SZSE has recently drafted the “1+3” bond trading rules and supporting business guidelines, and is currently seeking opinions from the market. SZSE spokesperson answered reporters’ questions on the formulation of the rules, trading optimization arrangements and next-step work arrangements that the market is concerned with.
I. Please give a brief introduction to the bond trading rules for which public opinions are solicited.
A: SZSE attaches great importance to and is continuously promoting the building of a bond market system with complete infrastructure, high market efficiency, excellent price performance and effective risk control. The bond trading rules, reflecting the faithful implementation of the requirements of higher-level laws, were drafted based on investors’ needs, the objective law of the bond market, and day-to-day regulatory practices. It aims to build a scientific, complete, transparent, efficient and easy-to-implement bond trading rules system to change the current situation that bond trading rules and stock trading rules are too overlapped and improve the basic systems of the market, thus better adapting to the high-quality development needs of the SZSE bond market.
The business rules include “one rule and three guidelines”, namely, Bond Trading Rules (Exposure Draft), Business Guidelines for Bond Trading No. 1 – Management of Bond Trading Participants (Exposure Draft), Business Guidelines for Bond Trading No. 2 – General Bond pledge-style Repurchase (Exposure Draft), and Business Guidelines for Bond Trading No. 3 – Bond Market Making (Exposure Draft). They constitute a relatively independent, parallel and complete bond rules system and architecture, making it easy for the market to understand and use.
The Bond Trading Rules is a basic business rule for bond trading on the SZSE market and provides comprehensive and systematic institutional support and basic regulations for bond trading. It is the basis for principled guidance in the preparation of specific business implementation rules. The three business guidelines are detailed supplements to the Bond Trading Rules. They have laid down comprehensive requirements on the bond trading participant system, bond market maker system, etc., and systematically organized scattered and fragmented rules on bond pledge-style repurchase, to further improve the pertinence, applicability and operability of the rules.
II. How has the Bond Trading Rules made optimized the cash bond trading mechanism?
A: Based on market needs and regulatory practices, SZSE has made the following optimization arrangements to the cash bond trading mechanism in the Bond Trading Rules:
First, enriching bond trading methods. To better meet market participants’ trading needs, the Bond Trading Rules has added trading methods of enquiry and bidding, thus providing five trading methods to the market, namely, matching, clicking, enquiring, bidding, and negotiation methods. In the meantime, we have optimized the matching, clicking and negotiation methods, by designing differentiated effective match scopes for matching trading, providing quotation receiver scope setting, full-amount transaction and trade-by-trade display functions to clicking trading, and providing the consolidated declaration function for negotiated trading, to further improve transaction efficiency.
Second, making settlement of bond transactions more flexible. To bond types that are settled by net amount, investors can choose to use the multilateral netting method or the trade-by-trade gross settlement method during their trading by clicking, enquiry, bidding, and negotiation. In the meantime, we plan to provide optional settlement cycle for trade-by-trade gross settlement, to facilitate settlement for domestic bond market interconnection and foreign institutional investors.
Third, standardizing the declaration elements for bond trading. To better connect to other market services of the same type and meet investors’ trading declaration needs, the Bond Trading Rules has adjusted the unit of the quantity of bonds declared to “face value” and specified the minimum quantity and price step under each trading method. We have increased the minimum quantity of cash bonds declared under all trading methods, except negotiated trading, to CNY 100,000 in face value, and unified the minimum price change unit under click, enquiry, bidding and negotiated trading as CNY 0.0001.
Fourth, adjusting the pricing method for bond trading. Currently, privately placed corporate bonds, publicly offered exchangeable corporate bonds and asset-backed securities are all traded at full price. To adapt to the mainstream trading practice of market investors and prevent operational risk, the Bond Trading Rules has unified the pricing method of the declared price of the foregoing bonds. Unless otherwise specified by SZSE, trading of cash bonds shall be declared using net price.
Fifth, adjusting the management method of transaction prices. To better reflect the market reference value of opening prices and closing prices, the Bond Trading Rules has included the transaction circumstance under each trading method into the calculation of relevant price, and has specified that the opening price shall be the price of the first transaction of that day and the closing price shall be the weighted average price of transactions in the one hour before the last transaction (included) before 3:30 p.m. (included) of that day.
Sixth, strengthening risk prevention and behavior supervision in bond trading. Keeping in mind the exchange’s statutory duties, we have strengthened self-disciplinary regulation of market participants and risk management of trading behaviors from the perspectives of participating entities, transaction behavior supervision, abnormal transaction behaviors and regulatory measures. We have defined key monitoring items, determination criteria of abnormal transaction behaviors and countermeasures that can be taken, and established the transaction price deviation reporting system, to maintain safe operation of the market.
III. What do the three supporting business guidelines mainly involve?
A: The three supporting business guidelines have refined management of bond trading participants, general bond pledge-style repurchase, and relevant arrangements on bond market making:
First, establishing the bond trading participant system, facilitating investors’ participation in bond trading, and strengthening echelon building of buyers in the bond market. As the bond market is becoming more open and interconnected and investor types and trading means are becoming more diversified, establishing the bond trading participant system can help not only increase the trading activity of main buyer institutions but also strengthen oversight of bond trading, thus ensuring the healthy development of the exchange bond market. The Business Guidelines for Management of Bond Trading Participants has laid down comprehensive provisions for bond trading participants. It states that SZSE members directly become bond trading participants and eligible non-member institutions can apply to be bond trading participants according to regulations. In addition, it has further refined the qualifications of bond trading participants, trading routes, transaction settlement arrangements, etc.
Second, establishing the bond market maker system, refining the price discovery function of the bond market, and increasing bond liquidity and market stability. The market maker system has advantages in transaction timeliness, block trade capability and price stability. To strengthen the construction of the secondary market and improve the trading activity of cash bonds through market making transactions, the Bond Trading Rules has introduced the bond market maker system. The Business Guidelines for Bond Market Making has laid out relevant arrangement for bond market making, set the hierarchical market maker architecture that consists of key market makers and ordinary market makers, and given detailed provisions on the market making conditions, methods, types, regulations and incentive mechanism of key market makers and ordinary market makers, to guide market makers in conducting bond market making business in an orderly manner.
Third, systematically specifying repurchase business arrangements, improving the repurchase system, and forestalling repurchase transaction settlement risk. The bond pledge-style repurchase business has been stable and active in trade since its launch, and it has become an important liquidity support mechanism in the secondary bond market of SZSE, playing a vital role in serving the real economy, reducing financing cost and strengthening the liquidity management of financial institutions. The Business Guidelines for General Bond pledge-style Repurchase has set out systematic provisions on general repurchase business. It has changed the original name of bond pledge-style repurchase to general bond pledge-style repurchase, laid down regulations for each business link including trading declaration, management of pledged bonds, pledging and discharging the pledge on bonds and risk management, and made moderate optimization on the basis of continuing the existing repurchase business model, to further optimize the arrangements for the business.
IV. Please give a brief introduction to SZSE’s next-step arrangements for promoting the implementation of the business rules for bond trading.
A: SZSE will continue to practice the principles of “system building, non-intervention, and zero tolerance”, stick to the market- and law-based reform direction, and follow the overall plan of CSRC. We will strengthen the institutional foundation, improve market efficiency, optimize services, continue to promote high-quality development of the bond market, and give better play to the role of the exchange bond market in serving the real economy.
First, optimizing and improving trading rules and arrangements. The public opinion seeking for the Bond Trading Rules and supporting guidelines will end on 21 May 2021. We will further refine the trading rules based on the feedback and opinions from market participants and make corresponding revisions to existing rules. Moreover, we will formulate the business guide for bond trading to set out business procedures and operation details.
Second, steadily advancing technical system preparations for the implementation of the rules. We have planned the establishment of the trading system synchronously. We have recently released the Notice on Making Technical Preparations for the Implementation of the Bond Trading Rules, the Guide for Changing the Technical System for Securities Traders in Cash Bond Trading Business of Shenzhen Stock Exchange and the first batch of interface documents. Subsequently, we will coordinate with market participants, meticulously plan and strictly implement relevant work plans, ensure every specific task is solidly carried out, advance preparations for technology upgrade in an orderly manner to get the system ready on time for the implementation of the rules.
Third, urging reporting of bond transaction account information. To better meet market requirements on trading efficiency and trading risk control and improve bond trading security, we have optimized and adjusted the bond transaction account system architecture. We have released relevant guide and held online business training earlier to guide the market to report information of bond transaction accounts. Later, we will continue to urge reporting of account information and provide solid basic arrangements for the optimization of the bond trading mechanism.