Rules tighten for corporate bonds used as collateral

China plans to stop allowing lower-rated corporate bonds to be used as collateral for repurchase agreements, as the government steps up efforts to guard against systemic risks in the financial market. As of April 7, entities raising capital through the agreements – in which a borrower pledges to buy back a security in a short period of time for a higher amount – won’t be able to use newly issued corporate bonds rated below AAA or bonds sold to the public by issuers graded lower than AA as collateral. Bonds issued before April 7 won’t be affected, under the plan proposed in a meeting Tuesday by the China Securities Depository and Clearing Corp. (CSDC), a state-owned clearing company. Sources told Caixin that the change is part of an effort to further reduce leverage in the financial market and reduce systemic risks.