11 Jan 2016
China's decision to suspend circuit breaker reflects resultant challenges – Moody’s
FXStreet (Mumbai) - Moody's Investors Service, in its latest note published on Monday, stated that China’s decision to scrap the circuit breaker mechanism last Thursday, i.e., just four trading days after its implementation, reflected concerns over the consequent emergence of various key challenges.
The agency noted the three key challenges, “First, there was the threat of a sharp reduction in market liquidity. Once the circuit breaker was triggered, trading would stop for all stocks, including blue-chips stocks, which are the most liquid, closing down a key channel that investors could use to dispose of their shares.”
“Second, the circuit breaker challenged the risk controls of securities companies with respect to their ability to dispose of collateral and securities purchased with margin loans, in the event that borrowers failed to honor their obligations.”
“Finally, the circuit breaker in its final state could have drastically reduced market volumes as well as the brokerage commissions of securities companies. On 7 January 2016, trading volume shrank to RMB188 billion due to a shortened trading time, compared to a daily average of trillion for 2015.”
The agency noted the three key challenges, “First, there was the threat of a sharp reduction in market liquidity. Once the circuit breaker was triggered, trading would stop for all stocks, including blue-chips stocks, which are the most liquid, closing down a key channel that investors could use to dispose of their shares.”
“Second, the circuit breaker challenged the risk controls of securities companies with respect to their ability to dispose of collateral and securities purchased with margin loans, in the event that borrowers failed to honor their obligations.”
“Finally, the circuit breaker in its final state could have drastically reduced market volumes as well as the brokerage commissions of securities companies. On 7 January 2016, trading volume shrank to RMB188 billion due to a shortened trading time, compared to a daily average of trillion for 2015.”