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SZSE Officially Releases Trading Rules and Self-discipline Regulation Guidelines of Convertible Corporate Bonds to Promote High-quality Development of the Convertible Bond Market

Date: 2022-08-02

Today, SZSE officially issued the Implementation Rules of Shenzhen Stock Exchange on the Trading of Convertible Corporate Bonds (hereinafter referred to as the Trading Rules) and the Business Guidelines of Shenzhen Stock Exchange for Self-discipline Regulation of Listed Companies No. 15 – Convertible Corporate Bonds (hereinafter referred to as the Self-discipline Regulation Guidelines). It is a measure of SZSE to implement the requirements of the Measures for the Management of Convertible Corporate Bonds, further regulate relevant services concerning convertible bonds, protect investors’ rights and interests, and promote the high-quality development of the convertible bond market.

 

SZSE sought public opinions on the Trading Rules and the Self-discipline Regulation Guidelines earlier. On the whole, market participants generally agreed with the institutional framework and main contents of the foregoing rules, and put forward some specific advices and suggestions. SZSE adopted some suggestions after careful studies.

 

The Trading Rules has optimized the trading mechanism based on the characteristics of convertible bonds and strengthened transaction regulation. On the basis of supporting the reasonable pricing mechanism of convertible bonds, it has highlighted risk control, which can help prevent excess speculation and promote healthy and long-term development of the convertible bond market. Its main contents include: first, refining the price stabilization mechanism. A range of effective declared prices from a 57.3% rise to a 43.3% drop from the issue price throughout the first day of listing of convertible bonds is specified, the exiting 20% and 30% two-level intraday temporary suspension mechanism is kept, and a 20% price fluctuation limit is specified from the second day of listing. Second, strengthening regulation of abnormal transactions. The Trading Rules has laid out the situations of abnormal fluctuations and serious abnormal fluctuations in the trading of convertible bonds, and specified the types of abnormal trading behaviors of convertible bonds and relevant regulatory measures. It has made it clear that SZSE may require listed companies to issue notices on abnormal fluctuations or suspend listing for investigation, or adopt mandatory intraday suspension measures, based on the actual situation of abnormal fluctuations. Third, enhancing risk warning. Issuers are required to add a “Z” letter before their stock abbreviations on the last trading day of convertible bonds to fully warn investors of risks, thus protecting investors’ rights and interests. Fourth, connecting to bond trading rules. The Trading Rules has adjusted the literal expression of trading methods, unit of declared quantity, etc., such as changing “auction trading” to “matching transaction”, and adjusting the way for handling declaration of convertible bonds exceeding price limits from “storing it in the host computer of trading temporarily” to “invalid declaration”.

 

With information disclosure at the core, the Self-discipline Regulation Guidelines has further refined the regulations on the listing, conversion, redemption, resale, etc. of convertible bonds and information disclosure requirements based on daily regulation practices, so as to better protect investors’ rights and interests. Its main revisions include: first, including private placement convertible bonds into the scope of regulation. It has set provisions on the listing, conversion, redemption, resale, principal and interest payment, repurchase, cancelation, etc. for private placement convertible bonds. Second, enhancing information disclosure of convertible bonds. It states that companies shall disclose relevant information when it’s five trading days before the estimated day when redemption conditions or the conditions for correction of conversion prices are met, and shall review and disclose whether to exercise redemption right or requirements on correcting conversion prices when relevant conditions are met. If companies fail to disclose, it will be deemed that they do not exercise their redemption right or correct conversion prices. If a company chooses not to exercise its redemption right, it may not exercise it again in at least three months. Such requirements are designed to stabilize market expectations. Third, optimizing the redemption or resale implementation period. The interval between the day when the redemption conditions of convertible bonds are triggered and the redemption day shall be no less than 15 trading days but no more than 30 trading days, and 3 trading days shall be reserved after transaction closed for investors as conversion time, so as to help investors reduce unnecessary losses. The day when the resale conditions of convertible bonds are triggered and the first day of the declaration period shall be no more than 15 trading days, in an effort to urge companies to implement resale timely and protect investors’ resale rights. Besides, the Self-discipline Regulation Guidelines has provided corresponding institutional arrangements including strengthening short-swing trading regulation, refining intermediaries’ responsibilities, enhancing risk warning, etc. SZSE has synchronously made corresponding revisions to the business guides and announcement formats concerning convertible bonds. It has added the formats of announcements on abnormal fluctuations and serious abnormal fluctuations in the trading of convertible bonds, etc., improved the operability of convertible bond services and the pertinence and effectiveness of relevant information disclosure, and revised essential provisions of relevant risk disclosure statement to enhance disclosure of risk information.

 

To promote the implementation of the foregoing institutional arrangements, SZSE will take the following measures. First, strengthening regulation of abnormal trading behaviors. It will formulate and improve internal monitoring standards according to the Trading Rules, strengthen research and analysis of trading behaviors, and develop targeted monitoring indicators. Regarding those who trigger indicators on abnormal fluctuations or serious abnormal fluctuations, it will adopt strict regulatory measures as well as implement relevant requirements on mandatory suspension. Second, urging members to fulfill customer management responsibilities. It will urge members to strengthen front-end monitoring of transactions of convertible bonds, take relevant actions promptly when a member fails to perform duties, and will conduct an off-site or on-site inspection when necessary. Third, enhancing regulatory information release. It will promptly disclose the list of key convertible bonds being monitored via its official website, WeChat, Weibo, etc.

 

The foregoing institutional arrangements do not involve adjustment to policies for financing in the primary market, so they will not affect the financing function of the convertible bond market or reduce the service support to the real economy, especially service support for small and medium-sized listed private companies. Next, SZSE will continue to stick to the market- and law-based reform direction and follow the unified plan of CSRC. It will strengthen the foundation of rules and regulations, maintain the trading order, intensify daily regulation, and crack down on acts in violation of laws and regulations to continue to promote the high-quality development of the convertible bond market and give better play to the capability of the convertible bond market in serving the real economy.