Disposal of default in stock-pledged repurchase transactions

The stock-pledged repurchase is a new financing method emerging in recent years. However, constant fluctuations in the stock market since 2018 have gradually exposed the risks of stock-pledged repurchase transactions.

Stock-pledged repurchases involve the repo seller (debtor) pledging its stock or other securities to the repo buyer (creditor) as collateral to raise funds. The parties agree to repay the loan and release the pledge in the future.

Stock-pledged repurchase transactions are divided into floor transactions and over-the-counter transactions. In floor transactions, traders report transaction data via the transaction system. Initial transactions, repo transactions and disposal of default involved are completed through the stock-pledged repo transaction system.

A floor transaction is a standard stock-pledged repo transaction method. An over-the-counter transaction is a fundraising service rendered by banks, trusts and other financial institutions. Involving pledge security for the loan under the principal contract, an over-the-counter transaction is a non-standard method of stock-pledged fundraising. For the purpose of this article, stock-pledged repo transactions mainly refer to floor transactions.

The following events will trigger default in stock-pledged repo transactions: (1) listing of the target securities is terminated; (2) the repo seller provides false or misleading information, or materially withholds or omits information in the process of the transaction; (3) the target securities under the account or special unit of pledge of the repo seller are frozen by a judicial authority, or subject to other compulsory measures; (4) the financial or credit status of the repo seller deteriorates, resulting in substantial impact on its repurchase capability on maturity; (5) the actual performance security proportion is lower than the minimum performance security proportion; or (6) the repo seller fails to pay the interest in the full amount on time.

In the event of the above-mentioned default circumstances, the repo buyer has the right to request the repo seller to fulfil the obligation of early repurchase, and to dispose of the target securities involving default.

DISPOSITION METHODS

When the repo seller is in default, the repo buyer may take the following actions in response:

The repo buyer (securities companies) may sell the pledged stock through the floor disposition procedures by itself. If the pledged target securities are non-restricted tradable shares and are not frozen by a judicial authority, the repo buyer may mandatorily liquidate through call auction or block trading to sell the pledged stock on the secondary market. As repo sellers of most stock-pledged repo transactions are majority shareholders of listed companies, or their persons acting in concert, the following provisions should concurrently apply to floor disposition: