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SHANGHAI, Dec 20 (Reuters) - China's central bank has told some of its branches to look into entrusted bond holding agreements between some commercial banks and non-financial firms, two sources with direct knowledge of the matter told Reuters on Tuesday.
The sources, who spoke on condition of anonymity, said the banks were told to fill out forms and answer queries including bond holding periods and reasons for holding those bonds.
Entrusted agreements are widely used by Chinese securities firms to obtain leverage for bond transactions in order to provide guaranteed returns they have promised investors.
Some traders said it is still not clear whether the central bank would roll out relevant policies to regulate the business.
"It is really hard to define the so-called entrusted holding agreement business," said a trader at a commercial bank. "But most people have sort of done this before."
The People's Bank of China (PBOC) did not respond to a request for comment.
Use of the loosely-regulated type of bond agreement has come to light following problems at Sealand Securities whose bond-related business is under inspection by the country's securities regulator.
Sealand Securities defaulted on a bond transaction with Bank of Langfang, based in northern Hebei province, following a recent tumble in bond prices, local media reported last week.
The next day, Sealand Securities denied there was a default, saying it had no agreement with the bank and its company seal had been forged by two former employees. Bank of Langfang, in a statement on its website, also dismissed the media reports as rumour.
China's bond market is having a bad time following the U.S. Federal Reserve's interest rate hike, and liquidity tightness has pushed the yields on Chinese treasury bonds higher.
Yields on 10-year Chinese treasury bonds were up more than 15 basis points to 3.382 percent on Tuesday afternoon, compared with the previous week's close.
The price of Chinese 10-year treasury futures for March delivery closed 0.17 percent higher on Tuesday. These hit their daily downside limit of 2 percent for the first time at one point on Dec. 15, shortly after the Fed rate hike. (Reporting by Shanghai Newsroom; Editing by Richard Borsuk)