China s Bond Market Overview May 2016

Transcription

1 China s Bond Market Overview 2015 May 2016

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3 Editor s Note Since 1981 when the issuance of treasury bonds resumed, China s bond market has developed amidst twists and turns and experienced an unusual development process. At the end of 1996, CSD (Central Securities Depository) was established, and subsequently the bond market entered a rapid development period. The market size was rapidly enlarged; market innovations successively emerged; the market entities were diversified with each passing day; the market became increasingly active; and system frameworks were gradually improved. By the end of 2015, the annual issuance amount in China s bond market has been up to RMB trillion Yuan, and the outstanding amount of bonds has exceeded RMB44 trillion Yuan. The bond market has become more and more important. The resolution of the 3 rd Plenary Session of the 18 th Central Committee of the CPC requires that we should develop and regularize the bond market and increase the proportion of direct financing. Compared with developed countries and emerging market countries, China maintains a huge developing potential in terms of the bond market. The opening up of the bond market is in the ascendant. Moreover, the construction of the bond market is in a period of significant strategic opportunities. On this occasion, CCDC compiles the China s Bond Market Overview which introduces the development achievements and status

4 quo of China s bond market and serves as a stepping stone for those home and abroad who are willing to invest in, participate in and study China s bond market. In the future, CCDC will yearly update the research and compile it on special topics according to the market needs. Due to the editors limited knowledge and the restricted data available, the White Paper inevitably has some omissions, so advices and suggestions from all walks of life are welcomed.

5 Table of Contents W.1 Basic Market Information... 1 W.2 Bond Variety... 2 I. Bond classification based on issuing body... 2 II. Classification based on way of paying interest... 8 III. Classification based on the currency type... 9 IV. Classification based on the circulation nature W.3 Bond Market Participants I. Primary market participants II. Secondary market participants III. Derivative market participants W.4 Central Securities Depository I. CCDC II. Other registration and depository institutions W.5 Law and Supervision...26 I. Bond market-related laws & regulations II. Supervision institutions of the bond market W.6 Bond Issuance I. Issuing ways II. Issuing system III. Cross-border issuance W.7 Bond Registration and Depository I. Bond registration II. Bond depository system III. Cross-market transfer of depository of bonds IV. Bond principal redemption/interest payment W.8 Bond Collateral Management I. Significance of collateral management II. Service fields of collateral management III. Functions of Chinabond collateral management system... 43

6 IV. Service advantages of Chinabond collateral management W.9 Bond Transaction I. Market structure II. Transaction types III. Ways of concluding transactions IV. Clean price transaction and full price settlement V. Investor suitability system W.10 Bond Settlement I. Settlement methods...63 II. Settlement cycle III. Settlement systems and their connection modes IV. Settlement process...69 V. Handling of special cases VI. Market monitoring VII. Cross-border settlement W.11 Bond Information Services I. Bond information disclosure II. Statistics on bonds III. Chinabond Pricing System W.12 References Appendix: Operating Status of China s Bond Market (2015)... 89

7 W.1 Basic Market Information Country Currency Greenwich Mean Time (GMT) People s Republic of China Renminbi (CNY) +8 hours (Beijing Time, UTC+8h time zone) Sovereign rating Main places credit trading Dagong Global Credit Rating Co., Ltd.: AAA (domestic currency)/aa+ (foreign currency), stable prospect Moody s: Aa3, negative prospect Fitch: A+, stable prospect S&P: AA- (long term)/a-1+ (short term), negative prospect Interbank bond market Exchange bond market Over the counter market Government bond PBC bill Government-backed agency bond Bond varieties Financial bond Enterprise credit bond Assets-backed securities Panda bond Interbank bond market: 9:00-17:00 Trading time Settlement mechanism Exchange bond market: 9:30-11:30, 13:00-15:00 Commercial bank counter market: 9:00-17:00 Gross settlement, net settlement China Central Depository & Clearing Co., Ltd. ( CCDC for short) Bond depository Central counterparty China Securities Depository & Clearing Co., Ltd. ( CSDC for short) Interbank Market Clearing House Co., Ltd. ( Shanghai Clearing House for short) CSDC Shanghai Clearing House National Development and Reform Commission of the People s Republic of China ( NDRC ) Ministry of Finance of the People s Republic of China ( MOF ) Relevant authority People s Bank of China ( PBOC ) China Securities Regulatory Commission ( CSRC ) China Banking Regulatory Commission ( CBRC ) China Insurance Regulatory Commission ( CIRC ) State Administration of Foreign Exchange ( SAFE ) Issuance amount: RMB trillion Yuan (2015) Market size Number investors of Depository amount: RMB trillion Yuan (by the end of 2015) Transaction amount: RMB trillion Yuan (cash bond transaction and repo transaction) 10,018 (by the end of 2015) 1

8 W.2 Bond Variety After more than 30 years development, China has developed a bond market with basically complete categories, relatively reasonable variety structure and increasingly expanded credit level. I. Bond classification based on issuing body (ü) Government bond 1. Treasury bond: With the central government that has the supreme credit rating as the issuing body, the treasury bonds are issued by the MOF and classified into book-entry treasury bonds and savings bonds. The book-entry treasury bonds are issued by tender through CCDC s systemic support, traded in the interbank bond market and exchange bond market, and under general depository of CCDC. At present, there are three issuance terms of discount treasury bonds: 91, 183 and 273-day; coupon treasury bonds cover the issuance terms such as 1, 3, 5, 7, 10, 15, 20, 30 and 50 years. Saving bonds are issued to individual investors through the commercial bank counters and classified into the certificated type and electronic type, in which electronic savings bonds are under general depository of CCDC. 2. Local government bond: With the local government as the issuing body, local government bonds are classified into general bonds and special targeted bonds. They are issued by tender or targeted underwriting through CCDC s systemic support, traded in 2

9 the interbank bond market and the exchange bond market, and under general depository of CCDC. At present, there re five issuance terms of the general bonds: 1 year, 3, 5, 7 and 10 years; six issuance terms of special bonds are: 1 year, 2, 3, 5, 7 and 10 years. (ý) PBOC bill With the PBOC as the issuing body, central bank bills are debt obligations issued to commercial banks (primary dealers) to adjust the money supply. The issuance term does not exceed one year in general, but there are also varieties whose terms last for as long as three years. Central bank bills are issued through the central bank s open market operation system, traded in the interbank bond market and under depository of CCDC. (þ) Government-backed agency bond Generally, government-backed agency bonds are issued through CCDC, traded in the interbank bond market and under depository of CCDC. 1. Railway bond: With China Railway Corporation (formerly the Ministry of Railways) as the issuing body, railway bonds are issued upon the approval of NDRC. 2. Central Huijin bond: With Central Huijin Investment Ltd. as the issuing body, Central Huijin bonds are issued upon the approval of the central bank. (ÿ) Financial bond Generally, financial bonds are issued through CCDC, traded in 3

10 the interbank bond market and under depository of CCDC. 1. Policy financial bond: The issuing bodies are developmental financial institutions (China Development Bank) and policy banks (Export-Import Bank of China and Agricultural Development Bank of China) Commercial bank bond: With legal entities of commercial banks established at home as the issuing body, commercial bank bonds are classified into general financial bonds, special loan bonds of small and micro enterprises, subordinated bonds, Tier 2 capital instruments, and other varieties. 3. Non-bank financial bond: The issuing body is the legal entity of non-bank financial institutions established at home, including banking institutions like finance companies and financial leasing companies, securities companies and insurance institutes. 2 ( ) Corporate credit bond 1. Enterprise bond: The issuing bodies are enterprises. Upon the approval of NDRC, enterprise bonds are uniformly issued towards the interbank bond and exchange markets through CCDC s issuance system, traded in the interbank and exchange bond markets, and under general depository of CCDC. SME collective bond: Collective bonds of SMEs represent one kind of enterprise bonds. The issuance is organized by the initiator, with the consortium consisting of multiple SMEs as the issuing body. Each issuing enterprise shall determine its own liabilities 4

11 corresponding to the issuing ceiling amount and use the unified bond name, through unified collection and unified payment. The maturity lasts 3-5 years usually. Project revenue bond: Project revenue bonds represent one kind of enterprise bonds, with the project implementation body or its actual controller as the issuing body. The funds raised are used for investment in and construction of special projects, and the repayment of principal and interest completely or mainly comes from operation earnings after the completion of the project. Renewable bond: Renewable bonds represent one kind of enterprise bonds issued in the interbank bond market, with non-financial enterprises as the issuing body. They are non-fixed-term bonds and have the hybrid capital nature, with the issuer s renewable options embedded and issuer s right of redemption included. 2. Debt financing instrument of non-financial enterprises: The instruments are registered and issued in the National Association of Financial Market Institutional Investors ( NAFMII ). Taking non-financial enterprises with the legal person status as its issuing body, the instruments are issued and traded in the interbank bond market and under depository of Shanghai Clearing House ( SHCH ). The period of the short-term commercial papers are within one year; that of the super-short-term commercial papers within 270 days; that of the medium-term notes more than one year. The 5

12 perpetual medium-term notes, with non-fixed term, contain the issuer s right of redemption. Issuing bodies of the collective notes of SMEs are 2-10 small and medium non-financial enterprises with the legal person status, and they jointly issue the notes with the unified product design, unified bond naming, unified credit enhancement as well as unified issuance & registration mode. The private placement note adopt private placement, and are issued towards special institutional investors in the interbank bond market and only circulated and transferred within the range of special institutional investors. The asset backed notes take the cash flow generated by enterprises underlying assets as the payment support. With non-financial enterprises as the issuing body, the project revenue notes are issued in the interbank bond market, and the raised funds are used for project construction; also, the operating cash flow generated by the project is the main source of debt repayment. 3. Corporate bond: Listed companies or non-listed companies are the issuing bodies. Upon the approval of CSRC, corporate bonds are publicly or privately issued in the exchange bond market, listed for transactions in the stock exchange or transferred through National Equities Exchange and Quotations ( NEEQ ), under depository of CSDC. 4. Convertible corporate bond: With the domestic listed companies as the issuing bodies, convertible corporate bonds can be converted into shares based on the agreed conditions within a given 6

13 time (no earlier than six months following the issuing date), the period lasting 3-5 years. Convertible bonds are issued and traded in the exchange bond market, under depository of CSDC. Equity warrant bonds are convertible corporate bonds of which the subscription right and bond are traded separately, and the period is one year at least. 5. Private placement bond of SMEs: With domestic SMEs and microenterprises as the issuing bodies, the bonds are privately issued towards qualified investors in the exchange bond market, only transferred within the range of qualified investors, under depository of CSDC. ( ) Assets-backed securities 1. Credit assets-backed securities: The credit assets-backed securities shall be issued by the special purpose trust & trustee institution (trust companies), representing the shares of beneficial rights under the special purpose trust. Subject to the trust property, the trustee institution shall pay the assets-backed security revenue to the investment organization. Credit assets-backed securities are mainly issued and traded in the interbank bond market, can also be issued and traded across the market, registered at and under depository of CCDC. 2. Enterprise assets-backed securities: With the securities trader as the issuing body, the securities appear in the form of the trader s collective asset management plan; the basic assets are other assets except credit assets, rights of charge, etc. The securities are 7

14 issued and traded in the exchange market, registered at and under depository of CSDC. ( ) Panda bond Panda bonds are RMB bonds issued within the territory of China; at present, the issuers are mainly international development institutions and foreign banks. Panda bonds are issued and traded in the interbank bond market under depository of CCDC and SHCH. ( ) Interbank negotiable certificate of deposit As a book-entry fixed-term deposit certificate issued in the interbank market by deposit financial institutions, an interbank negotiable certificate of deposit is a money market instrument. Interbank negotiable certificates of deposit are publicly or privately issued through China Foreign Exchange Trading System ( CFETS ) in an electronic way; the investment and transaction bodies are interbank market members, fund management companies and fund products. The bonds are under depository of SHCH. The periods of fixed-rate certificates of deposit include one month, three months, six months, nine months and one year; while those of the floating-rate one year, two years and three years. II. Classification based on way of paying interest 1. Zero-coupon bond: A zero-coupon bonds is issued at a price lower than the face value, with the face value repaid lump-sum at the time of maturity. Its period is at least one year. 2. Discount bond: A discount bond is issued at a price lower 8

15 than the face value, with the face value repaid lump-sum at the time of maturity. Its period is one year at most. 3. Fixed rate bond: Elements like the coupon rate, interest-paying frequency, and payment date shall be indicated during issuance of this kind of bond, and the interest shall be paid regularly based on the stipulated interest rate; the final interest and principal shall be paid at the maturity date. 4. Floating rate bond: The reference index of one certain short-term money market is taken as the bond benchmark interest rate which will be regarded as the coupon rate together with the interest margin (the issuing body can determine it by tender); the benchmark interest rate may vary in the redemption periods, but the basic interest margin doesn t. 5. Balloon repayment bond: During issuance, the coupon rate shall be indicated; before the maturity, no interest shall be paid and all the interest shall be accumulated till the maturity of payment and paid together with the principal. III. Classification based on the currency type 1. RMB bond: RMB bonds are Yuan-denominated bonds, classified into RMB bonds issued by domestic entities and Panda bonds issued by foreign entities, playing a dominant role in China s bond market. 2. Foreign currency bond: As a foreign currency-denominated bond issued at home, a foreign currency bond is issued upon the 9

16 approval of the PBOC. At present, there are only a few scattered domestic dollar bonds, most of which are under depository of CCDC. IV. Classification based on the circulation nature 1. Negotiable bond: A negotiable bond can be traded and circulated in the interbank bond market, exchange bond market and/or commercial bank counter market. 2. Non-negotiable bond: For a non-negotiable bond, early redemption, loan pledging, non-transaction transfer, etc. are allowable. Year Table 2-1 Evolution of Innovation in Bond Varieties Government credit Financial bond Corporate credit bond bond 1981 Treasury bond 1984 Enterprise bond Discount treasury bond Central bank financing bill Special loan financial bond Policy bank bond, special financial bond Non-bank financial bond Urban construction investment bond 2002 Central bank bill 2003 Domestic dollar bond Collective bond of SMEs Certificate treasury bond (electronic accounting) Subordinated bond of commercial bank Short-term commercial paper of short-term financing bond Credit assets-backed 10

17 securities company Foreign institution bond (Panda bond) securities, assets-backed securities issued by security companies 2006 Savings bond Convertible bond 2007 Special treasury bond Corporate bond 2008 MTN Local government bond Government-backed agency bond Targeted local government bond Local government special targeted bond General bond of commercial bank Interbank negotiable certificate of deposit CP of securities company, Subordinated bond of insurance company Certificate of deposit, Directional financial bond SMECN ABN PPN Private placement bond of SMEs Renewable bond Perpetual MTN Project revenue bond, Project revenue note 11

18 W.3 Bond Market Participants Along with the market development, the participant base in China s bond market is expanding and the level of the participants is increasingly enriched, which injects great vigor to the development of the bond market. I. Primary market participants 1. Issuers: Fund-raisers with the issuance qualification after approval by or filing with the supervising authorities can issue bonds in the interbank bond market, exchange bond market and/or commercial bank counter market. These issuers include the central government and local government, central bank, government-backed institutions, financial institutions, corporations, international development organizations, etc. 2. Underwriters: An underwriter is a financial institution who guides and helps the issuer to complete bond issuance, participates in the bond issuance and subscription, distributes the underwritten bonds to other settlement members (with distribution subscribers) within the issuance period, and leads other market intermediaries to supervise whether the bond issuer performs related obligations within the bond duration. At present, those with the national lead underwriter qualification are majorly large-scale commercial banks, joint-stock banks, large-scale bond merchants and some city commercial banks. 3. Direct investor: A direct investor is an institution which can take part in the bond bidding and subscription upon the approval of 12

19 the bond supervisory authorities, but which cannot engage in distribution. At present, direct investors have been introduced for book-building issuance of local government bonds and enterprise bonds. II. Secondary market participants 1. Market makers: A market maker is a financial institution carrying out market making business in the interbank bond market, enjoying the stipulated rights and undertaking the corresponding obligations upon the approval of the PBOC. The market maker shall quote the bilateral prices (bid and offer prices) of the in-cash market-making bonds continuously in accordance with the relevant regulations and rules, and conclude transactions with other market participants based on the quotation. By the end of 2015, there have been 49 trial market makers in the interbank bond market. 2.Money broker: A money broker company is a non-bank financial institution set up with the approval of CBRC, specializing in promoting broking services such as financing of funds and foreign exchange transactions among financial institutions and receiving commissions wherefrom. The money broker entering broking business shall submit its case to the PBOC for filing. By the end of 2015, there have been 5 currency brokering companies in the interbank bond market. 3. Settlement agents: A settlement agent is a financial institution handling the bond settlement and other business upon 13

20 entrustment by other market participants. To take on the bond settlement agent business, the settlement agent shall get the PBOC s approval; before taking on settlement agent business, the settlement agent shall sign the agency agreement with the client. The agent shall establish bond account at CCDC in the name of the client, to carry out bond settlement on behalf of the client. By the end of 2015, 47 commercial banks have obtained the qualification for the bond settlement. 4. Domestic investors: Commercial banks, credit cooperatives, non-bank financial institutions (inclusive of trust companies, finance companies, leasing companies, auto financing companies, and so on), securities companies, insurance companies, fund management, non-financial institutions, unincorporated institutional investors (including trust products, securities company assets management plans, securities investment funds, pension funds like the social security funds and supplementary pensions, social non-profit foundations like the charitable funds, private equity, assets management plans for special customers of the fund management company and its subsidiary, assets management plan of the futures companies, assets management products of the insurance assets management companies), and individual investors fall into the scope of domestic investors. Investors satisfying the requirements on admission investors of the interbank bond market specified by the PBOC shall be registered 14

21 at the PBOC Shanghai HQ. Participants in the exchange bond market shall file applications to Shanghai and Shenzhen Stock Exchanges; social participants can take part in while the deposit institutions except listed commercial banks shall not. 5. Overseas investors: Overseas investors, including overseas central banks or monetory authorities, RMB clearing banks, overseas participating banks for RMB settlement of cross-border transactions, and other overseas financial institutions participating in pilot cross-border service transactions, Qualified Foreign Institutional Investors (QFII), RMB Qualified Foreign Institutional Investors (RQFII), as well as international financial organizations, sovereign wealth fund and other overseas institutions. III. Derivative market participants 1. Exchange derivatives market The trading front office is China Financial Futures Exchange ( CFFEX for short). Investors are the qualified individuals, general and special institutional customers including securities companies, funds management companies, trust companies, etc..commercial banks are not allowed to take part in the treasury bond futures transaction temporarily. To open an account, the investor has to file in CFFEX through CFFEX members. The settlement of treasury bond futures is carried out in CFFEX while the delivery of treasury bond futures in CCDC. 2. OTC Derivative market 15

22 The front office for transactions of OTC bond derivatives is CFETS. To carry out a transaction, an investor has to sign the Master Agreement on Derivatives Transactions in the Interbank Market of China. The settlement and delivery of the OTC market are carried out in CCDC or Shanghai Clearing House respectively according to different bond types. 16

23 W.4 Central Securities Depository Improving bond registration, depository and settlement system has been increasingly observable. In the Recommendations for Securities Settlement Systems (RSSS) and Principles for Financial Mark Infrastructures (PFMI) issued by the international organizations, core requirements for thecentral depository are put forward, like the Central Securities Depository shall be realized within the largest range as far as possible for the sake of safety and efficiency, by integrating depository and settlement into a single entity, the scale economy can be realized and the cost will be reduced. In China s bond market, three institutions are involved in the Central Securities Depository of bond at present: CCDC, CSDC and Shanghai Clearing House. CCDC accounts for the highest market share. I. CCDC (ü) Company nature CCDC, established in 1996 upon approval of the State Council, is a financial market infrastructure with systematic importance. CCDC is a limited liability corporation funded by the State Council, and is solely state-owned. With a non-bank financial institution license, CCDC is one of the 22 central financial enterprises. And CCDC is under the supervision of regulatory authorities such as PBOC, MOF and CBRC. (ý) Service positioning As a neutral, independent and non-profit financial market 17

24 infrastructure, CCDC serves markets and provides business and technical support services for many departments like the MOF, PBOC, CBRC, CSRC, CIRC, NDRC and SAFE. It is the only treasury bond general depository authorized by MOF, responsible for establishing and operating nation-wide treasury bond depository, the interbank market bond registration, depository, and settlement body designated by PBOC, and the general depository for trading of book-entry treasury bonds at commercial bank counters, undertaking the development and operation of the trust registration system, wealth management products information registration system and credit assets registration & exchange system. As a professional depository and settlement institution, CCDC shows outstanding features like high policy content, high scientific & technological content and strong expertise in the business. Its comprehensive system, now, is with strong functions and high safety, and covers investment organizations across China through its proprietary network. With the same security level as that of the National Payment System, CCDC s comprehensive system is one of the national core information systems. (þ) Business functions Starting from the centralized depository of treasury bonds, CCDC has gradually developed into a CSD for various fixed-income securities, and become a national-level core financial infrastructure supporting operation of bond markets and macro-control policies, 18

25 playing a significant role in maintaining the financial stability and promoting the market development. First, it s the core infrastructure platform of the bond market. With international standards as the guidelines and starting from centralized depository of treasury bonds, CCDC has gradually constructed a unified and centralized bond depository system, to provide integrative services like the issuance, registration, depository, settlement, interest payment and principal redemption, valuation, collateral management and information disclosure for various fixed-income securities, which greatly reduces the operation cost of issuers and investors in the bond market, simplifies the process, lowers the operation risk and boosts the market efficiency. In 2015, CCDC supported the bond issuance with about RMB trillion Yuan, which exceeds 6/10 of the total issuance amount, handled RMB trillion Yuan of transactions settlement, about 8/10 of that of the whole market, and made RMB trillion Yuan of bonds under depository, about 8/10 of that of the total market amount. Besides, CCDC is responsible for the general registration and depository of varieties of the cross-market transaction and becomes de facto bond general depository. Second, it s an important platform to implement monetary and fiscal policies. CCDC provides the dedicated business and technical support for open market operations and central bank bills, supports innovative money control tools like the standing lending 19

26 facility (SLF) and short-term liquidity tool (SLO), continues to support the construction of Treasury bond and local government bond markets, and also provides systematic support to the treasury cash management of central and local government. Third, it s an important platform for pricing benchmarks in the financial market. In 1999, CCDC released the first Treasury bond yield curve; later, it has gradually built a whole set of Chinabond pricing system reflecting the RMB bond market situation with the yield curve family, valuation, index and risk value included. At present, CCDC, each day, issues over 1,200 curves of different types, over 40,000 lines about valuation, 50 bond indexes, 426 derived indexes, provides customers with customized services, and compiles China s key term treasury bond yield curve for the MOF. Chinabond pricing system are widely used in the market. The Chinabond yield curve is an important reference indicator for implementation of fiscal policies, a statistical indicator for the PBOC s bond market and a reference indicator for operation of monetary policies and the pricing benchmark for the banks risk management, the issuance of treasury bonds, local government bonds, preferred stocks and perpetual bonds as well as reserves of insurance institutions; Chinabond valuation has become a calculation benchmark for the net asset value of funds and the fair value of bonds; Chinabond index has become a performance measurement benchmark for the National Council for Social Security Fund, 20

27 financial institutions and fund companies and a tracking object of index fund products at home and abroad; Chinabond price index is adopted for management of about 90% of bond outstanding held by financial institutions. Fourth, it s a significant innovation platform for the bond market. CCDC provides the unified registration and depository services for credit assets-backed securities traded across different markets, services like the centralized issuance support and general registration & depository for enterprise bonds, support to commercial banks issuance of capital tools through the bond market, the issuance, registration and depository services for subordinated bonds of insurance companies, the delivery services for Treasury bond futures and the valuation and marking-to-market services for the margin bonds as the deposit, as well as the issuance, depository & settlement and related technical services for wealth management direct financing tools and management plans. Fifth, it s the risk management platform of the financial market. CCDC promotes and realizes DVP settlement and offers the strongest settlement finality. In 2004, Chinabond System was connected to the high-value payment system of Central Bank, which made the bank DVP (delivery versus payment), non-bank DVP and all-around DVP gradually realized, thus greatly improving the safety and efficiency of the interbank bond market. CCDC integrates and upgrades the collateral management function and establishes the 21

28 centralized, automated and professional collateral management system, which meets the personalized risk management needs and is widely used in financial transactions and policy tools. Besides, CCDC also performs its front-line monitoring function in the bond market and cooperates with the supervisors to carry out the risk monitoring and disposal of liquidity risks and settlement risks. Sixth, it s an opening-up platform of the bond market. CCDC provides support to international multilateral institutions for issuing RMB bonds in China, and depository & settlement services for overseas institutions to enter the domestic bond market and domestic institutions to invest in the overseas bond market. Chinabond pricing system like Chinabond index developed by CCDC are being gradually used at abroad, and Chinabond ETF products with Chinabond Index as the benchmark were listed in Hong Kong Stock Exchange and New York Stock Exchange in succession in Price index products compiled by China s domestic institutions have been widely recognized in the international market and become the catalyst to internationalization of RMB bond markets. Seventh, it s a service platform of the financial market system. Facing the guarantee needs of constructing the multi-level financial market system and strengthening financial supervision, to realize the scale economy of the financial infrastructure, CCDC provides the infrastructure registration and depository services for trust products, wealth management products and the transfer of bank 22

29 loans. By the end of 2015, CCDC has registered and hosted financial assets totaling RMB 72.6 trillion Yuan, an increase of RMB 18.3 trillion Yuan than last year. The bond assets occupied RMB 35.1 trillion Yuan; commercial bank wealth management products RMB 23.3 trillion Yuan; trust products RMB 14.2 trillion Yuan. Also, it built the Transfer Center for Registration of Banking Industry Credit Assets ( Banking Registration Center for short), which played a positive role in guaranteeing the market s healthy development, elevating supervision effectiveness, protecting investors rights & interests, and reducing the market organization cost. II. Other registration and depository institutions (ü) CSDC CSDC, founded in 2001, is under the supervision of CSRC. According to the requirements for centralized and unified operation of securities registration and settlement prescribed in the Securities Law, upon the approval of the State Council and CSRC, CSDC is created, with Shanghai Branch and CSDC Shenzhen Branch, and undertakes the registration and settlement business of Shanghai and Shenzhen Stock Exchanges. CSDC s functions include: establishment and management of securities accounts and settlement accounts, depository and transfer of securities, registration of names and rights & interests of the securities holders, settlement & delivery of securities and funds as well as related management, rights & interests of distributing 23

30 securities under the entrustment of the issuer, providing the inquiry, information, consulting and training services regarding the securities registration and settlement business. At present, varieties under depository of CSDC cover stocks, funds, bonds and securities derivatives, dominated by stocks. The varieties of depository bonds include corporate bonds, convertible bonds and separate convertible bonds and SMEs private placement bonds; also, CSDC undertakes the sub-depository responsibility for treasury bonds, local government bonds and enterprise bonds. (ý) Shanghai Clearing House Founded in 2009, Shanghai Clearing House is an OTC central counterparty clearing institution set up upon the approval of PBOC, subject to the PBOC s regulation. The function of Shanghai Clearing House is to provide the domestic & foreign currency clearing services, including clearing, settlement, delivery, margin management, collateral management, information service, and consulting, for cash and derivatives transactions in the financial market and RMB cross-border transactions approved by the PBOC. Now, the business type of Shanghai Clearing House covers the central counterparty clearing and registration & depository. The former one serves interest rate derivatives, foreign exchange and exchange rate derivatives, shipping and bulk commodity financial derivatives, and bonds. Debt financing instruments of non-financial 24

31 enterprises and certificates of deposit (CDs) are included in the varieties of bonds under its depository. Table 4-1 Comparison among Three Central Depositories CCDC CSDC Shanghai Clearing House Establishment time Approved by The State Council CSRC PBOC Supervision organ PBOC, MOF, CBRC, NDRC, CSRC CSRC PBOC System Wholly state-owned company Joint-stock company Joint-stock company Treasury bond and local government bond; policy Debt financing Treasury bond and financial bond and instrument of Major varieties Bond business share (at the end of 2015) Depository Settlement Depository system commercial financial bond; enterprise bond, assets-backed securities, international institutional bond, etc. RMB trillion Yuan, occupying 78.13% RMB trillion Yuan, occupying 69.11% Direct depository comes first while the indirect second. Government bond, enterprise bond, credit assets-backed securities master trustee local government bond; enterprise bond and corporate bond; stock and fund, etc. RMB 2.50 trillion Yuan, occupying 5.57% RMB trillion Yuan, occupying 12.12% Central registration, secondary depository non-financial enterprises, negotiable certificate of deposit, etc. RMB 7.31 trillion Yuan, occupying 16.30% RMB trillion Yuan, occupying 18.77% Direct depository Settlement method Real time gross settlement Gross + net amount Gross + net amount Capital settlement Date source: CCDC Using the Central Bank s currency Using the Commercial Bank s currency Using the Central Bank s currency 25

32 W.5 Law and Supervision The law structure of China s bond market is constituted of laws, administrative regulations, department rules, business rules and business agreements from top to bottom. The laws are prepared by the National People s Congress (NPC) or the NPC Standing Committee, with the supreme legal force; administrative regulations are issued by the State Council; department rules are prepared by departments of the State Council (inclusive of the bond market supervision organ); business rules are the rules issued by the bond market infrastructure; business agreements are the service agreements signed by and between the bond market infrastructure and customers. Market laws & regulations refer to the general term of laws, administrative regulations and department rules. I. Bond market-related laws & regulations (ü) Basic laws & regulations regarding the interbank bond market Law of the People's Republic of China on the People s Bank of China, implemented since 1995 and revised in 2003 Measures for the Administration of Bond Transactions in the National Interbank Bond Market, implemented since 2000 Measures for the Administration of the Issuance of Financial Bonds in the National Inter-bank Bond Market, implemented since 2005 Provisions Governing the Forward Transactions of Bonds in the 26

33 National Interbank Bond Market, implemented since 2005 Interim Measures for the Cash Management of the Central Treasury, implemented since 2006 Administrative Measures for the Registration, Custody and Clearing of Bonds in the Inter-bank Bond Market, implemented since 2009 Measures for the Administration of (Electronic) Savings Bonds, implemented since 2013 Measures for the Administration of Cash in Local Treasuries (Trial), implemented since 2014 (ý) Basic laws & regulations regarding the exchange bond market Securities Law of the People's Republic of China, implemented since 2006 and revised in 2014 Administrative Measures for the Issuance and Transactions of Corporate Bonds, implemented since 2015 Administrative Provisions on Assets Securitization of Securities Companies and Subsidiaries of Fund Management Companies, implemented since 2014 (þ) Basic cross-market laws & regulations Regulation on Treasury Bonds of the People s Republic of China, implemented since 1992 and revised in 2011 Regulations on Administration of Enterprise Bonds, implemented since 1993 and revised in

34 Interim Measures for Administration of Treasury Bonds of the People s Republic of China, implemented since 1997 Administrative Measures for Subordinated Term Debts of Insurance Companies, implemented since 2004 and revised in 2013 Guidelines for Bidding in Issuance of Enterprise bonds (Interim), implemented since 2014 Guidelines for Book Building in Issuance of Enterprise bonds (Interim), implemented since 2014 II. Supervision institutions of the bond market The supervision based on markets and bond varieties is implemented in China s bond market. Supervision institution PBOC MOF NDRC CSRC SAFE CBRC CIRC Supervision issues Interbank bond market, commercial bank counter market; Central Bank bill, financial bond, debt financing instrument of non-financial enterprises, credit assets-backed securities, and Panda bond; National Association of Securities Dealers of PBOC is responsible for the issuance and registration of debt financing instruments of non-financial enterprises in the interbank market. Treasury bond, local government bond, Panda bond Enterprise bond, Panda bond, railway bond Exchange market, National Equities Exchange and Quotations (New Third Board); CP of securities companies, corporate bond, convertible bond, enterprise assets-backed securities, Panda bond Panda bond Financial bond and credit assets-backed securities issued by baking institutions Financial bond issued by insurance institutions 28

35 W.6 Bond Issuance I. Issuing ways The public offering of bonds is the main way. (ü) Public offering modes 1. Offering by tender: The issuer determines issuing terms like the tender way and bid-winning mode and the open bidding shall be made in the market, and the underwriting syndicate members shall underwrite bonds based on the bid-winning amount. For bond issuance, there are many tendering ways like the quantity, price, interest rate and interest spread, and three bid-winning modes, the unified price, multiple prices and mixed type; also, there are many portfolios for tendering and bid-winning ways. At present, offering by tender is adopted for local government bonds, financial bonds and large-scale corporate credit bonds. 2. Book-building issuing: After the issuer and lead underwriter determines the interest rate or price range through consultations, the bookkeeper (generally the lead underwriter holds this post) records the investor s subscription quantity and bond interest rate or price level intention, and the investor can decide the subscription order at different interest rates on his/her own; at last, the bookkeeper shall gather the order and determine the final issuance interest rate or price based on the agreed fixed price and placing mode for placing and issuing. Many issuers of credit bonds with the small scale and low issuing frequency will choose this issuing way. 29

36 (ý) Private placement modes Targeted issuing by agreement: The issuer, based on the market needs, negotiates with the bond subscriber to determine the issuing terms like the face interest rate, price, time limit, interest payment mode, subscription quantity and payment date, subscription fees and subscriber s obligations and signs the bond subscription agreement. The agreed directional issuing is taken as a supplement to the bond market-oriented issuing. (þ) Over-the-counter issuing Different issuing ways are set up in the commercial bank counter bond market based on different bonds. The book-entry Treasury bonds are distributed by underwriters within the bid-winning ceiling amount in proprietary in the interbank bond market, and the issuing price is determined according to the result of tendering in the interbank bond market. As to the policy financial bonds and savings bonds, the issuer shall formulate the counter market issuing limit by himself/herself, and the issuing price shall be determined separately. II. Issuing system CCDC provides an integrated general issuing service platform, to satisfy the large-scale, high-frequency, low-cost, low-risk and efficient issuing demands. First, flexibly support diversified issuing ways like offering by tender and book-building. The issuing system can support simultaneous offering of multiple bonds by tender, with diversified 30

37 options such as the current additional issuing and reopening, realize many tendering ways and bid-winning ways, flexibly select the designated function for bidding according to the issuer s personalized needs and combine and set up multiple tendering control elements flexibly like the bid potential difference, price point, bid quantity and bidding continuity, to satisfy the diverse needs for bond issuance. Second, meet the issuer s personalized issuing requirements effectively. Provide the customized issuing systems for various issuers. The system effectively supports the diverse issuing needs, able to support different varieties, different interest paying ways and different tendering and bidding ways. Third, actively support the regional issuance needs. CCDC sets up Shanghai Branch and Shenzhen Customer Service Center, forms the regional issuing system architecture, and realizes the offering of foreign and local government bonds by tender and book-building offering of enterprise bonds, which provides bond issuance-related parties with more convenient services. III. Cross-border issuance According to the Interim Measures for the Administration of the RMB Bond Issuance of International Development Organizations, CCDC provides issuance, registration, depository and other support to international development organizations in issuing financial bonds in the interbank bond market. Since 2005, the International Finance Corporation and Asian Development Bank have been issuing Panda 31

38 bonds. To apply for the issuance of RMB bonds within the territory of China, international development organizations should file a bond issuance application to window units like the MOF; after approved by window units together with departments such as the PBOC, NDRC, CSRC and SAFE, the application should be submitted to the State Council for approval. If the issuer wants to remit the purchased foreign exchange for funds raised by the issuer abroad for use, the approval of SAFE shall be obtained. To transfer RMB funds from outside for RMB bonds principal & interest payment, the issuer shall submit this case to the PBOC for filing; to transfer foreign exchange funds from outside for RMB bonds principal & interest payment, the issuer shall get the approval of SAFE. 32

39 W.7 Bond Registration and Depository I. Bond registration Bond registration is a behavior that a registration & settlement institution authorized by the state confirms a fact that the bond holder holds bonds in book entry form. Within the territory of China, the central bond depository, also called the bond registration, depository and settlement institution, bears the bond registration function at the same time. II. Bond depository system In China s bond market, the primary depository and secondary depository coexist. In the interbank bond market, primary depository is carried out, while in the exchange bond market and commercial bank counter market, secondary depository is carried out. CCDC is responsible for the bond total depository and primary depository business, while the secondary trustee and the sub-trustee are, under the control of the total trustee, responsible for the bond secondary depository business. (ü) Interbank bond market Any investor conforming to the PBOC s stipulations regarding market access can become a depository and settlement member of CCDC. According to differences in qualifications for participation in bond settlement business and handling methods, settlement members are divided into three types, type A, type B and type C. Type A settlement members can handle the proprietary settlement business 33

40 and act as the agent of type C settlement members to carry out bond settlement or work on the bond counter transaction business; type B settlement members can only handle proprietary settlement business; type C settlement members have to entrust type A settlement members as the agent to handle bond settlement business. According to the property and business scope of institutions, CCDC implements classified setting and centralized management for the accounts. Institutional investors can directly open the primary bond account in CCDC, divided into the bond proprietary account and bond agency master account. The former account is used to record the balance and its changes of the bondholder s proprietary bonds, and type A, B and C settlement members shall open their own proprietary bond accounts in CCDC. The latter is used to record the balance and its changes of bonds managed by secondary depositories and sub-depositories, both of who shall open the bond agency master account in CCDC. The relationship between settlement members and the related bond accounts is as shown in the diagram: Diagram 7-1 Diagram of Relationship between Settlement Members and Bond Accounts 34

41 (ý) Exchange bond market In the exchange bond market, the settlement institution (CSDC) of stock exchanges opens the general depository account in CCDC and investors open the depository account in the settlement institution of exchanges which undertakes the registration & depository responsibility of bond transactions on exchanges and manages corresponding risks. With the independent establishment of two exchange markets in Shanghai and Shenzhen, the relevant responsibilities of secondary trustees are respectively designated to CSDC Shanghai Branch and CSDC Shenzhen Branch. CSDC in which the centralized registration and secondary depository system is implemented is a depository of the exchange bond market. Its Shanghai Branch and Shenzhen Branch are depositories of the Shanghai Stock Exchange and Shenzhen Stock Exchange, with the same setting of the depository account system. All bonds in the exchange market are uniformly and intensively registered at CSDC, and the transfer process shall be recorded. To engage in the exchange bond market, investors must get the permission of the qualified securities companies which act as the assets depository and transaction settlement agent. As to the depository account system, a secondary depository system is adopted; CSDC opens an agent master account in CCDC and an exchange investor opens a security account in CSDC who establishes a securities account in its own name, to handle centralized 35

42 delivery of bonds between CSDC and all settlement participants 3. CSDC sets up the bond delivery account for settlement participants, used to handle the bond delivery between settlement participants and CSDC & customers. Also, the transfer of securities between settlement participants and customers must be entrusted to CSDC. 36 Diagram 7-2 Depository Account System of Exchange Bond Market (þ) Commercial bank counter market In the commercial bank counter market, a secondary depository system is adopted; CCDC is the primary depository while the undertaking body able to handle the bond counter business upon the approval is the secondary depository. CCDC opens the proprietary and agent master accounts (primary depository accounts) for the undertaking body, recording the self-owned bonds of the undertaking body in different accounts and the total amount of bonds held by secondary customers under depository of the undertaking body, and the authenticity, accuracy, completeness and safety of the primary depository accounting. The bond depository account (secondary depository account) opened for investors by the undertaking body

43 through the sales network is used to record the bonds held by investors and their buying and selling changes and handle business like the bond issuance and selling, trading, pledging, freezing, non-trading transfer, depository transfer and principal redemption; the undertaking body is responsible for the secondary depository account. III. Cross-market transfer of depository of bonds Investors can transfer the depository of bonds of the same kind they holding to different depositories. It can be transferred from the interbank market to the exchange market or commercial bank counter market, or from the exchange market to the interbank market of commercial bank counter market, or from an exchange to another, or from a counter undertaking bank to another. At present, categories of bonds of which the cross-market transfer of depository can be carried out include Treasury bonds, local government bonds and enterprise bonds. According to the Administrative Measures for Cross-market Transfer of Depository of Bonds of MOF, certain conditions must be provided to handle cross-market transfer depository of treasury bonds and local government bonds, including: the bond holder shall own the qualification of trading in places where the transaction is transferred in; before applying for the transfer of depository, the bond holder shall open a bond or securities account in the depository to be transferred to the trading place, and the name of the bond or securities account shall be completely identical to that of depository to be 37

44 transferred out of the exchange; the bonds applied for to be under depository by the bond holder shall be with the trading circulating qualification during transferring in and out of the trading place. As to handling of the cross-market transfer of depository of enterprise bonds, CCDC s type A and B settlement members can apply to CCDC for handling directly; however, type C settlement members and investors opening the secondary depository account in the underwriter s sales network have to apply to sales networks of their settlement agents or bond underwriters helping open accounts as the agent and secondary depositories, and then the settlement agents or bond underwriters helping open accounts as the agent and secondary depositories will handle the transfer of depository on behalf of CCDC. After accepting the transfer of depository, CCDC will transfer the bonds to CSDC s accounts in real time, for the real-time trading in the exchange; after accepting the transfer of depository, CSDC has to transfer the bonds to CCDC s account, and the bonds can be traded in the interbank bond market next day. 38

45 Diagram 7-3 Operating Mechanism of Transfer of Depository in the Interbank Bond Market and Exchange Bond Market IV. Bond principal redemption/interest payment Entrusted by the issuer, CCDC provides the STP service for the principal redemption/interest payment of bonds transferred by the agent, which saves the intermediate section and improves the bond holder s capital use efficiency. After receiving the redeemed funds transferred by the issuer, CCDC shall calculate the investor s funds payable and transfer the bond principal redemption/interest payment of the bonds to bond investors opening accounts in CCDC through China National Automatic Payment System. 39

46 W.8 Bond Collateral Management CCDC undertakes the registration and depository responsibility for the majority of bonds. Since the establishment of the interbank bond market, CCDC has been providing the collateral management support for the competent department s economic management and interbank market transactions. CCDC s collateral management business dominates the market. I. Significance of collateral management With the function of supporting settlement, preventing risks, and liberating liquidity, collateral is known as the hidden capital and acts as a market lubricant. Since the outset of the financial crisis in 2008, supervision and market institutions throughout the country have paid unprecedented attention to collateral management, which results in an acute increase in the demand for qualified collateral. In the meantime, international securities depository institutions set up the collateral management system one after another, to satisfy the increasing demand, such as Clearstream s Liquidity Hub, Euroclear Bank s Collateral Highway, etc. Certain conditions shall be provided for use of bond collateral: First, there shall be relatively developed secondary markets. Second, there shall be a fair value appraisal system generally accepted in the market. The aforesaid two conditions have been preliminarily offered in China s bond market. Third, there shall be the advanced and efficient collateral management system. At present, CCDC has owned 40

47 the world s leading collateral management system and carried out parameterized management in the whole course, to satisfy all parties needs. Fourth, collateral re-transactions shall be permitted. Fifth, rapid disposal of bond collateral shall be guaranteed. II. Service fields of collateral management After integrating the decentralized collateral management functions intensively at the beginning of 2010, CCDC launched a new generation of collateral management services officially which has been comprehensively and gratifyingly developed. ( ü ) Serving commercial institutions in the securities market CCDC can provide services like collateral marking to market, replacement and adjustment for bilateral pledged business like the pledged repo, classic repo, forward transaction and bond lending. Nowadays, the bilateral pledged business has been applied for opening for more than 3,400 institutions and products, and the related collateral management services have been put into use, almost covering major active investors in the interbank market; the collateral in management of this part business has been beyond RMB 2.6 trillion Yuan. (ý) Serving China payment & settlement system China National Automatic Payment System (CNAPS) as the infrastructure in China s financial market includes the high-value payment system and small-amount payment system. To guarantee the 41

48 settlement efficiency and avoid insufficient liquidity, both the high-value and small-amount payment systems provide member banks with the liquidity support, but member banks need to pledge bonds to PBOC; As to the large-value payment system automatic pledge financing and small-amount payment system pledge quota management, CCDC has always provided the collateral management services. At present, collateral for these two business management has been beyond RMB 120 billion Yuan. (þ) Serving macro-control 1. Monetary policy In bond transactions in the PBOC s open-market operations, what is involved in collateral management is the repo transaction. Besides, in 2013, the PBOC added a new monetary policy tool: standing lending facility (SLF), a tool for PBOC to provide financial institutions with short-term liquidity, but it requiring the financial institutions to provide the bond pledge. Management of collateral to the monetary policy business is carried out through CCDC. 2. Fiscal policy Cash management of treasury is an important party of the fiscal policy of fiscal departments. Nowadays, management of collateral for cash management of treasury is carried out by CCDC. In 2015, RMB 510 billion Yuan in total were cumulatively operated for cash management of treasury. 3. Foreign exchange management 42

49 CCDC serves the foreign exchange management of the SAFE. In 2012, CCDC signed the Customer Service Agreement with SAFE officially and began to provide collateral management services for all kinds of business. By the end of 2015, the face value of collateral for foreign exchange entrusted loan business under management had been beyond RMB 118 billion Yuan. (ÿ) Collateral management extension and planning In future, the collateral management will be extended to more fields. First, it is the national macro-economic policy service, which is an important field not only for market institutions to obtain liquidity but also to promote the collateral management services. Second, it is the service for various central counterparties, e.g., Treasury bonds can be used to charge against Treasury bond futures transaction deposit; likewise, bonds can be used to charge against stock index futures, commodity futures and gold transaction deposit. Third, the multilateral credit business of financial institutions and bilateral credit transactions of any financial institution can be carried out through CCDC s collateral management system. Fourth, it is the cross-border collateral management service, which is also a field to be urgently extended by CCDC. III. Functions of Chinabond collateral management system Major contents of collateral management services cover: reporting, marking-to-market, automatic margin call and return of 43

50 pledged bonds, and automatic or manual replacement of pledged bonds. The main functions are as follows: 1. Parameterized management CCDC s collateral management system carries out the parameterized management for key elements, and all parameters can be set up, maintained and modified according to their personalized requirements. At present, major parameters of the system include: collateral range, pledge rate, pledge excess rate, pledge order, exposure difference critical proportion, etc. As to different business, market participants can tailor to forge a set of their own collateral management services through setting up different parameters. 2. Automated management During handling of specific business after setting up parameters, both parties of a transaction have no need to discuss about the related details but have to determine the amount of the risk exposure, and the collateral management system will realize automated management based on parameters, which can effectively reduce the business parts and improve the collateral management efficiency. 3. Period management Period management mainly includes marking to market, replacement and adjustment, and all of these functions cover the whole pledge period, which can realize whole-course supervision and in-time prevention of risks. 4. Data management 44

51 The pledge-involved two parties can realize the intensively integrated data management through systematically mastering the most comprehensive and detailed data information about collateral business, including: the counterparty s summary information, details of pledge collateral, marking to market result of collateral, etc. IV. Service advantages of Chinabond collateral management (ü) Scale effect realized by centralized management As mentioned before, all kinds of bonds entrusted to CCDC are up to RMB trillion Yuan, among which, the Treasury bonds, Central Bank Bills, local government bonds and policy bank bonds with the supreme credit standing and best suitable for acting as the collateral have been up to RMB 26.4 trillion Yuan. It can be said that CCDC hosts the top-quality collateral in the domestic market, enough to support the massive financial business. (ý) Mature experience from many years practice CCDC has carried out long-term practice in terms of collateral management for years, which makes it accumulate rich experience. The collateral management system is just formed on this basis and belongs to the summary, exploration, promotion and expansion of the past experience. (þ) International advanced level in the same industry The construction of CCDC s collateral system fully absorbs experience from the international institutions of the same trade and 45

52 has the late-mover advantages. Compared with the international representatives of the same trade, business carried out by the same trade internationally include the collateral management, repo, bilateral loan pledge, central counterparty s deposit management, securities lending, etc., and such similar business has been carried out by CCDC. However, other institutions of the same trade don t possess the macro-department services that CCDC provides for cash management of treasury and foreign exchange entrusted loans. (ÿ) Efficient and safe system operation management During the whole process of the collateral management system, automated parameterized management is carried out, which fully embodies the efficient principle. CCDC s system has reached the supreme level of the national safety certification; for the collateral management system, a part of CCDC s system, its safety is without any doubt. ( ) Real value of collateral embodied by fair value At present, Chinabond valuation issued by CCDC each day is adopted for the collateral management system marking to market. Chinabond valuation is not only a market fair value index that is recognized and designated by the supervisory authorities but also a fair value verified after the long-term market practice and widely accepted by people. To sum up, CCDC s collateral management services have been comprehensively promoted and spread to various fields. In other 46

53 words, such services serve both government economic management and transactions among commercial institutions, serve both the spot market and the futures market, and support not only bilateral transactions but also multilateral transactions. 47

54 W.9 Bond Transaction I. Market structure So far, a unified and layered market system has been formed in China s bond market, mainly inclusive of three sub-markets, respectively the interbank bond market, the exchange bond one and the commercial bank OTV one. 1. Interbank bond market: As the main body of China s bond market, this market occupies about 94.43% of the whole market in terms of the outstanding amount of bonds. It belongs to a block trading market (wholesale market), and the participants are various institutional investors; transactions here are made based on bilateral negotiations and the typical settlement method is the trade-by-trade type. CCDC opens bond accounts for investors, carries out primary depository and provides transaction settlement services. 2. Exchange bond market: With various social investors as participants, this market is a retail market in which transactions are facilitated intensively, and the typical settlement method here is net settlement. In the exchange market, a two-level settlement system is carried out, in which CCDC is the chief trustee responsible for opening master agent accounts for the exchange market while CSDC is a sub-trustee responsible for recording subsidiary accounts of exchange investors, but CCDC has no direct authority-responsibility relationship with exchange investors. Besides, settlement of transactions in exchanges is in the charge of CSDC. 48

55 3. Commercial bank counter market: As an extension of the interbank market, this market also belongs to a retail type. In the counter market, a two-level settlement system is carried out, in which CCDC is the chief trustee responsible for opening bond proprietary accounts and master agent accounts for administering banks while an administering bank is a sub-trustee responsible for recording subsidiary accounts of exchange investors, but CCDC has no direct authority-responsibility relationship with counter investors. Different from the exchange market, by the end of an administering bank day, data about changes in the balance shall be delivered to CCDC, and in the meantime, CCDC shall provide counter investors with the balance enquiry service which becomes an important way to protection investors rights and interests. Tale 9-1 Pattern of Transactions in China s Bond Market in 2015 (Unit: RMB trillion Interbank bond Commercial bank Exchange market Yuan) market counter market Issuance amount Transaction amount Depository amount Data source: CCDC II. Transaction types (ü) Cash bond transaction Both parties of a transaction shall transfer the ownership of bonds based on the agreed variety, quantity and price on the day when the transaction is concluded or the next day. (ý) Repo transaction Repo has always been the most important transaction variety in 49

56 the bond market, playing a significant role in currency regulation and liquidity management of institutions like the commercial bank. 1. Repo in the interbank bond market: It is mainly divided into two forms, respectively the pledged repo and classic repo. Before handling the repo business, market participants must sign the Master Agreement on Bond Repurchase Transactions in the Interbank Market of China. - Pledged repo: Both parties of a transaction carry out the short-term financing of funds by way of pledging the bonds; the funds receiver (the obverse repurchasing party) receives the funds by pledging the bonds to the funds provider (the reverse repurchasing party), both parties agree that, on a certain date in the future, the obverse repurchasing party shall refund the funds to the reverse repurchasing party at the amount calculated on the basis of the stipulated interest for the repurchase, while the reverse repurchasing party shall refund the originally pledged bonds to the obverse repurchasing party. Both parties shall not use the bonds pledged by the obverse repurchasing party within the repo period, and the bonds interest during freezing of the pledge shall be in the possession of the pledger. - Classic repo: When the obverse repurchasing party sells the bonds to the reverse repurchasing party, both parties agree that, on a certain date in the future, the obverse repurchasing party shall buy back the same quantity of bonds of the same kind at the agreed price 50

57 from the reverse repurchasing party. Different from the pledged repo, during the classic repo period, the reverse repurchasing party not only can obtain the ownership and right of use of the bonds during the repo, as long as the reverse repurchasing party owns adequate bonds of the same kind to refund to the obverse repurchasing party upon the expiration. During the repo, the interest of bonds shall be in the possession of the bond owner. During the handling of a classic repo, both parties of the settlement can negotiate based on the transaction counterparty s credit standing to take the bond of which the variety and quantity (secured bond) have been stipulated as the performance guarantee; during a repo, the bond for a guarantee will be frozen in the bond provider s bond account and unfrozen when settlement of the repo is normally carried out upon its expiration. 2. Repo in the exchange market (a case of the Shanghai Stock Exchange) - Treasury bond classic repo: When a treasury bond owner sells a treasury bond, the owner and the buyer agree that, on a certain date in the future, the seller shall buy back the treasury bond at the stipulated price from the buyer. The transaction subjects are confined to institutional investors who open security accounts in the name of a legal person in CSDC Shanghai Branch; besides, before the classic repo expires, the total amount of single bonds held by each institutional investor shall not exceed 20% of the issuance amount of this bond. In the treasury bond classic repo transaction, the 51

58 performance bond is implemented. - Bond pledged negotiated repo: That is to say, the repo-involved two parties agree that the obverse repurchasing party pledges the bonds to the reverse repurchasing party and in the future, refunds the funds and pays the repo interest, and releases the bond pledge registration. Main participant bodies cover the trust company, insurance company, security company, fund company as well as the bank wealth management product, trust product, security company s assets management product, and so on. Pledged bonds include Treasury bonds, corporation bonds, enterprise bonds, corporation bonds in convertible corporation bonds in separation transactions, assets-backed bonds, etc. Before participating in the negotiate repo, investors shall sign the Master Agreement on Bond Pledged Negotiated Repo Transactions in Shanghai Stock Exchange and submit it to the exchange for filing. The negotiated repo shall be declared by two parties of the repo through the transaction system and concluded upon the system s confirmation; the declaration time is 9:30-11:30 and 13:00-15:15 at each transaction date. The negotiated repo period shall not exceed 365 days and the duration of pledged bonds. - Agreed repurchase-type transaction: An eligible customer sells the object bond to a security company designated for a transaction at the agreed price, and the two parties agree that, on a certain date in the future, the client buys back the bond from the 52

59 security company according to another agreed price. The repo period shall not exceed one year. - Pledged quotation-based repo: It is a kind of the pledged repo. A security company takes his/her own bond as the pledged bond and receives funds from the designated customer by way of quoting to the customer who accepts the quotation, while the customer takes back the provided funds on the agreed repo date and obtains corresponding earnings. (þ) Bond lending It is a kind of bond financing business in which the bond receiver takes certain amounts of bonds as the pledge and lends the object bond from the bond provider and the two parties agree on that, on a certain date in the future, the receiver refunds the lent object bond and the bond provider refunds the bond corresponding to the pledge. During the bond lending, in case of payment of interest of the object bond, the bond receiver shall refund the interest of the object bond to the bond provider in time. The bond receiver pays the bond lending cost to the bond provider, and the cost standard shall be determined by both parties of the lending through negotiations. At present, the bilateral bond lending is only launched in the interbank market, but it is expected to be improved in the direction of automatic bond lending in the future. (ÿ) Transaction of bond derivatives 1. Bond forward: Both parties of a transaction agree on that, on 53

60 a certain date in the future, they will buy and sell the object bond based on the agreed price and quantity. The transaction object of the bond forward is the bond for which transactions in cash are carried out in the interbank bond market. The bond forward lasts as many as 365 days from the concluding date to the settlement date. Standard bond forward: It refers to a bond forward contract for which transactions are carried out in the interbank market and in which products elements like the object bond and settlement date are standardized. At present, transactions are carried out through the transaction system of China Foreign Exchange Trade System and submitted to Shanghai Clearing House for settlement. 2. Treasury bond futures: It is a voucher for certain amounts of Treasury bonds delivered at the transaction price on a certain date in the future stipulated in a standardized contract concluded by and between two parties of a Treasury bond transaction. There are two varieties of the Treasury bond futures contract so far, respectively the 5-year type and the 10-year type. For Treasury bond futures, delivery settlement is adopted; the deliverable Treasury bond must be the book-entry treasury bond that is traded in the interbank bond market and Shanghai/Shenzhen Stock Exchange, and if taking part in the Treasury bond futures delivery, investors must apply to CFFEX for Treasury bond depository accounts through CFFEX members. ( ) Treasury cash management 1. Central treasury cash management: It refers to a series of 54

61 fiscal management activities aimed to realize the minimization of cash reserves in the treasury and the maximization of income from investment on the premise of guaranteeing the payment need of the central fiscal treasury. The operation modes include the fixed-term depositing in commercial banks, buying treasury bonds back, treasury bond repo and reverse repo, etc. During the early stage, fixed-time depositing in commercial banks and buying Treasury bonds back are mainly implemented; since the business development in 2006, fixed-time depositing in commercial banks has been used for most of cash management of the treasury. Between 2015 and 2017, there are 52 commercial banks as the banking consortium members involved in fixed-time depositing in commercial banks for cash management of the treasury, and CCDC provided technical and business support to activities regarding the cash management of the central treasury. 2. Local treasury cash management: The local government carries out fiscal management for financial funds deposited by the municipal, district (county) government in the treasury at the same level, and the operation tool is fixed-time depositing in commercial banks. The fixed-time deposit rate is based on the benchmark interest rate of RMB deposits in financial institutions within the same deadline at the operation date and falls in the floating range of deposit interest rates stipulated by PBOC, and it shall be determined by commercial banks based on the business principle. The banking consortium members participating in the fixed-time depositing in 55

62 commercial banks for cash management of the local treasury shall be determined by the local finance department. CCDC will provide the in-cash tendering system for the local treasury and assist in pledge handling and settlement operation. ( ) Open market operation The open market operation is a main currency policy tool for the central bank to adjust the monetary base and adjust the market liquidity, through which the central bank carries out the negotiable securities and foreign exchange transactions with the designated dealer, to realize the goal of monetary policy control. Since 1999, the open market operation has become an important tool for the daily operation of the monetary policy in PBOC, playing a positive role in regulating the money supply, adjusting the liquidity level of commercial banks and leading the trend of money market rates. CCDC provides paperless and electronic remote technical support for open market operations, and under the entrustment of PBOC, undertakes daily business for open market operations, to provide various comprehensive services including transactions, issuance, liquidity monitoring and related data analysis & processing for open market operations. III. Ways of concluding transactions (ü) Way of transactions in the interbank bond market Transactions in the interbank bond market are concluded mainly through the transactions-involved two parties independent 56

63 negotiations on a trade-by-trade basis. The negotiation process, namely, enquiring process, and the process of transaction concluding and transaction contract forming can be carried out through the electronic exchange system of CFETS system or by phone, fax and other means. After a transaction is concluded, both parties shall input transaction data in the CFETS system uniformly, to generate a contract note. 1. OTC transaction: Both parties of a transaction can negotiate to determine the transaction price and other transaction elements on their own. In an OTC transaction, quotations include the intentional type, two-way type and dialogue type. The intentional quotation refers to a quotation sent to the whole market, specific transaction members/system users by transaction members to show transaction intentions; the two-way quotation refers to a quotation sent to the whole market by transaction members to show the buying/selling or receiving/providing intention; the dialogue quotation refers to a quotation with specific transaction elements sent to specific system users by transaction members who want to conclude the transaction, and the price taker can confirm the transaction directly. 2. Click conclusion of a transaction: It is a transaction way by which a transaction is concluded after the price taker clicks a named or anonymous offer quotation issued by the quoting party or when the issued quotation matches with the limited one. Referring to quoting ways, the market quotation (two-way quotation) and click-wrap 57

64 quotation (unilateral quotation) are included. The former quoting way refers to the offer regarding the buying and selling price & quantity of one certain bond given at the same time by the quoting party, while the market maker and trial market maker can give two-way quoting for the set market bonds; the latter quoting way refers to the offer regarding the buying or selling price & quantity of one certain bond by the quoting party. (ý) Way of transactions in the exchange market 1. Free auctioning and brokered transaction: Transactions are made through auctioning on the principle of price priority and time preference. As to auctioning methods, the call auction method is adopted during the opening quotation each day, while the continuous auction method in daily trading time, all of which lead to three results: FFL, PFL and No deal. 2. Way of block transactions: The cash & repo transaction for which the declared quantity of individual transaction made in Shanghai Stock Exchange is no less than 1,000 or the involved amount is no less than RMB 1 million Yuan, and the cash & repo transaction for which the declared quantity of individual transaction made in Shenzhen Stock Exchange is no less than 500 or the involved amount is no less than RMB 500,000 Yuan are regarded as the block transaction. For block transactions, the trade by agreement or after-hour pricing is adopted, and declaration of transactions covers the intention declaration and transaction-clinching declaration which 58

65 must be confirmed by a stock exchange. Upon the confirmation by a stock exchange, the seller and buyer shall not withdraw or change the transaction-clinching declaration and must acknowledge the transaction result and perform the relevant settlement and delivery obligations. (þ) Way of transactions in the commercial bank counter market Nowadays, only the book-entry Treasury bonds, China Development Bank bonds, policy bank bonds and the bonds issued by government-backed agencies like China Railways Corporation can be traded and circulated in the commercial bank counter market, and both parties of a transaction are the counter business administering bank and individual investors. With the counter transaction business hours, the administering bank carries out the continuous quotation for this bond and hangs out the whole-bank uniform buy and sell prices of this bond and yield to maturity for the investor s reference in sales networks where the counter transactions are carried out; also, the difference between the bilateral buy and sell prices shall not exceed the stipulated price difference range. When an investor sells a bond, the administering bank buys it based on the published price; when an investor buys a bond, the administering bank sells it based on the published price. Counter transactions are carried out through the counter trading business processing system of the administering bank from each Monday to Friday, except the legal holidays. Before 59

66 carrying out a counter transaction, an investor shall open a bond depository account with his/her true identity and open or designate a corresponding capital account according to the administering bank s requirements; during a bond buying or selling, the investor shall submit a writing order to the administering bank. The counter trade administering bank shall handle the bond and capital delivery & settlement in real time, send the related data and settlement orders to CCDC after the completion of a transaction, and pass the transaction information to China Foreign Exchange Trade System for filing. IV. Clean price transaction and full price settlement A clean price transaction refers to the transaction that is offered and concluded at the price exclusive of the natural growth accrued interest. The full price settlement means the sum of the transaction price and the amount of the accrued interest is regarded as the settlement price after the declaration and transaction concluding based on the net price. In a net price transaction, since the bond transaction price contains no accrued interest, its price formation and change can more accurately embody the change trend of the bond s intrinsic value, supply-demand relationship and market interest rate. Nowadays, the net price transaction and full price settlement way is adopted for all cash bond transactions, repo transactions and bond forward transactions in the interbank bond market and some bond transactions in the exchange bond market. However, the net price transaction is carried out for discount bonds and zero coupon 60

67 bonds in the interbank bond market and convertible bonds listed in an exchange. V. Investor suitability system 1. Interbank bond market investor: Institutional investors cover special settlement members like the PBOC and MOF, commercial banks, non-bank financial institutions, securities companies, insurance institutions, fund companies, non-financial institutions, unincorporated institutional investors and overseas institutional investors. 2. Exchange bond market investor: The investor is divided into the qualified investor and public one. With the Shanghai Stock Exchange as an example, qualified investors cover financial institutions like security companies, fund management companies and their subsidiaries, futures companies, insurance companies and trust companies, unincorporated institutional investors like security company assets management product institutions, overseas institutions like QFII and RQFII, enterprise and public institution legal persons and partnership firms of which the net assets are worth no less than RMB 10 million Yuan, individual investors under whose name the financial assets are worth no less than RMB 3 million Yuan, etc. Qualified investors can subscribe and trade bonds listed for transactions or hung with boards for transfer in an exchange, but those corporate credit bonds not publicly issued are only limited to the institutional investors among qualified investors for subscribing and 61

68 trading; the qualified investors can participate in Treasury bond pre-issuance transactions, cash bond transactions and pledged repo transactions. Public investors can participate in the cash bond transaction and pledged repo transaction. 3. Commercial bank counter market investor: Individual investors, corporate investors, unit investors, etc. are included in. 62

69 W.10 Bond Settlement I. Settlement methods (ü) Classification based on whether the settlement position is netted 1. Gross settlement: At present, CCDC provides the real-time gross settlement. The interbank bond market is dominated by this settlement method. 2. Net settlement: At present, CSDC and Shanghai Clearing House provide the net settlement services. The exchange bond market is dominated by this settlement method. (ý) Classification based on the relationship between bond delivery and fund payment 1. Delivery versus Payment (DVP): It refers to a settlement method by which bond delivery and payment are carried out simultaneously and mutually conditional at the settlement date. In 2004, by linking Chinabond General System to the high-value payment system, CCDC became a special participant in the Payment System, which paved the way for DVP settlement in the interbank bond market. At present, the DVP settlement method is adopted for all transactions in the interbank bond market. In DVP settlement, there are two kinds of arrangements for capital settlement accounts: direct participants in PBOC s high-value payment system can complete DVP capital settlement through the settlement accounts set up in their own payment system; direct 63

70 participants not in the Payment System can complete DVP capital settlement through the bond settlement capital special accounts established in CCDC s capital system. 2. Other settlement methods: For some individual services, settlement methods beyond DVP can be used, mainly the settlement of domestic dollar bond transactions. Non-DVP settlement methods include: (1) Free of Payment (FOP), referring to that the two parties regarding transaction settlement only require CCDC to handle bond delivery but they handle fund payment on their own; (2) Payment after Delivery (PAD), referring to a method that the bond-receiving party, after knowing the bond-paying party has sufficient bonds necessary for fulfilling obligations at the settlement date through CCDC Book-entry System, remits the payment to the other side and confirms it, and then notifies CCDC to handle bond settlement; (3) Delivery after Payment (DAP), referring to a settlement method that the bond-paying party, after conforming the payables have been received, requires CCDC to handle bond delivery. II. Settlement cycle 1. Bond distribution: Within the bond distribution period, the underwriter can distribute the bond to distributors; at the designated transfer date (the closing date of distribution period), the system will carry out the transfer of ceiling amount of the bond based on the distribution contract. 2. Cash bond transaction: Nowadays, settlement cycles of cash 64

71 bond transactions in the interbank bond market are divided into T+0 and T+1, in which T is the transaction concluding date. 3. Repo transaction: The settlement cycle of repo transactions is divided into two parts, first settlement and last settlement respectively. The first settlement date is the day when the transaction is concluded while the last settlement date is determined based on the repo period agreed by both parties. The pledged repo period is 365 days at most while the classic repo period is 91 days at most. 4. Bond forward transaction: During the handling of a bond forward transaction, both parties involved in the settlement should confirm the forward transaction settlement order on the day when the transaction is concluded or the next workday. For the bond forward transaction, the concluding day to settlement day lasts days. 5. Bond lending: The settlement cycle of bond lending is divided into two parts, down payment date and expiration date respectively. The down payment settlement date is the day when the transaction is concluded, while the expiration settlement date is determined based on the period agreed by the two parties. The bond lending period shall not exceed 365 days at most. III. Settlement systems and their connection modes Bond settlement systems are the infrastructure used to handle the whole process of bond settlement services. (ü) CCDC book-entry system The CCDC book-entry system is an electronic system (also 65

72 known as the book-entry system) to handle services like bond registration, trust and settlement, which is developed, constructed, operated and managed by CCDC. With this system at the core, the Central Bank Open Market Transaction System, Bond Issuance System, Bond Counter Service Center Processing System, Modern Payment System, Foreign Exchange Transaction Center Bond Transaction Front Office System are connected, thus realizing the one-stop services including bond issuance, registration, trust and settlement. After identified by the authority, the system s security level is the same as that of CNAPS, belonging to the civil highest level. (ý) Fund payment system The national payment system consists of the high-value payment system and small-amount payment system. Also known as the real-time gross transfer system, the former system provides various banks, enterprises and financial markets with fast, efficient, safe and reliable payment settlement services, and besides, real-time payment for transaction by transaction and full-amount settlement are carried out; the latter system provides the society with low-cost and high-value payment settlement services, and the payment in batches and net amount settlement of funds are adopted. CCDC is a special participant in the payment system, with a charted settlement account established in the payment system. Also, CCDC can, as a third party, initiate the instant transfer service 66

73 regarding debit/credit of related settlement accounts directly to the payment system through the charted settlement account. Settlement members having created settlement accounts in the payment system can handle DVP fund settlement through their own settlement accounts in the payment system, or commission CCDC to handle DVP fund settlement; settlement members having not created settlement accounts in the payment system should commission CCDC to handle DVP fund settlement. Before adopting the DVP settlement, settlement members shall sign the Bond Transaction DVP Settlement Agreement, and those commissioning CCDC to handle DVP fund settlement should also sign the Agreement on Use of Bond Settlement Fund Accounts. (þ) Straight through Processing (STP) As a processing method that automation is realized and data input is unnecessary for the data transmission mode during the whole process from an enquiry to transaction confirmation, bond delivery and fund settlement, STP greatly saves the manpower, reduces the operation risk and improves the transaction efficiency. 1. Internetworking between front office and back office In 2005, CCDC connected with China Foreign Exchange Trade System through Internet, to provide the interbank bond market with the transaction data STP service. Transaction data of transaction members on the transaction system will be transmitted to CCDC s book-entry system in real time which will generate the settlement 67

74 order to be confirmed by the two parties based on the data later, and the settlement order will be delivered to members for confirmation through the client; the book-entry system will handle settlement according to the order confirmed by transaction-related two parties. 2. Internetworking with the payment system In 2004, CCDC s book-entry system was connected to PBOC s payment system through the Internet, to provide the DVP settlement service. The two systems cooperate with each other, to jointly handle the OMP (open-market operation) DVP settlement, bond transaction DVP settlement, bond issuance payment, interest & principal payment and capital transfer, credit deposits management and other capital services. In DVP settlement, the book-entry system is responsible for receiving and confirming the settlement order and bond transfer, while the payment system sending and receiving the settlement order of the payment system and handling the fund delivery. CCDC, as a third party, can initiate the instant transfer service to the payment system through a charted settlement system. 3. Direct connection of major settlement member systems In 2011, CCDC launched direct interface standards satisfying international standards, to provide customers with the business data interfaces; customers internal bond management systems (or the relevant systems used for management of bond assets like the fund management system and transaction system) were connected to CCDC s Chinabond comprehensive business system through the 68

75 Internet. After logging in their own internal management systems, customers can handle the bond settlement business directly; in the meantime, CCDC provides the two-way data interface, to provide settlement members with basic data and information products, thus making settlement members transaction data not kept, to realize the true STP for transaction settlement services. At present, the business quantity of institutions involved in the direct connection system accounts for 60% of the total of settlement processed by CCDC. IV. Settlement process (ü) Interbank market With CCDC as an example, the settlement process of settlement of transactions in the interbank bond market includes three steps: 1. Account opening and internetworking: Market participants handle the filing formalities based on PBOC s relevant stipulations, to realize the system internetworking with China Foreign Exchange Trade System and CCDC. 2. Concluding of transactions: The transaction-involved two parties conduct transactions through enquiries or carry out the click trading, and conclude the contract trade by trade; the negotiation and transaction concluding process can be achieved through the CFETS system or by phone, fax, while a contract note will be generated by the CFETS system. 3. Settlement and delivery: After a transaction is concluded, 69

76 the transaction-involved two parties complete the settlement and delivery of back-stage bonds and funds through CCDC s CCDC book-entry system. The whole process of bond settlement business starts from that the two parties send the settlement order and ends up with that the delivery of bonds and funds are completed. Its basic process is as follows: Step 1: At the date when the bond transaction is concluded, the settlement order automatically generated by transaction data shall be confirmed by the settlement-involved two parties. Step 2: The two involved parties confirm the settlement order through Chinabond comprehensive business platform. Step 3: The settlement order after confirmed will generate a settlement contract. Step 4: At the settlement date designated in the contract, the book-entry system will check the two parties bonds; if the bonds are sufficient, the system will check funds automatically, and if the payment is adequate, a contract will be come into force. Then the settlement shall be completed and a delivery order shall be generated as the transaction settlement basis. 70

77 Diagram 10-1 Flow Chart of Settlement of Bond Transactions in Interbank Bond Market 71

78 As to any settlement contract for which settlement has not been successfully handled due to inadequate amount of designated bonds or a temporary failure in full payments to the account within the system s operation time at the settlement date, the system will put the contract in the waiting line. If the related conditions are provided by the end of the settlement date, the system will re-start the processing process of this settlement; for the settlement contract in which the amount of bonds or payment is still inadequate by the end of the settlement date, the system will notify the related settlement members that the settlement is a failure and a failure delivery order will be generated as the final basis of the transaction settlement. (ý) Exchange market The settlement process of transactions in the exchange bond market roughly covers four steps: 1. Account opening: The all-round designated transaction system is implemented in the exchange bond market; if a bond investor has to go to a stock exchange to participate in a bond transaction, he/she should select a securities brokerage (exchange member) to handle account opening formalities, sign the designated transaction agreement and securities transaction entrust agreement, and establish the cash account and security account at the same time. 2. Entrustment and declaration: An investor can give an entrustment order through self-service entrustment ways such as the written type or phone, self-service terminal, Internet, etc., to 72

79 commission an exchange member to buy/sell bonds. The entrustment order can be the limit one or market one. For an entrustment order, the bidding transaction declaration will be carried out, and the declaration time is 9:15-9:25 (call auction during opening), 9:30-11:30 and 13:00-15:00 (continuous auction) at the transaction date. 3. Transaction concluding: A bond auction transaction is promoted and concluded on the principle of price priority and time preference. 4. Settlement and delivery: The net amount guarantee settlement, namely, net settlement and guarantee delivery, is adopted for the cash bond and pledged repo transactions in exchanges. CSDC carries out the netting offset settlement for bonds and funds receivable and payable by all settlement participants like investors, and undertakes the delivery guarantee responsibility as a central counterparty. After the stock exchange is closed at 15:00 on the transaction day, CSDC carries out settlement based on the transaction data sent by the stock exchange, and sends the settlement result to all settlement participants; bonds delivery shall be completed at the T+1 date. V. Handling of special cases (ü) Settlement failure In the interbank bond market, settlement failures are mainly caused by the seller s insufficient amount of bonds or the buyer s inadequate amount of funds, which will result in a failure to perform 73

80 the settlement order contract. As to the contract with a settlement failure, the transaction-involved two parties should submit a written instruction to CCDC on the workday following the settlement date. As to the pledged repo expiring contract with a settlement failure, the transaction-involved two parties can unfreeze the pledge bonds through pledged repo overdue resale, and funds shall be transferred by the two parties through negotiations. (ý) Emergency settlement When a terminal for the system (Chinabond comprehensive business system) internetworking between a settlement member and CCDC is beset by a technical failure which cannot be repaired in time, or as to other business needing to be handled through a paper voucher, an emergency method can be used to commission CCDC to handle it. Settlement members should send the corresponding emergency letter of instructions. The deadline for the handling of emergency business is 30 minutes before the end of the system s operation, 16:30 at present. VI. Market monitoring Market monitoring is an important function that a regulator entrusts to CCDC and a significant part for the bond market risk management system. 4 To do this, CCDC has established a whole set of supervising systems and approaches, utilizing multiple methods like data supervision and field investigation to supervise bond-related risk. 74

81 As per the competent department s requirements, settlement members shall submit the instruction filing report of the involved transactions to CCDC before the concluding of the abnormal price transaction. VII. Cross-border settlement To review the opening history of the RMB bond market, it can be found that the scope of qualified foreign institutions is unceasingly expanding and that types of involved transactions and access conditions are also softened gradually. From that Asian bonds and funds were permitted to enter the market in 2005, after the pilot project for the use of the RMB in cross-border trade in 2009, the CNH cash pooling increases constantly and the demand for asset allocation and liquidity management is growing strongly. In 2010, foreign central banks, monetary authorities, RMB settlement banks and cross-border RMB trade settlement participating banks were allowed to enter the interbank market. Since 2011, RQFII and QFII have been permitted to enter the bond market for investment. In June 2015, foreign settlement banks and participating banks were allowed to carry out the repo transaction; the repo funds could be transferred outside for use. In July the same year, PBOC issued the Notice on Relevant Matters Concerning Use of RMB to Invest in the Interbank Market by Overseas Central Banks, International Financial Organizations and Sovereign Wealth Funds, simplified the related application program from the examination & approval system to the 75

82 filing system, cancelled the limit on the ceiling amount of the above institutions, and extended the investment scope from the cash bond to bond repo, bond debit/credit, bond forward, interest rate swap, forward rate agreement and other transactions. The amount of overseas institutions entering in the bond market increases rapidly. By the end of 2015, 305 overseas institutions entered the interbank bond market in total, holding bonds worth RMB 603 billion Yuan. The interbank bond market is the main market among China s bond market opening to the outside. At present, all overseas investors in the interbank bond market are CCDC s settlement members. Among them, most are the type C members who commission a domestic settlement agent bank to accomplish settlement in CCDC s system; some overseas central banks commission PBOC as their settlement agent; settlement banks for RMB business in Hong Kong or Macao can complete settlement within CCDC s system on their own. CCDC sets up the one-way connection to the CMU of Hong Kong Monetary Authority and Clearstream, to provide settlement agent services for domestic qualified institutions to invest in the overseas bond market. 76

83 W.11 Bond Information Services I. Bond information disclosure Bond information disclosure is generally classified into information disclosure before issuance, including issued documents, prospectuses, rating documents, legal opinions, and other contents, information disclosure after issuance, such as the issuing result, and information disclosure in its duration, such as rating documents, financial reports, interest payment & encashment announcements, major issues announcements, etc. Supervision institutions have different information disclosure requirements for the interbank bond market and exchange market, and also, the information disclosure requirements for various bonds in the same market vary. Information disclosed in the interbank bond market can be gained on websites like and that in the exchange market the websites designated by CSRC. CCDC has established information disclosure channels like the bond information self-help disclosure system, Chinabond comprehensive business platform and WeChat platform. In which, becomes a professional information platform in China s bond market, a designated channel for disclosure of information about the issuer and the main way to get the service information. II. Statistics on bonds CCDC, as a Central Securities Depository, is responsible for 77

84 providing the market and supervision institutions with a series of authoritative, standard and mature public statistical products, and publicly issuing bond basic data, statistics on the clearing situation, monthly statistics, weekly report on situation about the operation of the bond market, monthly & annual analysis reports on the bond market, as well as rankings of various services. Chinabond statistics is divided into the public statistics and my statistics. 1. Public statistics: Use data from the whole market to reflect overall information such as the market scale and trend. The service objects of public statistics are the bond market investors, issuers and competent departments, with the aim of improving the market transparency, helping the involved institutions deeply learn about the bond market and satisfying investors needs for investment analysis and decision making. Through nearly 20 years accumulation, Chinabond public statistics covers the entire interbank bond market, having reached and even exceeded the international advanced level in multiple indexes like the issuing contents and issuing time. The public statistics falls into the statistical data and statistical analysis report, the former including the bond data, clearing situation, monthly statistics and rankings. In which, each bond element registered at CCDC and detailed information about its whole life cycle are recorded in the bond data; the clearing situation reflects the price/quantity trend of the bond market in real time; the monthly statistics will issue 24 monthly reports with the fixed pattern at 78

85 regular intervals each month, the report contents including all services like the issuing in the primary bond market, clearing of transactions in the secondary bond market, and investors holding structure; the rankings are the rankings of various services in the bond market regularly issued by different service main bodies, including the ranking of the amount of transaction settlement, that of the amount of consignment sales, that of Chinabond valuation members, etc. The statistical analysis report objectively reflects the latest changes and trends in the market; covering the weekly report, monthly report and annual report, the reports written and issued regularly, used to assist investors in deciding the investment, have attracted the market s general attention. 2. My statistics : It is the special statistical report on bond services set up for investors; data regarding individual members are used to reflect the personalized statistical situation, so the report can be used as the performance evaluation index and service special statistics. The contents cover nearly 70 bond service statistical reports including the bidding and tendering in the primary market, clearing of transactions in the secondary market, bond investment performance measurement, position structure, and risk monitoring indexes. Serving investors, My statistics conducts multi-dimension analysis of customers accounting data by using the Chinabond price index and statistical index, and supports the in-depth application of services given by the front, middle and back office personnel of investment 79

86 institutions. III. Chinabond Pricing System To satisfy the market participants needs for services like bond transaction pricing, risk control, accounting measurement and performance evaluation, and promote improvements in the market transparency and liquidity, CCDC has built and completed a whole set of Chinabond price index products system reflecting the price and risk situation in the RMB bond market, and the system cover four major product lines, respectively Chinabond yield curve, Chinabond valuation, Chinabond index and Chinabond VaR. What s more, nowadays, the system has become an important reference indicator for implementation of fiscal and monetary policies, has been accepted and recommended those competent departments like MOC, PBOC, CBRC, CSRC and CIRC, widely used by market participants, and been one of core pricing fundamentals for China s financial market. (ü) Chinabond yield curve The Chinabond yield curve is to reflect the relationship between a set of curves with the same credit rating but different interest rate levels based on redemption periods in China s bond market. According to different interest rate types, this yield curve is divided into the maturity yield curve, spot rate yield curve and forward rate yield curve. In 1999, the first Treasury bond yield curve in China was issued by CCDC. At present, Chinabond yield curves cover all varieties of bonds and all credit ratings in China s bond market, 80

87 including the yield curves of the treasury bonds, Central Bank Bill, local government bonds, policy financial bonds, railway bonds, commercial bank bonds, enterprise bonds, city investment bonds, medium-short-term bills and assets-backed securities. By the end of 201, the total of various yield curves issued by CCDC at the end of each day had been beyond As the basis of Chinabond price index systems, the Chinabond treasury bond yield curve, functioning as a leading indicator for domestic economies and the pricing reference basis for credit bonds, and the measurement reference for the market risk management and investment performance evaluation in the meantime, can be used as a reference for pricing of financial derivatives like equity securities and treasury bond futures, loans & deposits in commercial banks and internal transfer pricing, as well as pricing of contracted deposits. Since 2004, the Central Bank and MOF have cited Chinabond yield curve and index in succession in related policy reports regularly issued by them, to reflect the overall situation of the bond market; since 2006, the Chinabond yield curve has been taken as the bond valuation pricing basis for the money market fund; in 2007, CBRC determined the Chinabond yield curve as the measurement benchmark of risk-based regulation by bank internal market risk management and supervisory authorities; in 2009, the local government bonds issued by the tender agent of the MOF begun to take the Chinabond interbank fixed interest rate treasury bond curve 81

88 as the pricing benchmark; in 2010, the CIRC took the 3-year moving average of spot rate yield curves of the Chinabond interbank fixed interest rate treasury bond as the reference for measurement of insurance reserves in the insurance industry; in 2011, the Chinabond interbank fixed interest rate treasury bond curve was taken as the pricing benchmark for the 50-year-period fixed interest rate book-entry treasury bonds issued by the MOF by tender; in 2012, the Chinabond Credit Rating Co., Ltd. referred to the Chinabond yield curve to calculate the implied rating of the bond issuers; in 2014, China s key term Treasury bond yield curve, prepared by CCDC, was published on the website of MOF daily. At present, issuers of over 100 securities including MTNs, securities companies subordinated debts and preferred stocks use the Chinabond interbank fixed interest rate treasury bond yield curve as the pricing benchmark spontaneously; some institutions begin to adopt the interbank fixed interest rate policy financial bond yield curve (China Development Bank) spontaneously as the pricing benchmark for bond issuance. (ý) Chinabond valuation Chinabond valuation is to carry out discount and generation of the future stream of cash flows of the valuation object by using Chinabond yield curves, issue them to the market every day and attach a series of related indexes, which can be used as a reference for the fair value measurement, market risk monitoring and transaction pricing. At present, the Chinabond valuation covers all the domestic 82

89 RMB bonds, including nearly 30 varieties, valuates nearly 20,000 bonds each day, and also offers valuations of financial management direct financing tools, non-standard bank assets and some equity assets. Chinabond valuation products have been deeply used. Chinabond valuation becomes a reference index monitoring abnormal transactions in the interbank bond market and a critical benchmark for the monitoring system of bonds investment & trading behaviors; the fund industry association recommends that Chinabond valuation should be adopted for the net value calculation of bonds held by the security and fund companies; the listed commercial banks use Chinabond valuation as the fair value measurement basis of investment interbank market bonds in the financial reports disclosed regularly; accounting firms use Chinabond valuation as the audit standard. (þ) Chinabond index The Chinabond index is a series of bond indexes aimed to objectively reflect the price trend features of China s bond market. Since its issuance in 2002, through unremitting perfection and improvements, it has formed an index system rich in indexes and wide in the coverage with each passing day. Chinabond index product systems can be divided into 6 major categories, respectively the overall index, component index, strategy-type index, investor classification index, position index and customization index. In which, 83

90 the Chinabond overall index family is compiled to embody the overall price trends of all bonds or a certain kind of bond in the market. One or more elements like the bond s redemption periods, issuer types, types of circulating sites, way of bond interest paying and credit rating are taken as the screening condition to decide the scope of component bonds but the quantity of component bonds shall not be defined in advance. Index values and related indexes of the Chinabond overall index family shall be weighted based on the market value weight of the bond balance. Similar to the Chinabond overall index family, the Chinabond component index family is also compiled to represent the overall price trend of all bonds or a certain kind of bond in the market. One or more elements like the bond s remaining period, issuer types, types of circulating sites, way of bond interest paying and credit rating are taken as the screening condition to decide the scope of component bonds, but different from the Chinabond overall index family, for the component index, the quantity of component bonds shall be defined in advance. As to the Chinabond strategy-type index, the non-market value weighting method is used, accompanied by the weight setting and other sample conditions, to simulate the bond indexes of one type of investment strategy, suitable for investment objects. The China position index is an integration of all bonds with all institution member bond accounts of CCDC as the unit and all bonds in all accounts (excluding the dollar debt and assets-backed security) as the component bond. A position index will be compiled for each account. 84

91 Different from the Chinabond overall index family and Chinabond component index family, the Chinabond position index shall be weighted based on the position market value weight of all bonds in the member accounts. Such index is only used for internal performance evaluation and risk control for the account members, but is not open to the public. As to the Chinabond investor classification index, the integration of bonds of investors of different kinds managed in CCDC index are regarded as the index component bond, and after the dollar debt and assets-backed security are excluded, the weighting calculation is carried out based on the position market value. Different investors can select investor indexes that they belong to as the performance evaluation benchmark for horizontal comparisons. The Chinabond customized index is the type developed according to the customers individualized and diversified needs. Customers can customize the special index according to their own investment objectives and risk preference under the compilation principle of Chinabond indexes. Customers can customize the index which can satisfy their own investment needs through two ways. (1) Customers can construct the customized index satisfying their own needs by listing in the Chinabond information network maintenance component bond, and then the Chinabond index team shall carry out the index calculation. Such indexes are only for internal use by customers but not open to the public. (2) Customers can customize the index bond-selecting rules satisfying their own needs after seeking 85

92 professional advice from the Chinabond index team, and then the Chinabond index team is responsible for the component bond maintenance and index calculation. Such index customers can decide whether to make the indexes open to the public and select the issuing channels. Chinabond index has multiple angles of application in presenting price trend of bond market, predicting macroeconomic situation, performing evaluation of bond investment portfolio and tracking the object of index investment products. Along with the development of Chinabond index and constant changes in the market needs, the application fields of Chinabond index are being extended continuously. Before 2012, Chinabond index was mainly used to provide investors with tools (for observing the market) and the investment performance benchmark, while in 2012, the application field was extended to track the object of index funds and derivatives. In 2014, the first RQFII-ETF with Chinabond China 5-year Treasury Bond Index as benchmark was listed on the stock market in Hong Kong Stock Exchanges; the first Chinabond ETF product with Chinabond China High Grade Bond Index as benchmark went public in New York Stock Exchange; Chinabond Index was nominated as Annual Index Provider in In 2015, the investor classification index was further promoted for Chinabond index, able to be used as a refined performance evaluation analysis tool and used for the performance horizontal comparison. At present, Chinabond index has 86

93 been widely used by the domestic and foreign investors regarding funds, banks and insurance, and the bond funds are dominated by Chinabond index. Table 11-1 Situation about Bond Indexes Used in Various Domestic Fund Performance Benchmarks (based on quantity) Unit (one) Bond-inclusive index Chinabond Proportion Bond type % Hybrid type % Equity type % Total % Total (the equity type excluded) % Data deadline: July 31, 2015 Data source: Wind Information (ÿ) Chinabond VaR The Chinabond VaR (Value at Risk) reveals the possible max loss of a certain bond or bond portfolio within the future holding period under the certain probability; CVaR (Conditional VaR) shows the average loss of those parts beyond the possible max loss. Chinabond Var/CVaR products are classified into the single bond-related and bond account portfolio-related. The Chinabond VaRCVaR can assist the banking financial institutions in regulating the capital, and measuring and managing the bond capital market risk, able to be used to carry out the risk adjustment for the bond investment performance and verify the risk indexes calculated by software construed by the market participants or purchased outside. 87

94 W.12 References [1] China Banking Regulatory Commission [2] China Financial Futures Exchange [3] China Central Depository & Clearing Co., Ltd. [4] China Securities Depository & Clearing Co., Ltd. [5] China Foreign Exchange Trade System & National Interbank Funding Center [6] China Insurance Regulatory Commission [7] China Securities Regulatory Commission [8] Ministry of Finance of the People s Republic of China [9] People's Bank of China [10] National Development and Reform Commission of the People s Republic of China [11] Interbank Market Clearing House Co., Ltd. [12] Shanghai Stock Exchange [13] Shenzhen Stock Exchange 88

95 Appendix: Operating Status of China s Bond Market (2015) I. Operating Status of China s Bond Market in 2015 (ü) The interest rates of monetary market level off after continued downward In 2015, the interest rates of monetary market continued to go down compared to the previous year, with average daily rates of Shibor Overnight downward 76 basis points to 2.01%, the average daily rates of interbank buy-back overnight bonds downward 77 basis points to 2.01%, and the average daily rates of 7-day-repobonds downward 71 basis points to 2.92% compared to the previous year (see Figure 1). Source: chinamoney.com.cn Chart 1 Trends of Shibor since 2014 (%) According to disclosed statistics, PBC provided the market with trillion Yuan through reverse repo in Considering repo 89

96 maturity, PBC bill maturity, treasury cash deposit and other factors, PBC recovered funds totally 150 billion Yuan in the open market, and this year has lowered down 7-day repo interest rate for ten times from initial 3.85% to final 2.25%. (ý) Bond Index continued to rise and the yield curve went down In 2015, in order to cope with the domestic economic slowdown and downward pressure, PBC continued to carry out the relative robust monetary policy and guided the market interest rates downward by various measures. The overall capital tended to be easing and the bond market continued to show bullish pattern. ChinaBond index continued rising, and the bond yield curve kept downward. As of December 31, 2015, ChinaBond new composite index (net price) was , rising by 3.37% compared with at the end of December, 2014; ChinaBond new composite index (fortune) was , rising by 8.18% compared with at the end of December, 2014(see Figure 2); the average yields of ChinaBond fixed treasury bonds, policy financial bonds, corporate bonds (AAA) and medium and short term bills (AAA) cut 84, 129, 159 and 181 basis points respectively compared to that at the end of the previous year (see Figure 3). 90

97 ChinaBond- new composite index-total value- net price ChinaBond-new composite index-total value-cash bond settlement Figure 2 Trends of ChinaBond new composite net index Source: chinabond.com.cn Figure3 Trends of yields of China treasury bonds Source: chinabond.com.cn (þ) Total issuance in bond market surges In 2015, various bonds of trillion Yuan were issued in the bond market, with a year-on-year growth of 53.12%. The growth rate increased by 16.7% (see Figure 4), among which, CCDC issued bonds of trillion Yuan, accounting for 60.15% of the total market issuance (see Table 1). 91

98 Table1. Bond market issuance in 2015 Issuance (RMB 100 million) Total bond market 168, CCDC 101, Shanghai Clearing House 56, China Securities Depository and Clearing Corporation (CSDC) 10, Source: chinabond.com.cn, shclearing.com, chinaclear.cn and wind.com.cn Figure 4 Trends of bond market issuance from 2005 to 2015 (unit: x 10 8 Yuan) Source: chinabond.com.cn, shclearing.com, chinaclear.cn and wind.com.cn For bond market issuance, treasury bonds issuance was 1.8 trillion Yuan in 2015, with a year-on-year growth of 25.43%; local government bonds issuance was 3.84 trillion Yuan almost tenfold of issuance of the previous year; Policy bank bonds issuance was 2.58 trillion Yuan, with a year-on-year growth of 12.23%; commercial bank bonds issuance was 0.2 trillion Yuan, with a year-on-year growth of %;Medium-term notes issuance was 1.24 trillion Yuan, rising by 27.11% than the previous year; short-term financing 1 The statistics do not include negotiable certificates of deposit. 92

99 bonds ( including super short-term commercial bonds) issuance was 3.24 trillion Yuan, with a year-on-year growth of 49.35%; private placement notes issuance was 0.88 trillion Yuan, with a year-on-year growth of % (see Figure 5). Figure 5 Bonds issuance ratio of interbank bond market in 2015 Source: chinabond.com.cn and shclearing.com (ÿ) Total bond depository volume in bond market surges By December 31, 2015, total bond depository volume in the national bond market reached trillion Yuan, increased by 9.21 trillion Yuan with a growth rate of 25.83% year-on-year. Among which, bond depository volume of CCDC was trillion Yuan, accounting for 78.13% of the bond market (see Table 2). Table 2. Bond market balance in 2015 Balance (x 10 8 Yuan) Total bond market 448, Bonds under depository of CCDC 350, Bonds under depository of Shanghai Clearing House 73, Bonds under depository of CSDC 24, Source: chinabond.com.cn, shclearing.com, chinaclear.cn and wind.com.cn 93

100 Investor s holding status at the end of 2015: (see Figure 6 and Table 3) Firstly, local government debt swap was carried out in 2015, and the annual new issuance of local bonds was 3.84 trillion Yuan. In this context, the main bonds holders increased their holding of local government bonds substantially. Among which, the largest holder of local government bonds was commercial banks, the holding balance at the end of the year was up to 4.46 trillion Yuan, rising by 288.4% year-on-year. Secondly, the government s supports for credit asset-backed securities were increased further. In order to revitalize the stock of credit assets, the issuance of asset-backed securities rose by 42% year-on-year. Meanwhile, the investing institutions also greatly supported asset-backed securities, and increased their holding of credit asset-backed securities substantially. Thirdly, commercial banks, credit unions, insurance institutions and non-financial institutions all decreased the holding of corporate bonds while securities companies, funds and overseas institutions increased the holding of corporate bonds. Among which, overseas institutions had the fastest growing for holding corporate bonds, with growth rate up to 147.7%. Fourthly, interbank bond market opened up further, yet the overall participation of overseas institutions was still low relatively. As of December 31, 2015, the holding ratio of overseas institutions 94

101 was about 1.72%. Considering the bond structure, overseas institutions preferred low-risk treasury bonds and policy bank bonds, accounting for 82.13% of the whole holding. Furthermore, although the local government bonds issuance was very large, the holding of overseas institutions was merely 380 million Yuan, with year-on-year growth rate of %. Source: chinabond.com.cn Figure 6 Bonds ration entrusted by CCDC at the end of 2015 Book-entry treasury bonds Year of 2015 (RMB 100 million) Year-on-year (%) Table 3. Main holder structures of bonds entrusted by CCDC at the end of 2015 Commercial Banks Credit cooperative Non-bank financial institutions Securities companies Insurance institutions Funds Nonfinancial institutions Special settlement Overseas institutions 63, , , , , , Total Local government bonds Year of 2015 (RMB 100 million) Year-on-year (%) 44, , , , ,