China to crack down on illegal bond trading
April 30, 2013 Category Finance, Weekly
Illegal trading of bonds on the interbank market is being targeted by law enforcement authorities and financial regulators. The People’s Bank of China (PBOC) held a meeting with the heads of commercial banks to discuss the control of illegal bond transactions. Details of the meeting were not known, but it is believed that commercial banks were told to step up policing of trading activities and examine trading histories. According to bond traders, illegal transactions involving government and corporate debt at the Shanghai-based China Foreign Exchange Trade System, known as the interbank market, were rampant as unethical fund managers took advantage of regulatory loopholes to make money. In a typical case, a member of the interbank market would sell bonds to an affiliated institution at an artificially low price before the affiliate resells the bonds to another at a premium based on a fair market price. The affiliated institutions are normally run by the fund managers’ relatives or friends to help pocket illicit gains. Analysts liken the institutions to “rat-trade” accounts on the stock market, a term given to brokerage accounts opened by fund managers’ relatives which are used by the fund managers themselves to trade shares. Gong Zhenhua, Partner with the Shanghai law firm Ronghe, said that the Supreme Court might need to clarify what crimes these rogue traders have committed before the prosecutors bring lawsuits against them.
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