, any credit events, major events or defaults, the contracting market player also need to file for record as required.
Third, a market player need to comply with the requirements on player management. A market player should meet relevant requirements on investor suitability management, and tender an application to SZSE before becoming a key dealer. Registered key dealers who no longer satisfy relevant conditions shall stop relevant business as a key dealer and inform SZSE of the same. A market player who no longer meet the requirements on investor suitability are prohibited from conducting new transactions, but is allow to perform relevant obligations under existing contracts.