Shanghai Stock Exchange Boosts ABS Market with Tri-party Repo Rules


The Shanghai Stock Exchange has introduced provisional regulations for tri-party pledge-style bond repurchase agreements, in a move that is expected to shore up the liquidity of asset-backed securities as well as the security of the exchange itself.

The new regulations permit approved financial institutions, publicly offered securities investment funds and commercial bank wealth management products to serve as parties to tri-party repo agreements.

They provide details on the use of credit bonds as collateral, as well as various discount rates for publicly offered and privately placed corporate bonds on the basis of ratings.

The rules also allow for the use of asset-backed securities as collateral, in a move that analysts expect to greatly improve the liquidity of the instruments by providing increased standardisation and convenience.

Yun Xiong, partner at Leiton Capital in Shanghai, said to Reuters that the rules will also help to improve the security of the exchange itself, given that that tri-party repo agreements are subject to far less risk than exchange-traded repos.

Exchange-traded repos leave the stock exchange exposed to default risk as the central counter-party, while with tri-party repo agreements the third party serves only as a central clearing house, with the other two parties undertaking default risk.

“More and more, SSE realises it is sitting on a volcano,” said Xiong.

SSE and the China Securities Depository and Clearing Co., Ltd. first posted a draft edition of the rules for the solicitation of public opinions in January.