China’s Deleveraging Campaign Sets Its Sights on Bond Trading


The Chinese central government is introducing new rules to tighten trading on the bond market as part of its ongoing deleveraging campaign, according to sources speaking to Reuters.

The People’s Bank of China and the banking, securities and insurance regulators have jointly issued new rules requiring that institutions execute written deals when conducting bond repurchase or bond forward transactions.

Under the new rules financial institutions are also required to submit financial data to the authorities should their outstanding repo agreements and reverse repo volumes breach a certain threshold.

Deposit-taking institutions will need to report data should these transactions exceed 80% of net assets, while for securities firms, fund houses and futures brokerages the ceiling is set at 120%, and for insurers at 20%.

According to sources the new regulations aim to curb the leverage levels of traders, as well as crack down on deals designed to sidestep regulatory requirements.

Regulators hope that the new rules will prevent a reoccurrence of the $2.4 billion Sealand Securities bond scandal, which triggered widespread market panic towards the end of 2016.

Under the new rules it will not be possible for traders to engage in the informal “pledged financing” that Sealand Securities used to conceal its exorbitant leverage levels.

The new rules arrive just as Chinese regulators step up their ongoing deleveraging campaign, with the People’s Bank of China tightening limits on the issuance of interbank CD’s.