China Halts Bond Accounts in Crackdown, Securities Journal Says

China suspended trading for bond accounts of non-financial institutions on the nation’s interbank market as authorities seek to stamp out illegal activities, the China Securities Journal reported.

The accounts will be allowed to only sell securities they hold, settle existing contracts or find new custodians, the newspaper reported today, citing a notice that the China Central Depository & Clearing Co. issued May 7 with immediate effect. Account holders must download and fill out “emergency” request forms from the clearing house to sell bond holdings or transfer to a new custodian, according to the report.

The suspension was imposed to end practices used to make personal gains through bond accounts held by non-financial institutions, the Chinese-language newspaper reported, citing unidentified bond traders. The impact on the debt market won’t be large as participants have been expecting regulatory action, according to the report.

A woman at China Central Depository & Clearing’s client service office, who declined to give her name when contacted by telephone today, said she wasn’t aware of the order.

China’s central bank met last month with participants in the $3.7 trillion interbank bond market, asking them to examine trading histories as it cracks down on illegal transactions, two people with knowledge of the matter said at the time.

Some financial institutions, seeking to move bonds off their balance sheets, have asked other institutions to hold those bonds for them over a certain period and for a specific fee, according to an April 22 China National Radio article.

Interest payments and gains from any price appreciation continue to belong to the original owner of the bond, according to the article. Because such transactions are outside of regulated markets, they open the door to abuses like insider trading and the use of client funds for trades generating personal gains, China National Radio said.

— With assistance by Dingmin Zhang

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