The China Securities Regulatory Commission has initiated the investigation of Sealand Securities for alleged bond fraud. The brokerage firm is currently embroiled in controversy related to the country's debt market.

Sealand Securities played truant on a bond deal with Bank of Langfang, which is located in Hebei Province in North China. According to local media, Sealand Securities defaulted after decline in bond prices. However, the allegation has been denied by Sealand Securities.

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The brokerage firm stated that it had no such agreement with Langfang Bank. It also said that the brokerage's seal was forged by two ex-employees of the company. 

Bank of Langfang also claimed the report to be a rumor. The scandal has brought the counter-party risk in Chinese bond market to the forefront.

Zhou Li, president at bond-focused asset manager Rationalstone Investment, said "I'm worried that the bond market has witnessed just the first wave of sell-offs."

According to a filing made by Sealand Securities to the Shenzhen Stock Exchange, the China Securities Regulatory Commission's Guangxi branch initiated the inspection at the brokerage firm's offices on Dec. 15. The brokerage firm said that it is cooperating with the authorities for proper investigation.

It is rumored that the transaction may have involved entrusted agreements, a widely prevalent practice in Chinese securities market. Under this arrangement, a third party temporarily holds bond assets. However, such deals are generally not legally binding and may allow brokerages to engage in highly leveraged transactions.

China is looking to control liquidity in the market as the third quarter showed the local economy to be stabilizing. 

TagsSealand Securities, Bank of Langfang, The China Securities Regulatory Commission