THE Shanghai Stock Exchange has introduced new temporary rules governing tri-party “pledge-style” bond repurchase agreements in what it says is a move to further develop China’s bond market.

Approved financial institutions, publicly offered securities investment funds and commercial banks’ wealth management products may participate in the tri-party repo agreements, the Shanghai Stock Exchange said in a statement late Tuesday.

The rules were also published by China Securities Depository and Clearing Co. (CSDC), the State-owned firm that provides clearing services for the Shanghai and Shenzhen stock exchanges.

They detail the use of credit bonds as collateral, including a breakdown of discount rates for publicly offered and privately placed corporate bonds by rating. Under the rules, the senior tranches of asset-backed securities can also be used as collateral for the first time.

The stock exchange and CSDC had posted draft rules with a call for market feedback in January.

Yun Xiong, partner at Leiton Capital in Shanghai, said the new rules would “dramatically” improve the liquidity of asset-backed securities (ABS).

They would also help to reduce risk compared with exchange-traded repos, which expose the stock exchange to default risk as the central counterparty, he said.

In tri-party repo agreements, the third party is only a central clearing house, with default risk borne by the other two parties.

Analysts at Pengyuan Credit Rating Co. cautioned in a research note that the near-term development of tri-party repos would depend on factors including market acceptance of ABS-backed products. (SD-Agencies)