Moody's Investors Service says that the decision by China's regulators to scrap the stock market's circuit breaker just four trading days after its implementation reflected concerns over the consequent emergence of various key challenges.

The authorities had introduced the circuit breaker mechanism on 1 January 2016 with the aim of curbing stock market volatility, and then suspended it as of 8 January.

The breaker suspends trading for 15 minutes if the benchmark CSI 300 Index rises or falls by 5% and for the rest of the day if it rises or falls by 7%.

Moody's conclusions were contained in a just-released special comment, "Chinese Securities Firms: China Scraps the Stock Market Circuit Breaker".

Moody's says the decision to scrap the mechanism reflected 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.

According to Moody's, there are pre-existing rules governing trading on individual stocks that are more specific than the all-or-nothing approach of the circuit breaker.

These rules include limit-up and limit-down rules which disallows stock trading at prices more than 10% above or below its previous closing price. There is also the T+1 trading rule which prevent investors from selling shares bought on the same day.

The operating environment for Chinese securities companies remains challenging but, on a more positive note, they are maintaining material collateral buffers even after the sharp market correction seen in the four trading days between 4 and 7 January.

As of 7 January 2016, the margin loans of these companies amounted to trillion, equivalent to 3.09% of the capitalization of tradable A-market shares. The average margin maintenance ratio -- the market value of cash & securities in the margin account divided by margin loans and accrued interest and expenses -- also remained high at 245%.

This situation demonstrates the industry's improved level of risk management and its resilience, following efforts by the major securities companies to strengthen their liquidity and capital positions through equity financing and bond issuance in 2015.