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December 22, 2016

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Brokerage responsible for bond scandal

SEALAND Securities has accepted responsibility for a scandal after the securities regulator stepped in to investigate amid concerns over financial stability, the brokerage said yesterday.

Sealand will take responsibility for the scandal involving forged bond agreements and look into criminal liabilities of its two former employees as it defended the “trust and order of China’s bond market,” the brokerage said in a statement filed to the Shenzhen Stock Exchange.

Two of the brokerage’s former employees were alleged to have signed unauthorized bond transaction agreements with Hebei-based Bank of Langfang by forging the brokerage’s seal. The bond defaulted after a recent tumble in bond prices, local media said last week.

The China Securities Regulatory Commission gathered over 22 involved institutions for negotiations on Tuesday night, 21st Century Business Herald reported, adding that the amount involved in the scandal was around 20 billion yuan (US$2.9 billion) and the floating loss on the brokerage’s books stood at 1 billion yuan.

Some participants at the talks questioned if there was a need for the two former employees to forge the seal since Sealand is the final recipient when the bond matured.

But the meeting agreed to a consensus of risk sharing amid pressure from the CSRC to “maintain stability of the bond market,” the newspaper cited participants as saying.

Similar practices, in which a brokerage or bank temporarily holds another party’s bond assets, are prevalent in the industry but they remain in a gray area, analysts said.

“This incident has clearly dampened market sentiment and broken the trust between banks and smaller non-bank financial institutions,” OCBC economist Xie Dongming wrote in a note on Monday. “It may take some time to repair the trust.”

China’s bond market calmed after Sealand’s announcement, as the country’s 10-year treasury bond futures rebounded 1.57 percent yesterday.

Chinese bond prices fell sharply last week after the US Federal Reserve raised its interest rate for the second time in a decade and indicated a faster-than-expected pace of monetary tightening.


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