When the interbank market is under strict supervisionZaccariapinballThe Dealers Association will do it again!

On April 12, the official website of the Bank of China (601988) Market Dealers Association announced that it had launched a self-discipline investigation into six small and medium-sized financial institutions suspected of illegal holding, lending bond accounts and other violations. This is also the self-regulatory investigation of such irregularities once again published since the Dealers' Association notified a number of banks of illegal brokering last year.

A Chinese reporter from securities firms noted that in February this year, when the Association of Dealers took stock of the self-discipline punishment of the interbank bond market in 2023, it was also mentioned that 13 institutions were subject to self-discipline punishment for trading irregularities, covering various types of market entities, such as city commercial banks, agricultural commercial banks, trust companies, insurance companies, futures companies, and money brokerage companies.

Researchers told Chinese reporters that illegal holding and lending of bond accounts are usually used to evade regulatory requirements, manipulate the market or transfer benefits, and there are hidden market risks such as distorted market price signals and distorted market prices. it may even face credit risk and liquidity risk, which in turn affects the stability of the entire financial system.

Six small and medium-sized financial institutions have been investigated by self-discipline

On April 12, according to the official website of the Dealers Association, recently, according to the situation reflected by market institutions, the Dealers Association found that some small and medium-sized financial institutions were suspected of illegally holding and lending bond accounts. According to the rules on self-discipline in the interbank bond market, the Dealers Association launched a self-discipline investigation on six small and medium-sized financial institutions.

The circular said that recently, market institutions have reflected that some employees of small and medium-sized financial institutions have conspired with outsiders to take advantage of the expected downward interest rate of treasury bonds to carry out proxy and benefit transfer, and other illegal acts have increased. All market members should strengthen internal control, attach great importance to the compliance inspection of bond business, and avoid such illegal and illegal acts.

The Dealers Association said that the next step will be to strengthen the analysis of bond transaction settlement chain, step up efforts to crack down on illegal transactions, strengthen market warning education, maintain market order, and promote the standardized and healthy development of the inter-bank bond market.

Illegal custody and repeated prohibitions on the transfer of benefits

In fact, as early as 2023, the Association of Dealers informed some banks of violations such as involving bond holding transactions and participating in the bond holding trading chain. Dalian Bank, Zhengzhou Bank (002936), Jiangxi Bank, Qingdao Bank (002948) were named.

Among them, Dalian Bank illegally carried out related transactions of temporarily holding bonds for others, evaded relevant regulatory regulations, and falsely increased market trading volume were seriously warned. At the same time, the bank's authority on bond-making business in the inter-bank bond market has been suspended and rectified within a time limit.

At that time, the Association of Dealers said that market makers, as the cornerstone institutions of the interbank market, played an important role in improving market liquidity and promoting price discovery, and should effectively enhance their market-making and trading capacity, strengthen internal control and risk management, and ensure compliance and sound business development.

In February this year, when the Association of Dealers reported on its website the situation of self-discipline in the interbank bond market in 2023, it also mentioned that there has been a significant increase in the number of penalties against investment trading institutions in the past year, and that violations in the interbank market have attracted attention.

Specifically, in 2023, 13 institutions were disciplined by the Dealers Association for trading irregularities. From the perspective of institutional types, the punishment targets cover various types of market entities, such as city commercial banks, agricultural commercial banks, trust companies, insurance companies, futures companies and money brokerage companies. From the perspective of violations, it covers illegal trading of bonds, illegal proxy, transfer of benefits, lack of internal control and so on.

Dealers Association self-discipline, all-round accountability, continue to improve the impact of violations, investment institutions "bond holding" case of a number of institutions and responsible persons involved in the illegal chain have been punished.

Bond trading irregularities may cause multiple risks

So what exactly are the violations mentioned this time, such as "illegal escrow" and "bond lending account"? How does a trading institution operate?

Zhou Yiqin, founder of Guanyuan Consulting, told Chinese reporters that "bond holding" means that there is a private drawer agreement between the bond holder and the agent, agreeing to transfer the bond to the agent at a certain price and then buy it back at a pre-agreed price after a certain period of time. This kind of bond "holding" behavior has a strong financial concealment.

Zhou Yiqin said the origin of this business model was that regulators had introduced rules to limit trading size and leverage in order to control risk. In order to avoid supervision, bondholders continue to enlarge the scale of assets through extracorporeal circulation and increase investment leverage, so that bond "subrogation" has become an off-balance-sheet leverage tool to escape supervision. among them, there are also some cases of benefit transfer and illegal arbitrage.

Wang Peng, a researcher at the Beijing Academy of Social Sciences, told Chinese reporters at the brokerage firm that because brokerage transactions are not based on real market supply and demand, illegal holding may lead to distortion of market price signals. If the agent fails to buy back the bonds from the principal on time, it will face credit risk; in addition, because some bonds are locked in the subrogation arrangement for a long time, this locking effect may aggravate the liquidity tension in the market when the market fluctuates.

Chinese reporters from brokerages have learned that some financial institutions have had credit risks in the brokerage incident before, resulting in serious consequences. For example, in 2016, a brokerage default event triggered a crisis of confidence in non-bank institutions, involving 28 financial institutions. Due to the collapse of the bond market, some institutions were unwilling to deliver floating losses, resulting in a technical default.

With regard to the behavior of financial institutions "lending bond accounts" mentioned by the Dealers Association, Wang Peng believes that account lenders allow other entities or individuals to use their accounts to trade bonds, which usually involves non-compliant capital flows and potential transfer of benefits.

Lending accounts may lead to an increase in non-compliant transactions, further distorting market prices, and may cause account owners to lose control over transactions in their accounts, thereby increasing credit risk. These violations may lead to broader market mistrust, which in turn affects the stability of the financial system as a whole. " Wang Peng told the Chinese reporter of the securities firm.

Why are bond trading violations hidden in gray areas repeatedly prohibited? Wang Peng analyzed that, on the one hand, financial institutions and employees may be driven by high returns, and illegal operations can bring higher profits and performance. In the fierce market competition, some financial institutions have taken illegal actions in order to gain competitive advantages; On the other hand, the internal risk control systems of some financial institutions may have flaws and cannot effectively identify and prevent violations.

Editor in charge: Li Xuefeng

Proofread: Wang Chaoquan