July 8, 2019 / 11:59 AM / 10 days ago

UPDATE 1-Shanghai exchange curbs bond issuers' use of repos in structured financing - sources

(Adds more details, background)

SHANGHAI, July 8 (Reuters) - Shanghai Stock Exchange is curbing bond issuers from using repurchase agreements, or repos, in structured financing, four sources told Reuters on Monday, as regulators step up efforts to contain financial risk.

In a notice issued by the exchange, regulators also urged institutions to strengthen risk-management in the repo businesses, the sources said.

In such structured financing business, issuers use their own bonds as collateral to borrow money from the market, a practice that increases leverage and risk.

Risks in China’s banking system rose after Beijing’s surprise takeover of troubled Baoshang Bank in May which shocked the market and boosted funding costs for small financial institutions who find their creditworthiness questioned.

Financial market jitters also exposed weak risk-management at some financial institutions, which act as intermediaries for repo-based structural financing.

“After the Baoshang incident, many institutions have started cleaning up their repo business,” said a trading manager at a brokerage who declined to be identified.

Another trader said tougher regulations would make it harder for companies to issue bonds via private placements.

SSE declined to comment. (Reporting by Steven Bian, Xiaochong Zhang and David Stanway; Writing by Samuel Shen; Editing by Richard Borsuk and Nick Macfie)

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