Applying Securities Law to interbank bonds

The Securities Law is the fundamental law governing China’s capital market, coming into force on 1 July 1999. The Securities Law was amended in late 2019, in its second overhaul since it came into force 21 years ago, marking a new chapter for China’s governance of the rule of law in its capital market.

Article 2 of the Securities Law provides that, “This law shall apply to the issuance and trading of stocks, corporate bonds, depositary receipts and other securities recognized by the State Council, in accordance with the law within the territory of the People’s Republic of China. Any matter not covered by this law shall be subject to the Company Law, and other laws and administrative regulations.” This article looks at the definition and scope of application of “securities”, but provides no clarification on the meaning of “corporate bonds”.

On 29 February 2020, the Notice on the Work Concerning Implementation of the Amended Securities Law was issued by the General Office of the State Council, stating that: “The registration-based system for public offering of corporate bonds shall be well implemented. According to the revised Securities Law, the public offering of corporate bonds shall be registered with the China Securities Regulatory Commission (CSRC) or the National Development and Reform Commission (NDRC) in accordance with the law.

“As for a corporate bond for which the CSRC is responsible for deciding its registration in accordance with the law, the stock exchange designated by the CSRC is responsible for accepting and examining its application for public offering. As for a corporate bond for which the NDRC is responsible for deciding on its registration in accordance with the law, the agency designated by the NDRC is responsible for accepting and examining its application for public offering.”

On 11 March 2020, officials from the People’s Bank of China (PBOC) and the CSRC answered reporters’ questions about the bond market supporting the development of the real economy. Their answer to the question of, “What changes have taken place in the institutional arrangements for the interbank bond market since the promulgation of the new Securities Law?” is as follows: “According to the spirit of the notice, the issuance, trading, registration, custody and settlement of financial bonds, non-financial enterprises’ debt financing instruments, etc., in the interbank bond market shall be managed by the PBOC and its designated agencies in accordance with the rules formulated pursuant to the Law on People’s Bank of China and those currently in force.”

The Securities Law provides no institutional arrangements for the interbank bond market. The notice only addresses the enterprise bonds overseen by the NDRC and corporate bonds overseen by the CSRC, excluding other types of bonds. The above-mentioned reply has basically clarified the doubts about “whether corporate bonds include those in the interbank bond market”.

At present, it is generally believed that the higher-level law applicable to the issuance of bonds, such as financial bonds and non-financial enterprises’ debt financing instruments, in the interbank bond market is the Law on People’s Bank of China, rather than the Securities Law. However, the author believes that the perception that the Securities Law is not applicable to the interbank bond market is too absolute.

According to the Opinions on Further Strengthening Law Enforcement in the Bond Market, jointly issued by the PBOC, CSRC and NDRC on 23 November 2018, the CSRC centrally carries out law enforcement in accordance with the law against illegal acts in the interbank bond market and the exchange-based bond market. Information disclosure non-compliance, insider trading, securities market manipulation, and other violations of the Securities Law in respect of corporate bonds, enterprise bonds, non-financial enterprises’ debt financing instruments, financial bonds, etc., shall be identified and subject to administrative penalties in accordance with articles 193, 202, 203, 223 and 226 of the Securities Law.

On 24 December 2019, the Supreme People’s Court, the Legislative Affairs Commission of the Standing Committee of the National People’s Congress, the Ministry of Justice, NDRC, PBOC and CSRC held a National Symposium on Court Trial of Bond Disputes. After the meeting, they issued the Minutes of National Symposium on Court Trial of Bond Disputes (Exposure Draft).

The draft pointed out that the people’s court should, in hearing cases regarding bond issuance and trading, apply the same legal standards to corporate bonds, enterprise bonds and non-financial enterprises’ debt financing instruments with the common attribute of principal repayment and interest payment in accordance with the basic principles established by laws and administrative regulations.

If the draft is formally released, in terms of administrative enforcement and judicial trial, the corporate bonds overseen by the CSRC, enterprise bonds overseen by the NDRC, and the interbank bond market will be subject to a unified responsibility system, which will provide a basis for the application of the Securities Law to legal disputes over medium-term notes (MTN), commercial papers (CP), super-short-term commercial papers (SCP) and private placement notes (PPN) in the interbank bond market.

It also means that it is not absolutely true that interbank bonds are not governed by the Securities Law in terms of law enforcement and judicial trial. Thus, it eases to some extent the law enforcement difficulties regarding, for example, interbank bond information disclosure non-compliance. On the other hand, however, checks and balances in terms of administrative law enforcement and judicial trial alone are insufficient, as the interbank bond market is managed on a self-regulatory basis.

China’s interbank debt financing instrument market has exceeded RMB11 trillion (US$1.54 trillion) in size. It is a pity in the recent amendment that the interbank bond market, as a major part of the bond market, has not been included in the Securities Law to date.

The development of the bond market cannot go without the support of the Securities Law as the basic law. The author expects that the interbank bond market will be incorporated into the Securities Law framework, and that the laws and regulations of the bond market will be integrated in the future, in a bid to establish a systematic and fully-fledged legal system for bonds.

Li Jumei is a salaried partner at Grandway Law Offices