Establishing Internal Quotation Restraint System And New Regulation Of China Securities Association To Curb Vicious Price War In Bond Underwriting

The chaotic situation of low price competition in corporate bond underwriting finally attracted regulatory action.

On December 25, China Securities Association said that in order to further improve the internal control mechanism of corporate bond underwriting quotation, compact the management responsibility of underwriting institutions, ensure the quality of bond underwriting, and maintain the benign ecology of the industry, the association formed the "corporate bond underwriting business specification (Revised Draft)" and recently solicited opinions from the industry 。

According to the information provided by the investment banks in the industry, the "business specification" which is seeking opinions puts forward the overall requirements for the underwriters to establish the internal quotation restraint system. Among them, the internal constraint line of underwriting quotation will be determined based on the average project cost of the previous year. If the project quotation is below the internal constraint line, the underwriting institution shall state the reasons and may be subject to spot check by the Securities Association.

Reshape the market order of corporate bond underwriting

In 2020, the "cabbage price" and "floor price" of underwriting fees in the bond market will be rampant.

In April this year, Hainan Development Holding Co., Ltd. publicly selected the lead underwriter for issuing medium-term notes. Finally, CITIC Securities and industrial bank won the bid, but the underwriting rate was only 0.03 ‰, that is, 3 / 100000.

China Association of interbank market dealers then launched a self regulatory investigation.

In June, after the interbank market, the underwriting fee of corporate bond market reappeared "floor price". China Nuclear financial leasing company decided to issue no more than 2.1 billion yuan of corporate bonds. Among the eight securities companies participating in the bidding, Guotai Junan and CITIC Securities were listed as the first and second place respectively, and their underwriting rates were 0.015% of the total rate and 0.01% of the annualized rate. Based on this calculation, the two securities companies won a huge order of 2.1 billion, but they could only receive less than 300000 underwriting fees. Since then, the China Securities Association has immediately launched a self-discipline investigation on eight securities companies with low underwriting fee quotations in the process of bond issuance bidding.

"Low price competition of corporate bonds disturbs the market order, damages the legitimate rights and interests of market entities, and affects the practice quality of underwriting institutions." China Securities Association said.

Therefore, in the "business specification", the China Securities Association proposed the overall requirements for the underwriters to establish the internal quotation restraint system, and made clear the constituent elements of the internal restriction system of underwriting quotation. At the same time, it also clarifies the decision-making procedures, submission requirements and external supervision arrangements for the underwriters to implement the quotation constraint, and brings the construction and implementation of the internal restraint system of underwriting quotation into the scope of the association's self-discipline inspection.

According to the investment bank, it is specified in the "business specification" that the underwriting institution shall specify the cost accounting method of corporate bond project, the internal constraint line of underwriting quotation, the formation method of quotation, the decision-making procedure, the special approval procedure, the marking and filing method, and submit it to the Association.

Among them, the internal constraint line of underwriting quotation can be determined on the basis of the average project cost of the previous year, and the average project cost should cover the investment of the whole business process and all the amortization that should be accrued.

If the project quotation is below the internal constraint line, the underwriting institution shall perform the internal special approval procedure, and submit a special explanation to the association within 5 working days after the completion of the internal special approval procedure. The special explanation shall state the reasons why the price is lower than the internal constraint line. The association will publicize special instructions to the industry according to the situation. If the special instructions are questioned by the industry, the association will conduct spot checks on all corporate bond projects of corresponding underwriting institutions.

"In the middle of the year, after eight securities companies were investigated, the price war in the market has converged." According to a bond underwriter of a Western securities firm, the underwriting rate of corporate bonds with AAA rating in the middle of this year can be stabilized at the level of 1 / 10000. However, the underwriting rate of "AA" bonds, which are two grades lower than that of AAA grade, is at the level of three thousandths. In the second half of the year, the underwriting rate of "AAA" bonds was basically between 1 / 10000 and 5 / 10000, and "the premium rate of" AA "bonds remained unchanged.

The underwriter said that the underwriting rate of three thousandths of the "AA" corporate bonds was basically the normal price formed by cost and profit. The main issuers of "AAA" bonds are central enterprises, local state-owned enterprises and other large-scale enterprises. "This kind of large-scale issuance of bonds will generally lead to price war among the top securities companies in the industry. It is on the one hand to seek the underwriting scale, and on the other hand, to form stable cooperation with central enterprises and state-owned enterprises."

It is reported that in the future, the China Securities Association will conduct regular or irregular inspections on the Underwriters by means of on-site inspection and off-site inspection, including the binding system of underwriting quotation and the objective rationality of underwriting quotation and project cost evaluation.

Regulatory policy orientation needs to be reversed

There are different market feedbacks on whether the "business specification" issued by the China Securities Association can shake the existing price system of corporate bond underwriting.

"The price war is determined by the market, not by the failure of internal control or by the project team itself. Because after the price war, the benefits still outweigh the costs. " There are senior investment banks in Beijing said so.

Part of the corporate bond project underwriting rate is low, or because the project risk is small, the workload of securities underwriters is not big.

The above-mentioned investment bank personage points out, "a lot of large enterprises' corporate bonds are issued continuously, one period after another, and the total income is also quite a lot. There are few contents that need to be supplemented due diligence.

"Some of the large projects previously underwritten could not even afford the travel expenses, and these loss making projects would be affected by the new regulations." "Now the underwriting quotation needs to be determined on the basis of factors such as the average cost of the previous year's project, and the average project cost should cover the investment of the whole business process and all the amortization that should be accrued. There may be fewer and fewer projects that are losing money. ".

However, the underwriter also said that the price war in the corporate bond market is not only caused by the underwriting institutions, but also in the face of large enterprises such as central enterprises and local state-owned enterprises, securities companies are relatively weak and do not have enough bargaining power. "Once the price is higher, it will be on the" blacklist "in the future

Wang Jiyue, a senior investment banker, further pointed out that the policy orientation of supervision has also played a boosting role in the price war of bond underwriting.

"Regulatory policy orientation is that securities companies rank according to the underwriting amount, and scoring is also the priority of underwriting amount, and the evaluation basis is based on the underwriting scale. In the face of large-scale central enterprises and state-owned enterprises, securities companies naturally need low prices. "

He said that the price war of corporate bond underwriting is not unlimited and will only be reflected in the projects of individual issuers in most cases.

"The price war is the result of market competition and is fair. Securities companies are not only concerned about the income of specific projects, but also consider the impact on their own market position. Some projects let underwriters discount money will be done, spend hundreds of thousands to buy market position, very cost-effective Wang Jiyue said.

At present, regulation is also intended to reverse the wind. China Securities Association said that in the future, it plans to take various measures to curb low price competition by reducing the score of underwriting scale index and adding low quotation deduction index, guide the underwriting institutions to change from "quantity competition" to "quality competition", and promote the construction of a benign market competition order.

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