Moody's: China draft rule for risk-control indicators are 'credit positive'

The proposed modification of the risk-control indicators of securities firms by the Chinese regulator are credit positive for the firms, as it will help address the industry's emerging risks, global credit rating agency Moody's Investors Service said in a report on Thursday.

Last Friday, the China Securities Regulatory Commission announced a draft rule to modify major risk-control indicators of the securities firms, including risk capital reserve ratio, leverage ratio, liquidity coverage ratio and net stable funding ratio.

The regulator also lowered the cap on net assets to total liabilities to 10 percent from 20 percent.

"The proposed changes are credit positive for securities companies because they will better address the industry's emerging risks, such as off-balance-sheet activities and an over-reliance on short-term liabilities, notwithstanding some relaxation in the industry's leverage limit," said Sean Hung, an analyst at Moody's Investors Service.

As a result of the new rules, securities firms will need to put up more net capital to support their business growth, Hung said.

The calculation of net capital leverage ratio will take into account securities companies' off-balance-sheet items, including financial derivatives and asset management businesses, which have expanded significantly in recent years.

The proposal will also reduce the industry's reliance on short-term funds to support their business by formalizing the use of liquidity coverage ratio and net stable funding ratio as regulatory liquidity ratios, Hung said.