Brokers cite "flowing water" again: long-term subordinated debt can be included in net capital.

Source: China Bond Information Network (Hong Kong and Macao Information) Date: 20 10-09-09 Author: [Zhang Yun]

The scale of net capital has always been a threshold for securities companies to apply to the regulatory authorities for innovative business licenses, including direct investment, margin financing and stock index futures, etc. Now securities companies have gained a flood of "living water".

Yesterday, the CSRC promulgated the Regulations on Borrowing Subordinated Debt by Securities Companies (hereinafter referred to as the Regulations). Long-term subordinated debt can be included in net capital according to a certain proportion. If the maturity exceeds 5 years, 4 years, 3 years, 2 years, and 1 year, in principle, it shall be included in the net capital according to the proportion of 100%, 90%, 70%, 50% and 20% respectively. After the promulgation of the Regulations, securities companies can include long-term subordinated debts in their net capital. In other words, borrowing subordinated debt can enrich the scale of net capital.

The definition of subordinated debt in the Regulations refers to the debt borrowed by securities companies from shareholders or other qualified institutional investors with approval, and the repayment order is after ordinary debt and before equity capital of securities companies. According to the order of debt repayment: general debt >; Subordinated debt > preferred stock > common stock.

In the traditional sense, subprime bonds first occurred in banks, and banks need mixed capital instruments to share the risks of banks. The subordinated debts of banks can not be used to write off bad debts, but only to write off the losses during bank bankruptcy liquidation.

The subordinated bonds of securities companies have a similar effect. However, the Regulations also point out that the amount of long-term subordinated debt included in the net capital shall not exceed 50% of the net capital (excluding the accumulated amount of long-term subordinated debt included in the net capital).

Meanwhile, it is stipulated that securities companies are allowed to borrow subordinated bonds from each other. As a creditor, a securities company should deduct all the lent funds when calculating its own net capital. However, a securities company may not borrow subordinated debts from its actually controlled subsidiaries.

With the above provisions, securities companies can "sacrifice" their net capital scale to "help" other securities companies "meet the standards" and obtain more business licenses. As creditors, securities companies can obtain the equity of debt companies in this way, which may indicate the beginning of mutual wooing and sphere of influence division among brokers.

The Regulations also regulate the disclosure methods of subordinated debts of securities companies. "A securities company shall publicly disclose the subordinated debt borrowing on the company website within 3 working days from the date when the subordinated debt borrowing is approved."

When a listed securities company borrows and repays subordinated debts, it shall not only meet the requirements of the Regulations, but also fulfill its information disclosure obligations in accordance with the Regulations on the Administration of Information Disclosure of Listed Companies.

Looking through the annual reports of a number of listed brokers, the reporter found that some brokers listed "borrowing subordinated bonds" in the net capital calculation table, while most brokers only mentioned the means of issuing subordinated bonds in "establishing a net capital replenishment mechanism", but they rarely put them into practice.

This regulation shall be implemented as of September 1 year.