Anonymous Bond Auctions Arrive as Defaults Rise

China has released new rules for anonymous bond auctions of defaulted and high-risk debt. It's timely because institutions do not want to trade these bonds publicly:

In its view, current institutions are reluctant to trade risky bonds in the open market. First, they are unwilling to expose themselves; secondly, large institutions in particular have concerns: considering that the market will doubt whether there are any problems with the bonds they are selling. (Whether or not there actually is a problem), and the market speculates that large institutions know bad news ahead of time so selling leads to market panic.

Reuters: China plans to introduce anonymous bond auctions system: sources

China plans to introduce an anonymous bond auction system to support transactions of high-yield, low-liquidity bonds, two sources with knowledge of the matter said.

In a notice confirmed by the sources, the China Foreign Exchange Trade System (CFETS), also known as the National Interbank Funding Center, said that the anonymous bond auction system would apply to bonds with high-yield and low-liquidity characteristics.

The rules came out today.

Sina: 债券匿名拍卖业务细则出台 利于提升违约债券流动性

According to Circular 192, the bonds applicable to the anonymous auction business should meet relevant standards for circulation in the inter-bank bond market, including but not limited to default bonds, bonds affected by default, and low-liquidity bonds such as the sub-tranche of asset-backed securities.

　　The specific auction bonds are determined by the market dismantling center's intention to pool the market, and anonymous auctions are held from time to time. Participating agencies may submit their intention to anonymously borrow bonds to the interbank lending center through e-mail or telephone.

　　On the auction day, the anonymous auction of bonds is divided into two phases: two-way quotations and centralized bidding. The duration of each phase is based on the announcement of the interbank lending center.

　　In the two-way bidding stage, transactions cannot be matched. The participating institutions fully consider the factors affecting the pricing of the underlying bonds according to their own needs, and issue a two-way quotation within a range of pricing differences, and the system displays the quotation prices in real time.

　　After the two-way bidding period is over, the trading system determines the price range during the concentrated bidding period, and the price range is located between the better bid price and the better selling price.

　　In the phase of concentrated bidding, the participating institutions may quote in the price range determined in the two-way bidding stage. The trading system calculates the unified transaction price based on the principle of price priority and time first, and uses the principle of maximum matching, and determines the buying and selling of the counterparty after blacklist filtering.

　　In terms of risk control, Circular 192 stipulates that participating organizations that have entered into transactions through anonymous auction of bonds must not conduct reverse transactions with the same counterparty directly or indirectly on the same underlying bond within 5 working days. Between parties, for the same bond, one party buys first and then sells, and the other sells first and then buys. Except when reverse trading is achieved through anonymous auctions). If there is indeed a need, it is necessary to provide the necessary explanation of the official seal to the interbank lending center.

　　A state-owned big trader told a 21st Century Business Herald reporter that under the background of increasing defaults on bonds, the document was conducive to the trading of defaulted bonds and increased bond liquidity.

　　In its view, current institutions are reluctant to trade risky bonds in the open market. First, they are unwilling to expose themselves; secondly, large institutions in particular have concerns: considering that the market will doubt whether there are any problems with the bonds they are selling. (Whether or not there actually is a problem), and the market speculates that large institutions know bad news ahead of time so selling leads to market panic.