China’s bourses have introduced new rules governing asset-backed securities that seek to strengthen information disclosures and management of credit risk.
On 11 May the Shanghai Stock Exchange unveiled the “Asset-backed Securities Credit Risk Management Guidelines (Trials)” (资产支持证券存续期信用风险管理指引（试行) ) while the Shenzhen Stock Exchange launched the “Asset-backed Securities Regular Reporting Contents and Formatting Guidelines” (资产支持证券定期报告内容与格式指引).
The new rules seek to clarify the relevant duties of market participants, strengthen information disclosures and credit management during the lifetime of products, as well as provide a foundation for the ABS market in China, which is currently undergoing a rapid growth phase.
2017 saw an over 74% increase in the ABS issuance volume, while the outstanding volume of securities reached more than 2 trillion yuan.
The surging growth in Chinese ABS has led to major problems in relation to information disclosures and credit risk, prompting the Chinese bourses to introduce the new rules.
The “Risk Management Guidelines” issued by the Shanghai Stock Exchange calls for the establishment of a comprehensive credit risk management system which is centred upon managers, while also clarifying the specific duties of managers, original equity holders, asset service companies, credit agencies and trustees.
Analysts point out that the new guidelines focus upon managers given the pivotal role they play in the asset securitisation process, from upstream enterprises to intermediary organisations to downstream investors.
The Risk Management Guidelines also introduces the measure of regulation based upon risk-categories, with asset -backed securities divided into the categories of regular (正常类), alert (关注类), risky(风险类) and defaulting (违约类).
They require that managers perform category-based management of investment plans based on risk monitoring and inspection results.
Alert category ABS, for example, refers to those that have seen one or multiple indices undergo adverse change, including underlying asset quality, cash generation capability, or transaction structure validity.
The Risk Management Guidelines require that where ABS are initially placed in the alert category, managers should undertake risk inspections at least one month prior to each income allotment date.
Following inspections managers will provide feedback to participating institutions on key risk issues that could impact income allotments to investors, and work with institutions to conform and adopt pragmatic risk handling measures.
Analysts say the introduction of the category will serve as a highly effective mechanism for providing risk warnings to investors.
Shanghai’s Risk Management Guidelines also establish a regular and irregular risk management reporting system, requiring that managers submit risk category and risk management work information to the exchange once every six months, as well as impromptu reports on disposal measures for risk category or defaulting category ABS.
Shenzhen’s Regular Reporting Guidelines focus upon requirements for the drafting and disclosure of annual asset management reports and annual trustee reports.
The Reporting Guidelines provide detailed rules on disclosure in relation to underlying assets, based on the four main asset categories of debt, infrastructure or other assets generating operating revenues; immoveable assets and their ownership rights, and other.
Receipts and payments of funds and management information are another major component of regular disclosures as required by the Guidelines.