China – Trading Of CIMB Low-liquidity Bonds New Mechanism Introduced.

 

5 September, 2018

 

 

China does not currently have a specific mechanism for trading low-liquidity bonds. It is our observation that there is widespread interest on the part of institutional investors, including overseas investors, in any new mechanism that appears to be offering such opportunity. 

 

It has recently been reported that the China Foreign Exchange Trade System (the “CFETS”) will be introducing an “anonymous bond auction” mechanism, to be based on the current module of system for trading of RMB-denominated physical bonds, with the objective of improving the liquidity of low-liquidity bonds traded in the China Inter-Bank Bond Market (“CIBM”) and promoting the price discovery and transparency of such bonds. 1 

 

Moreover, according to a news story published on its WeChat public account, CFETS has already started to trial the anonymous bond auction mechanism (“Trial”) with the first auction completed on July 6, 2018. 2 Here we provide a summary of the key information that we can surmise about the Trial available from public sources.

 

I. Who can participate: Any participant in the CIBM is eligible to apply to participate into the Trial.

 

II. Bonds for auction: All low-liquidity bonds traded in CIBM, including but not limited to default bonds, bonds affected by defaults or subordinate tranches of asset-backed securities. Default bonds refers to bonds which default on interest, but that are still tradable in the CIBM.

 

III. Trading methods: Any single auction held by CFETS at one scheduled time and on one designated platform.

 

IV. Trading procedures: Four phases as follows:

 

(i) Filing Phase: Participants declare their intention and file applications for the auction of a specific bond;

 

(ii) Auction Phase: 

 

a) Participants offer two-way quotations within a certain range and the trading system displays the quotations in real time;

 

b) Following the two-way quotations phase, the trading system determines the centralized price bidding range based on the two-way quotations offered by participants. Participants can then place bids within this bidding range.

 

c) The trading system calculates the price of trading based on the principles of price priority, time priority and maximum trading volume priority. Having checked for any bidders who might be on a blacklist, the system then selects the ultimate buyer;

 

(iii)Transaction: Bilateral transaction concluded.

 

(iv)Settlement: Settlement separately completed by both parties.

 

We look forward to CFETS officially launching Anonymous Bond Auctions as soon as possible, so as to respond the needs of market. We will continue to pay close attention to any developments and share all relevant updates and advice with our clients.