Brokerage Barred From Issuing New Asset-Backed Funds for Six Months

A major Chinese securities brokerage has been barred from issuing new funds that invest in asset-backed securities (ABS) for six months after a regulator-backed industry association ruled the brokerage had improperly moved money in and out of the three ABS funds it manages.

Hengtai Securities Co., the country’s second-largest ABS fund manager by asset under management, was found moving 1.44 billion yuan ($213.7 million) out from the ABS funds without notifying investors, the Asset Management Association of China (AMAC) said. Although Hengtai had returned the entire amount to the funds, the brokerage violated the Securities Law, the AMAC added.

Before the AMAC handed down its ruling late Friday, Hengtai had defended the practice, saying it was done to lower the refinancing costs for ABS issuers. The ruling marked the first time a Chinese ABS fund manager has been disciplined for improper behavior.

ABS is a financial security backed by loans, leases or receivables against nonproperty assets. For companies, it’s a tool to monetize its outstanding assets quickly rather than waiting for the maturity date of the repayments. For investors, it is an alternative to investing in corporate debts.

China’s ABS market has grown quickly since the China Securities Regulatory Commission relaxed rules on securitization in 2014. The number of ABS products approved by the CSRC was up 26.4% year-on-year to 110 in the first quarter of 2017, with 168.4 billion worth of assets under management.

CSRC Vice Chairman Li Chao warned in a conference in Beijing on July 25 that the industry should be clear about potential risks hidden in ABS products. He called for heightened risk management and due diligence while investing in these products.

Separately, the CSRC also handed down a total 59.93 million yuan in fines to three individuals for insider trading of listed-company shares.

Contact reporter Leng Cheng (chengleng@caixin.com)