FOR INFORMATION Issue No: PBOC SH and SAFE Released Implementation Details and FX rules on CIBM Access for FIIs

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1 Investor Services Market Newsflash Investor Services China FOR INFORMATION Issue No: Regulatory Changes PBOC SH and SAFE Released Implementation Details and FX rules on CIBM Access for FIIs May 27, 2016 The People s Bank of China (PBOC) issued a Notice on 24 th February 2016 to further liberalize FIIs (FIIs) access to the China Interbank Bond Market (CIBM) (Please refer to our Newsflash dated 24 th February 2016 for details). PBOC Shanghai published the Implementation Details and FAQ on 27 th May 2016 to regulate FIIs registration in the CIBM. In addition, the State Administration of Foreign Exchange (SAFE) released the notice regarding Foreign Exchange requirements on FIIs CIBM investments. The key information of the Implementation Details: Eligible FIIs shall file the Registration Form and the executed bond settlement agency agreement with PBOC Shanghai via the appointed bond settlement agent. FIIs, who have already accessed CIBM, do not need to re-register with PBOC Shanghai again. PBOC Shanghai will provide Acknowledgement Letter within 20 working days upon receipt of the Registration Form. The acknowledgement is valid for three months upon issuance. FIIs, who fail to remit in 50% of its registered investment volume within 9 months upon completion of its investment registration with PBOC Shanghai, shall re-register the anticipated investment volume with PBOC Shanghai. FIIs, who need to make changes on registration information or exit the CIBM, shall submit an application to PBOC Shanghai via the bond settlement agent. FIIs can remit in/out capital in either RMB or foreign currency. There is no restriction on capital movement, except that the proportion of RMB and foreign currency shall follow relevant SAFE rules. FIIs can conduct cash bond trading in CIBM and are also allowed to participate in bond lending and derivatives trading for hedging purpose (including bond forwards, forward rate agreement, IRS, etc).

2 On top of that, offshore RMB clearing banks and offshore RMB participating banks can also trade repo. PBOC will also allow other FIIs to trade repos in due course. Each FII can only open one RMB Special Account for CIBM bond trading purpose. PBOC will strengthen daily monitoring of FIIs investment behavior and abnormal large amount RMB X-border flows. PBOC Shanghai reserves the right to supervise FIIs and bond settlement agent via face to face meeting and onsite inspection. In particular, FIIs CIBM investments shall comply with the rules and regulations; FIIs and bond settlement agents shall report significant or abnormal situation to PBOC Shanghai timely, accurately and completely. In case of breaching the rules and regulations by FIIs and the bond settlement agent when conducting business in the CIBM, PBOC Shanghai would report such cases to PBOC HQ, and may take following actions, i.e. face to face meeting, issuance of warning notice, business suspension, or enforcement on exiting CIBM depending on the seriousness of violation. The key information of the Foreign Exchange requirements in CIBM from SAFE: FIIs shall make registration in CIIS system with SAFE via the appointed bond settlement agent within three months of issuance of Acknowledgement Letter from PBOC Shanghai. FIIs shall update the registration information with SAFE if there is any change on important information such as bond settlement agent, the anticipated investment volume, etc. Where the settlement agent has changed, the new bond settlement agent shall submit the bond settlement agency agreement to and make the change registration with the in-charge local SAFE bureau of the original bond settlement agent. Where the anticipated investment volume or other required information has changed, FIIs shall make the change via the appointed bond settlement agent in CIIS system. FIIs, who need to exit CIBM, shall cancel the registration with SAFE after submitting relevant application to PBOC Shanghai via the bond settlement agent. The appointed bond settlement agent shall open a special foreign currency account for the FII based on SAFE registration certificate. The fund in the special foreign currency account can only be used by the FII for CIBM trading purpose. There is no quota limitation on individual FII level or market level. The appointed bond settlement agent shall conduct inward/outward remittance and FX for FIIs based on relevant registration certificates. No approval from SAFE is required for capital remittance/fx. The proportion of accumulative outward remittance in RMB and foreign currency shall remain consistent with that of accumulative inward remittance, with difference in proportion of +/-10%. The first outward remittance does not need to follow the above proportion requirement; however, the outward remittance in RMB or foreign currency cannot exceed 110% of the accumulative inward remittance in RMB or foreign currency.

3 QFII/RQFII shall follow applicable QFII/RQFII rules when investing in CIBM. FAQ for Registration Administration of FIIs in CIBM from PBOC: 1. How should FIIs (FIIs) handle registration? A: FIIs shall appoint a bond settlement agent to handle the registration for investments in the CIBM. To improve the administration approval method, it will be an electronic registration, i.e. online application and online submission of documents. For the registration, the bond settlement agent shall submit the application form, the Registration Form, and the bond settlement agency agreement on behalf of the FIIs. 2. How should we comprehend the bond settlement agent s responsibilities on the qualification assessment of FIIs? A: The bond settlement agent shall assess qualification of FIIs following Clause 3* of PBOC [2016] No. 3 Circular. The bond settlement agent shall develop the corresponding internal management processes and guidelines according to the three principles to perform its responsibilities in accessing the qualification of FIIs. Qualified FIIs shall execute the bond settlement agency agreement with the appointed bond settlement agent before the agency appointment can come into effect. PBOC Shanghai will be responsible to conduct in-process and post-process supervision and administration on the bond settlement agents and the FIIs. (*Clause 3: PBOC encourages FIIs to invest in the CIBM as medium and long-term investor and will conduct macro-prudential administration over the investments of FIIs. FIIs shall conduct FX and remittance in accordance with applicable foreign exchange regulations.) 3. Is there any restriction on quota and duration for FIIs investment? A: FIIs may decide the investment duration and quota for its CIBM investment; however, the anticipated investment volume and intended investment horizon shall be specified during registration. For CIBM investment using the QFII/RQFII status, given currently QFII and RQFII are subject to relevant quota approval requirement, the FIIs shall select and fill in the corresponding field in the registration form. 4. Is there any restriction on the investment products and trading tools for FIIs? A: At this stage, all FIIs can participate in cash bonds trading in the CIBM, and based on hedging need, can further trade in bond lending, bond forward, forward rate agreement, interest rate swap and etc. Offshore RMB

4 clearing banks and offshore RMB participating banks can also transact in (reverse) repo in the CIBM. Please select the corresponding fields in the Registration Form to indicate the intention to participate in the relevant transaction. 5. In what format shall the registration form and bond settlement agency agreement be submitted? A: The registration form and the bond settlement agency agreement shall be sealed / signed by the FII and the bond settlement agent, and the scanned attachment shall be uploaded to the electronic registration system. The original copy does not need to be mailed to PBOC Shanghai. 6. As of when shall the Total Assets in the registration form be? A: It shall be the latest audited figure at the time of registration. 7. Does the Investment Horizon under the Initial Investment Intention of the Registration Form refer to the investment quota utilization plan? A: The Investment Horizon refers to the duration where the institution/product intends to invest in the CIBM. 8. Does an entity have to register separately for multiple products? A: In order to clearly identify and independently handle investors assets, and also to protect investors beneficiary ownership, multiple products should register separately. 9. Is there any naming rule for unincorporated entities (products)? A: The suggested name shall be investment manager + product, also, the translation shall be limited to 30 Chinese characters. 10. What shall be filled in under the Type of Entity for Unincorporated Entities in the Registration Form? A: The types of entity include: products under management by commercial bank, insurance company, securities company, fund management company and other asset management organization, pension fund, charity fund and endowment fund, etc.

5 11. Does the Custodian for Unincorporated Entities in the Registration Form refer to offshore custodian bank or domestic custodian bank? A: It refers to the offshore custodian of the product. 12. For Unincorporated Entities, shall each product execute a bond settlement agency agreement with the bond settlement agent? A: For Unincorporated Entities, the signing party of the bond settlement agency agreement should be the investment manager of the product. 13. Shall FIIs that have already accessed the China Interbank Bond Market re-register/re-file with PBOC Shanghai? A: No, it s not required. 14. Shall a bank which has already been acting as a bond settlement agent for FIIs submit required documents to PBOC Shanghai? If yes, what is the sequence of the bank submitting filing documents from bond settlement agent perspective and submitting Registration Form on behalf of FIIs? A: Since the announcement of the Implementation Details, the bank, which acts as the bond settlement agent for FIIs for the 1 st time, shall submit required documents as per Article 5 to PBOC Shanghai. The bank may submit such documents together with the Registration Form on behalf of FIIs. 15. What are the trainings required for respective personnel who performs bond settlement agency function and custodian function? A: The respective function s personnel and head of department shall attend CIBM related training held by the National Association of Financial Market Institutional Investors (NAFMII), China Foreign Exchange Trade System (CFETS), China Securities Depository and Clearing Co., Ltd (CCDC), Shanghai Clearing House (SCH), etc. 16. How shall the bond settlement agent collect the Acknowledgement Letter from PBOC Shanghai? A: PBOC Shanghai Financial Supervisory Department would publish the e-acknowledgement Letter via the e- registration platform (i.e. each bond settlement agent is able to locate the e-acknowledgement Letter via the e- registration platform). Though the e-acknowledgement Letter is deemed valid and effective, physical copy of the Acknowledgement Letter with PBOC Shanghai s stamp will still be available.

6 17. When assisting FIIs to open RMB cash account, if the bond settlement agent needs to provide physical copy of Acknowledgement Letter to respective PBOC branch, how can this be done? A: The bond settlement agent shall print out the e-acknowledgement Letter with a serial number, sign and affix business stamp on it for external use. 18. How long is the Acknowledgement Letter valid for? A: The Acknowledgement Letter is valid for 3 months. In case of overdue, the FII shall re-register with PBOC with explanations. 19. When shall FIIs update the registration details and how? A: When there are material changes of information provided in the Registration Form, the FII shall request the bond settlement agent to update the registration details. Material changes include but not limited to: change of account name, change of bond settlement agent, when the actual investment size is greatly different from the anticipated investment volume, to revise the anticipated investment volume, etc. The updated Registration Form shall be submitted via e-registration platform, together with the application form and the bond settlement agency agreement. PBOC Shanghai will re-issue an Acknowledgement Letter if such changes are approved. 20. How long does it take for PBOC Shanghai to acknowledge the re-registration? A: PBOC Shanghai would acknowledge the re-registration within 20 working days upon receipt of completed documents. 21. What documents are required to be submitted if FIIs wish to exit CIBM? A: FIIs shall submit the market exit application via the appointed bond settlement agent. PBOC Shanghai would handle the application according to relevant rules and make public announcement afterwards. 22. Can FIIs change the bond settlement agent? A: Yes, but the FII shall make relevant filing with PBOC Shanghai for such a change. 23. What are the restrictions on fund injection and repatriation?

7 A: FIIs shall follow the respective rules published by PBOC and SAFE. 24. What type of bond account shall FIIs open? A: Please refer to the respective rules publish by CCDC and SCH. Source of Information: May 27, Impact: FIIs shall follow the Implementation Details and FX requirements for CIBM investments. Deutsche Bank, as a qualified bond settlement agent, will assist clients to access CIBM accordingly. We will continue to closely monitor the progress of market liberalization and keep clients updated. Contact Vicky Tsai Tel: vicky.tsai@db.com For more information visit Investor Services OnDemand, our web portal at: