To standardize bond issuance conduct in the interbank bond market, safeguard market order, and promote high-quality development of the bond market, the People's Bank of China has formulated the Administrative Rules for Bond Issuance in the Interbank Bond Market (hereinafter referred to as the Rules) and released them for public comment on October 16.
The Rules apply to interest-bearing securities issued by both domestic and overseas issuers in the interbank bond market that carry an agreed schedule of principal and interest repayment.
Bond pricing is the core element of bond issuance. It determines whether the bond market can precisely channel financial resources into the real economy, and it is also an important precondition for achieving high-quality development of the bond market.
The Rules specify that bond issuance shall follow the principles of market orientation, rule of law, fairness and impartiality, and good faith. The issuance price, interest rate, and commissions and fees involved in the issuance process shall be determined in a market-oriented manner. No entity or individual may influence the fair pricing of bonds, and no one may engage in acts that violate fair competition, transfer benefits, seek improper gains, harm investor rights and interests, or disrupt market order.
The Rules comprise 28 articles and strengthen the regulation of bond issuance conduct from three dimensions: issuers, underwriters, and investors.
First, they regulate issuers' pricing conduct in issuance. Specifically, the Rules prohibit issuers from subscribing to, or subscribing in disguised form to, bonds they themselves issue, and stipulate that no person may directly or indirectly assist an issuer in subscribing to, or subscribing in disguised form to, its own bonds. They prohibit issuers from interfering with investors' subscription decisions or disrupting pricing through rebates and similar means. They clarify pricing requirements for different bond issuance methods. And they push issuers to improve the mechanism and standards for selecting underwriting institutions so as to raise the quality of bond underwriting services.
Second, they regulate underwriting institutions' underwriting conduct. The Rules prohibit low-price underwriting and stipulate that underwriting fees must not be significantly lower than a fair industry level. They prohibit advance commitments on bond bid prices or issuance prices (interest rates). They standardize practices such as firm commitment underwriting and entrusted bidding and payment. And they strengthen internal control requirements for underwriters on conflicts of interest and information barriers, as well as market-based constraints such as enhanced information disclosure.
Third, they regulate investors' subscription conduct. The Rules prohibit investors from submitting false bids, from deliberately filing a large number of subscriptions and then withdrawing them in order to disrupt bond issuance prices (interest rates) and allocations, and from bidding at prices significantly below fair market prices for the purpose of interfering with pricing. The Rules also set out explicit prohibitions on insider trading, benefit transfers, and similar conduct.
Fourth, they regulate issuance processes such as book building. The Rules require that the book-building venue be able to record the full process of all price inquiries, adjustments, and pricing decisions, and to form records that cannot be tampered with for subsequent verification.
Fifth, they strengthen supervision and management over the issuance pricing process. The Rules make clear that the People's Bank of China supervises and manages bond issuance in the interbank bond market. They establish a closed-loop management mechanism combining front-line monitoring, self-regulatory management, administrative supervision, and unified enforcement. They specify that the People's Bank of China and its branches may adopt regulatory measures such as ordering rectification and holding regulatory talks, and may impose administrative penalties on illegal and non-compliant acts in accordance with the law. They also strengthen coordination between administrative and criminal enforcement, transferring suspected criminal conduct to judicial authorities so that criminal liability is pursued in accordance with the law.
Comments