Overview of China s Bond Market. (2016 Version)

Transcription

1 Overview of China s Bond Market (2016 Version)

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3 Since 1981 when the issuance of government bonds resumed, China s bond market has developed amidst twists and turns and experienced an unusual development process. At the end of 1996, with the establishment of a Central Securities Depository (CSD), the bond market entered a period of fast development, demonstrated by the rapid expansion of market size, emerging market innovations, increasingly diversified market entities, increasingly vibrant market activities, steady market opening up and gradually improved institutional framework. By the end of 2016, the annual issuance amount in China s bond market has reached RMB 22 trillion Yuan, and the outstanding amount of bonds has exceeded RMB 57 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. The 13 th Five Year Plan points out that we should improve the registration system for bond issuance as well as bond market infrastructures, step up efforts to establish interconnectivity among bond markets and steadily innovate bond products. Compared with developed countries and other emerging markets, China s bond market still has huge development potential and is on track to further liberalization. A period of significant strategic opportunities for bond market development is upcoming. Based on the White Paper of China s Bond Market (the White Paper) for 2015, CCDC has complied the Overview of China s Bond Market (the Overview) which provides the updates on development achievements and status quo of China s bond market so far and serves as a stepping stone for those at 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 White Paper and compile white papers on special topics according to the market needs. Constrained by editors knowledge and data resources, omission is inevitable, so your advice and suggestions are very much appreciated.

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5 Table of Contents W.1 Basic Market Information W.2 Bond Type I. Classified by issuer II. Classified by interest payment method III. Classified by currency IV. Classified by negotiability V. Others W.3 Bond Market Participants I. Primary market participants II. Secondary market participants III. Derivatives market participants W.4 Central Securities Depository (CSD) I. CCDC II. Other registration and depository institutions W.5 Law and Regulation I. Bond market-related laws & regulations II. Regulators in the bond market W.6 Bond Issuance I. Issuing methods II. Issuance system III. Cross-border issuance W.7 Bond Registration and Depository I. Bond registration II. Bond depository system III. Cross-market custodian transfer of bonds IV. Bond principal redemption/interest payment W.8 Bond Collateral Management I. Significance of collateral management II. Fields of collateral management III. Functions of CCDC s collateral management system IV. Service advantages of CCDC s collateral management services W.9 Bond Transaction I. Market structure II. Transaction types

6 III. Ways of concluding transactions IV. Clean price transaction and full price settlement V. Investor suitability system W.10 Bond Settlement I. Settlement methods II. Settlement cycle IV. Settlement systems and their connection modes V. Settlement process VI. Handling of special cases VII. Market monitoring VIII. Cross-border settlement W.11 Bond Information Services I. Bond information disclosure II. Statistics on bonds III. ChinaBond Pricing products W.12 References Appendix I: Status of Operation of China s Bond Market (2016) Appendix II: Procedures for Foreign Central Banks and Similar Institutions to Enter China s Inter-bank Bond Market Appendix III: Operational Guide on Networking and Account Opening Process for Overseas Institutional Investors in the Inter-bank Market

7 W.1 Basic Market Information Country Currency Greenwich Mean Time (GMT) Sovereign credit rating Main trading venues Bond varieties Trading time Settlement mechanism Bond depository Central counterparty Regulatory organizations Market size Peoples Republic of China Renminbi (CNY) +8 hours (Beijing Time, UTC+8h time zone) Dagong Global Credit Rating Co., Ltd.: AA+ (domestic currency)/aaa (foreign currency), stable prospect Moodys: 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 Central bank bill Government-backed agency bond Financial bond Enterprise bond Asset-backed securities Panda bond Interbank bond market: 9:00-17:00 Exchange bond market: 9:30-11:30, 13:00-15:00 Commercial bank OTC market: 9:00-17:00 Gross settlement, net settlement China Central Depository & Clearing Co., Ltd. (CCDC) China Securities Depository & Clearing Co., Ltd. (CSDC) Shanghai Clearing House (SHCH) CSDC SHCH National Development and Reform Commission of the Peoples Republic of China (NDRC) Ministry of Finance of the Peoples Republic of China (MOF) Peoples 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 (2016) Depository amount: RMB trillion Yuan (by the end of 2016) Transaction amount: RMB trillion Yuan (cash bond transaction and repo transaction in 2016) Number of investors 15,300 (by the end of 2016) - 1 -

8 W.2 Bond Type After more than 30 years development, China has built a bond market with basically complete categories, relatively reasonable bond type structure and growing credit rating scales. I. Classified by issuer (I) Government bond 1. Central government bond: Central government bond is issued by the central government and therefore enjoys top credit rating. MOF is responsible for the issuance process. There are two varieties of central government bond: book-entry central government bond and savings central government bond. Book-entry central government bonds are issued by tender through CCDC issuance platform. They are traded in both the interbank bond market and the exchange bond market, and are under the general depository of CCDC. At present, discount central government bond has three different terms to maturity, namely 91 days, 183 days and 273 days. And the terms to maturity of coupon central government may last for 1, 3, 5, 7, 10, 15, 20, 30 or 50 years. Saving central government bonds are offered to individual investors through the commercial bank counters and can be classified into the certificate variety and the electronic variety. The latter is under the general depository of CCDC. 2. Local government bond: With the local government as the issuer, local government bonds are classified into general bond and project bond. They are issued by tender or targeted underwriting through CCDC issuance platform, traded in the interbank bond market and the exchange bond market, and are under the general depository of CCDC. At present, the terms to maturity of general bonds include: 1, 3, 5, 7 and 10 years, and those of project bonds are: 1 (not yet issued), 2 (not yet issued), 3, 5, 7 and 10 years, etc. (II) Central bank bill With the PBC as the issuer, central bank bills are debt obligations issued to commercial banks (primary dealers) to adjust money supply. The term to maturity usually does not exceed one year, but sometimes it can be extended to as long as three years. Central bank bills are issued through the central banks open market operation system, traded in the interbank bond market and are under the depository of CCDC. (III) Government-backed agency bond Generally, government-backed agency bonds are issued through CCDC, traded in the interbank bond market and are mainly under the depository of CCDC. 1. Railway bond: With China Railway Corporation (formerly the Ministry of Railways) as the issuer, railway bonds are issued upon the approval of NDRC. 2. Central Huijin bond: With Central Huijin Investment Ltd. as the issuer, Central Huijin bonds are issued upon the approval of PBC. (IV) Financial bond - 2 -

9 Generally, financial bonds are issued through CCDC, traded in the interbank bond market and under the depository of CCDC. 1. Policy bank financial bond: The issuers are development financial institutions (China Development Bank) and policy banks (Export-Import Bank of China and Agricultural Development Bank of China). 1 In recent years, innovation has been intensified for policy bank financial bonds, and new varieties like poverty-alleviation project financial bond have been launched. 2. Commercial bank bond: With legal entities of commercial banks established in the domestic market as the issuer, commercial bank bonds are classified into general financial bond, SME loan bonds, and special financial bonds for the agriculture, rural areas and farmers, subordinated bonds, Tier 2 capital instruments, and other varieties. 3. Non-bank financial bond: The issuer is the legal entity of non-bank financial institutions established in the domestic market, including accounting company bonds, financial leasing company bonds, securities company bonds, financial bonds of insurance companies and subordinated bonds of insurance companies, issued by banking institutions. 2 (V) Enterprise bond 1. Enterprise bond: The issuers are enterprises. Upon the approval of NDRC, enterprise bonds are uniformly issued towards the interbank and exchange bond markets through CCDC issuance system, traded in the interbank and exchange bond markets, and under the 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 a group of SMEs as the issuer. Each issuing enterprise shall determine its own liabilities corresponding to their respective issuance quota, use the unified bond name, collect investment money and make payments collectively. The maturity usually lasts 3 to 5 years. Project revenue bond: Project revenue bonds represent one kind of enterprise bonds, with the project developer or its actual controller as the issuer. The funds raised are used to finance and implement specified 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 issuer. They do not have fixed maturity, have the hybrid capital nature, and are embedded options for the issuer to renew or to redeem the bonds. 2. Non-financial enterprise debt financing instrument: The instruments are registered for issuance by the National Association of Financial Market Institutional Investors (NAFMII). They are issued by non-financial enterprises with legal person status to the interbank bond market, traded 1 One issue of bonds is now being traded on the exchange market on a trial basis. Certain bond varieties are available for trade over-the-counter. 2 The issuance of securities company bonds requires approval from CSRC and such bonds are issued and traded in the exchange bond market

10 in the interbank bond market and under the depository of SHCH. 3 The maturity of the short-term commercial papers (CP) is within one year; that of the super-short-term commercial papers (SCP) within 270 days; that of the medium-term notes (MTN) more than one year. The perpetual medium-term notes, with non-fixed term, contain the issuers right of redemption. Issuers of the SME collective notes are 2 to 10 small and medium non-financial enterprises with legal person status, and they jointly issue the notes with unified product design, unified bond name, unified credit enhancement as well as unified issuance & registration mode. The private placement notes are not issued publicly, and are issued towards special institutional investors in the interbank bond market and only traded 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 issuer, the project revenue notes are issued to 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: Both listed companies and non-listed companies can be the issuer. 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), and are under the depository of CSDC. In March 2016, innovation-and-entrepreneurship-themed corporate bonds were issued on a trial basis to finance technical innovation, product research and development and market expansion of innovative and entrepreneurial companies. 4. Convertible corporate bond: With the domestic listed companies as the issuer, convertible corporate bonds can be converted into shares based on the agreed conditions within a given time (not allowed in six months after the issuing date). Their maturity may be 3 to 5 years. Convertible bonds are issued and traded in the exchange bond market, and are under the depository of CSDC. Equity warrant bonds are convertible corporate bonds of which the subscription right and bond are traded separately, and the maturity is one year at least. 5. Private placement SME bonds are issued by domestic SMEs and micro-enterprises privately issued to qualified investors in the exchange bond market, only transferred within the range of qualified investors, and are under the depository of CSDC. (VI) Asset-backed securities 1. Credit asset-backed securities: The credit assets-backed securities are 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 income from the asset-backed securities to the investment organization. Credit asset-backed securities are mainly issued and traded in the interbank bond market, but can also be issued and traded across markets. The securities are registered at and deposited with CCDC. 3 Before 2010, such instruments were under the depository of CCDC

11 2. Enterprise asset-backed securities: With the securities companies as the issuer, the securities appear in the form of the securities companies collective asset management plan. The underlying assets are assets other than credit assets, rights to charge fees, etc. The securities are issued and traded in the exchange market, and registered at and deposited with CSDC. (VII) 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 and are under the depository of CCDC and SHCH. (VIII) Interbank negotiable certificate of deposit As a book-entry fixed-term deposit certificate issued in the interbank market by depository 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 investors and traders of such instruments are interbank market members, fund management companies and fund products. The bonds are under the depository of SHCH. The maturity of fixed-rate certificates of deposit include one month, three months, six months, nine months and one year, while those of the floating-rate may be one year, two years and three years. II. Classified by interest payment method 1. Zero-coupon bond: A zero-coupon bond is issued at a price lower than the face value, with the face value repaid lump-sum at the time of maturity. Its maturity is at least one year. 2. Discount bond: A discount bond is issued at a price lower than the face value, with the face value repaid lump-sum at the time of maturity. Its maturity is one year at most. 3. Fixed rate bond: Elements like the coupon rate, interest payment frequency, and payment date shall be indicated during issuance of this kind of bond. The interest shall be paid regularly based on the agreed interest rate. Principal payment and the last interest payment shall be paid at the maturity date. 4. Floating rate bond: A short-term money market reference index is taken as the bond benchmark interest rate, which plus interest spread (may be determined by the issuer through auction) will be regarded as the coupon rate. The benchmark interest rate may vary before the bond reaches maturity, but the basic interest spread will stay the same. 5. Balloon repayment bond: During issuance, the coupon rate shall be indicated. No interest shall be paid until the date of maturity. All the interest shall be accumulated till the maturity date and be paid together with the principal. III. Classified by currency 1. RMB bond: RMB bonds are Yuan-denominated bonds, classified into RMB bonds issued by domestic entities and Panda bonds issued by foreign entities. They constitute the vast majority of China s bond market. 2. Foreign currency bond: As a foreign currency-denominated bond issued at home, a foreign - 5 -

12 currency bond is issued upon the approval of the PBC. At present, there are only a few domestic USD bonds, most of which are under the depository of CCDC. 3. SDR bond: SDR bonds are bonds denominated in Special Drawing Rights (SDR). In August 2016, the World Bank issued 500 million of RMB-settled SDR bonds in China s interbank market. It is estimated that there will be more Chinese-funded institutions and international organizations participating in the issuance of such bonds in the future. IV. Classified by negotiability 1. Negotiable bond: A negotiable bond can be traded in the interbank bond market, exchange bond market and/or commercial bank OTC market. 2. Non-negotiable bond: A non-negotiable bond can be redeemed before maturity, pledged for loans, and transferred to other accounts without any transaction reached. V. Others 1. Green bond: Funds raised by such bonds are targeted to back up green industry projects. Based on standards defined in the Green Bond-backed Project Directory (2015 Version) published by the Green Finance Committee of China Society for Finance & Banking, green bond can be further divided into labeled green bond and unlabeled green bond. In 2016, the green bonds issued by Chinese issuers at home and abroad amounted to RMB 238 billion Yuan, ranking the first in the world, among which the labeled green bonds issued in domestic market reached RMB billion Yuan, covering 66 varieties like green financial bond, green corporate bond, green enterprise bond, green medium-term notes and green asset-backed securities issued by 29 issuers. 2. Social impact bond (SIB): As charitable bonds, SIBs are issued to finance the social service sector, and focus on using market-oriented means to solve social problems. In 2016, China s first SIB Shandong Yinan poverty-alleviation SIB was registered in the National Association of Financial Market Institutional Investors (NAFMII), having raised RMB 500 million for local poverty alleviation projects. Table 2-1 Evolution and Innovation of Bond Varieties Year Government bond Financial bond Enterprise bond 1981 Central government bond 1984 Enterprise bond 1985 Special loan financial bond 1992 Urban construction investment bond Discount central government bond, Central bank financing bill Policy bank bond, special financial bond 2001 Non-bank financial bond - 6 -

13 2002 Central bank bill 2003 Domestic USD bond Collective bond of SMEs Certificate government bond (electronic accounting) Subordinated bond of commercial bank Commercial paper of securities company, Foreign institution bond (Panda bond) Commercial paper, Credit asset-backed securities, Asset-backed securities issued by securities companies 2006 Savings bond Convertible bond 2007 Special central government bond Corporate bond 2008 Exchangeable bond, MTN 2009 Local government bond SME collective note Government-backed agency bond General bond of commercial bank Enterprise asset-backed securities Private placement 2012 Private placement bond of SMEs Targeted underwriting local government bond, Local government project bond Interbank negotiable certificate of deposit Commercial paper of securities company, Subordinated bond of insurance company, Special financial bonds for the agriculture, rural areas and farmers Certificate of deposit, Directional financial bond Green financial bond, SDR bond, Poverty-alleviation project financial bond Renewable bond Perpetual MTN, Project revenue bond, Project revenue note Green enterprise bond, Green asset-backed securities, Corporate bonds Innovation-and-entrepreneurship-themed bond - 7 -

14 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 regulatory authorities can issue bonds in the interbank bond market, exchange bond market and/or commercial bank OTC 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 process, distributes the bonds to other settlement members (and 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 qualified as national lead underwriter are majorly large-scale commercial banks, joint-stock banks, large-scale securities companies and some city commercial banks. 3. Direct investor: A direct investor is an institution which can take part in the auction and subscription process upon the approval of the bond regulatory authorities, but cannot engage in distribution. At present, direct investors are allowed to participate in the 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 activities in the interbank bond market, enjoying the stipulated rights and undertaking the corresponding obligations upon the approval of the PBC. The market maker shall quote the bilateral prices (bid and offer prices) of cash bond tradings continuously in accordance with the relevant regulations and rules, and conclude transactions with other market participants based on the quotation. As of December 31, 2016, there have been 30 market makers in the 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 in the interbank bond market shall submit its case to the PBC for filing. 3. Settlement agents: A settlement agent is a financial institution handling the bond settlement and other business upon entrustment by other market participants. To take on the bond settlement agent business, the settlement agent shall get the PBC s approval. Before taking on settlement agent business, the settlement agent shall sign the agency agreement with the client. The agent shall - 8 -

15 establish a bond account at CCDC in the name of the client, to carry out bond settlement on behalf of the client. 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 companies, non-financial institutions, unincorporated institutional investors (including trust products, securities company asset 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, asset management plans for special customers of the fund management company and its subsidiary, asset management plan of futures companies, asset management products of insurance asset management companies), and individual investors (such investors may participate in the OTC market) fall into the scope of domestic investors. Investors satisfying the requirements on qualified investors of the interbank bond market specified by PBC shall be registered at the PBC Shanghai Head Office. Participants in the exchange bond market shall file applications to Shanghai and Shenzhen Stock Exchanges. All social participants can take part in except for depository institutions other than listed commercial banks. 5. Overseas investors. Overseas investors include overseas central bank or monetary authority, sovereign wealth fund, international financial organization, RMB clearing bank, overseas participating bank of RMB settlement for cross-border trade, overseas insurance company, qualified foreign institutional investor (QFII) and RMB qualified foreign institutional investor (RQFII); commercial bank, insurance company, securities company, fund management company, asset management institution and other financial institutions registered legally abroad, and investment products offered by the said institutions to customers in a legal and compliant manner; and any medium and long-term institutional investor approved by PBC such as pension fund, charitable foundation and donation fund. The aforesaid overseas institutional investors may conduct cash bond trading in the interbank bond market, and may conduct bond lending, bond forward, forward rate agreement, interest rate swap and other transactions on the basis of hedging needs. Specifically, overseas central banks or monetary authorities, international financial organizations, sovereign wealth funds, overseas RMB clearing banks and participating banks may also conduct bond repo transactions in the interbank bond market. QFIIs may decide their own investment size, as there is no limit on investment amount. III. Derivatives market participants 1. Exchange derivatives market The trading front office is China Financial Futures Exchange (CFFEX). Investors are the qualified individuals, general and special institutional customers including securities companies, fund management companies, trust companies, etc. Commercial banks are not allowed to take part in central government bond futures transaction for the time being. To open an account, the investor - 9 -

16 has to file with CFFEX through CFFEX members. The settlement of central government bond futures is carried out in CFFEX while the delivery is in CCDC. 2. OTC derivatives market 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 in the OTC market are carried out in CCDC or SHCH according to different bond types

17 W.4 Central Securities Depository (CSD) The importance of improving the bond registration, depository and settlement system is receiving growing attention. In the Recommendations for Securities Settlement Systems (RSSS) and Principles for Financial Mark Infrastructures (PFMI) issued by international organizations, core requirements for CSDs are put forward. For example, for both safety and efficiency reasons, securities should be immobilized or dematerialized in CSDs to the greatest extent possible and by centralizing the operations associated with custody and transfer within a single entity, costs can be reduced through economies of scale. In China s bond market, there are three CSDs at present: CCDC, CSDC and SHCH. CCDC accounts for the largest market share. I. CCDC (I) Company nature CCDC, established in 1996 upon approval of the State Council, is a financial market infrastructure with systemic 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 financial enterprises owned by the central government. And CCDC is under the supervision of regulatory authorities such as PBC, MOF and CBRC. (II) Service positioning As a neutral and independent financial market infrastructure established for public good, CCDC serves the market and provides business and technical support for many government agencies like the MOF, PBC, CBRC, CSRC, CIRC, NDRC and SAFE. It is the only general depository of central government bonds authorized by MOF, responsible for establishing and operating the nation-wide government bond depository system. It is the registration, depository, and settlement institution for the interbank bond market designated by PBC, and the general depository for book-entry central government bonds traded over the counter at commercial banks. It is also responsible for developing and operating the trust product registration system, wealth management registration system and credit assets registration & exchange system. As a professional depository and settlement institution, CCDC s business is closely connected with government policies, highly technical and professional. Its integrated bond system is powerful with high security level, and covers investment organizations across China through its proprietary network. Having the same security level as that of the China National Advanced Payment System, CCDC s integrated bond system is one of the national core information systems. (III) Business functions Started as the centralized depository of central government bonds, CCDC has gradually developed into a CSD for various fixed-income securities, and become a core national financial market infrastructure supporting the operation of bond markets and implementation of macro-control policies, playing a significant role in maintaining financial stability and promoting market development

18 First, it is the operation platform of the bond market. The full life-cycle bond service system developed by CCDC covers issuance, registration, depository, settlement, interest payment and principal redemption, valuation, collateral management and information disclosure. It supports the rapid growth and various innovations of bond market while constantly reducing the operational risk and cost. The system enables cross-market linkage and facilitates market transparency and standardization. In 2016, CCDC supported the issuance of about RMB 14 trillion Yuan of bonds, accounting for more than 60% of the total issuance amount in the interbank bond market. It handled RMB 581 trillion Yuan of transaction settlement, about 80% of that of the whole interbank bond market. RMB 44 trillion Yuan of bonds are under its depository, which is around 80% of the total interbank bond market amount. Besides, CCDC is responsible for the general registration and depository of varieties transferred to other markets, and has therefore become the de facto bond general depository. Second, it is the platform for the implementation of macro-control policies. Since the Central Bank officially started implementing indirect monetary regulation in 1998, CCDC has been providing business and technical support for open market operations of the Central Bank. As of the end of 2016, CCDC accumulatively supported the issuance of central bank bills and open market operations of over RMB 90 trillion Yuan, provided full life-cycle services for RMB 24 trillion Yuan of government bonds in total, supported more than RMB 4 trillion Yuan of central and local treasury cash management operations, and provided enterprise bonds with such services as pre-issuance technical assessment, centralized issuance support and credit system construction. Third, it is the platform offering pricing benchmarks to the financial market. CCDC has built a system of ChinaBond price indexes reflecting the RMB bond market situation with the yield curve family, valuation, index and VaR included. The ChinaBond price index thereby becomes important reference indexes for the implementation of relevant fiscal policies and monetary policies and powerful instruments for market monitoring by regulatory authorities, and are extensively applied by institutional market participants in pricing analysis, financial accounting, risk measurement, performance evaluation and other investment management practices. Given that the 13 th Five-Year Plan has laid down requirements to better leverage the pricing benchmark role of the central government bond yield curve, it can be estimated that ChinaBond price index will play an increasingly significant role in the future financial reform and development in China. Fourth, it is the risk management platform for the bond market. CCDC has incorporated the operational and relevant risk management mechanism in the design of all business service modes, and at the same time, constantly explores to establish a more resourceful risk management mechanism for the market by tapping into its own resources; CCDC promotes the realization of DVP settlement, and provides the most stable settlement method; CCDC provides specialized, intelligent and integrated collateral management services, and safeguards all types of financial transactions and the operation of relevant policy instruments and payment systems of central banks, central and local finance and foreign exchange administrations; CCDC has thus gradually

19 become a financial market liquidity hub and risk management center. The individualized and in-depth application of Chinabond price index provides a powerful instrument for portfolio identification and risk measurement within the institution. CCDC has always effectively performed its front-line monitoring function and provided the foundation for precautions against systematic and regional financial risks. Fifth, it is the platform for the opening up of the bond market. CCDC support the issuance of Panda bonds by international financial institutions in China and provides depository and settlement services for various overseas institutional investors. Till the end of 2016, various overseas investors have altogether opened 411 accounts and held bonds of RMB billion Yuan, accounting for more than 90% of the domestic bonds held by overseas investors. The ChinaBond price index developed by CCDC was extensively adopted by overseas central banks, international organizations and financial institutions, and ChinaBond index ETF products have been listed in Hong Kong Exchanges and Clearing Limited (HKEx) and New York Stock Exchange (NYSE). The growing recognition of the price indexes compiled by domestic institutions among international markets catalyzes the internationalization of the RMB bond market. Besides, CCDC has made arrangements in Shanghai and other localities to actively support the financial reform in free trade zones (FTZ) and the construction of international financial centers. Sixth, it is the platform for innovations and R&D activities in the bond market. CCDC actively assists the innovative construction of bond market, introduces asset-backed securities, enterprise financing instruments, commercial bank capital instruments and other new bond types, and provides R&D support for outright repo, bond forward, bond lending, central government bond futures and other new transaction modes. CCDC has provided consultancy for multiple projects of the World Bank and Asia Development Bank (ADB) and made a series of significant research achievements in the development of the central government bond secondary market and the local government bond market as well as debt management models for central government bonds. Besides, CCDC has coordinated with PBC to complete many important research projects such as the function of central government bond yield curve in monetary policy transmission. CCDC regularly publishes annual bond market reports and annual wealth management market reports, which have received extensive attention. The magazine Bond sponsored by CCDC is the only authoritative and professional bond periodical in China. And the ChinaBond online training platform is the first online training platform for securities in China. Seventh, it is a diversified service platform for the financial market. Under the guidance and promotion by relevant authorities, CCDC successively starts to provide registration and other fundamental services for credit asset exchange and transfer, trust products and wealth management products. And it has set up relevant institutions such as the Credit Assets Registration & Exchange Co., Ltd., and the of Banking Wealth Management Registration & Depository Center. As of the end of 2016, the various financial products registered at CCDC topped RMB 90 trillion Yuan, and

20 CCDC has played a positive role in guaranteeing the healthy development of market, improving the effectiveness of regulation, protecting the rights and interests of investors and reducing financial market organization costs, and laid foundation for liquidizing financial inventory and optimizing financial resource allocation. In addition, CCDC has launched the ChinaBond Cash Management System to provide support for capital business and financial services of small and medium-sized financial institutions. II. Other registration and depository institutions (I) 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 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 central government bonds, local government bonds and enterprise bonds. (II) SHCH Founded in 2008, SHCH is an OTC central counterparty clearing institution set up upon the approval of PBC, subject to the PBC s regulation. The function of SHCH 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 SHCH 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 enterprises and certificates of deposit (CDs) are included in the varieties of bonds under its depository

21 Table 4-1 Comparison of Three CSDs CCDC CSDC SHCH Establishment time Approved by State Council CSRC PBC Regulator PBC, MOF, CBRC, NDRC, CSRC CSRC PBC System Wholly state-owned company Joint-stock company Joint-stock company Major varieties Central government bond and local government bond; policy bank financial bond and commercial bank financial bond; enterprise bond, asset-backed securities, international institutional bond, etc. Central government bond and local government bond; enterprise bond and corporate bond; stock and fund, etc. Debt financing instrument of non-financial enterprises, negotiable certificate of deposit, etc. Bond business market share (at the end of 2016) Depository RMB trillion Yuan, 77.66% Settlement RMB trillion Yuan, 60.34% RMB 4.45 trillion Yuan, 7.89% RMB trillion Yuan, 24.11% RMB 8.13 trillion Yuan, 14.44% RMB trillion Yuan, 15.55% Depository system Mainly direct depository. Supplemented by indirect depository; general depository for government bond, enterprise bond, and credit asset-backed securities Central registration, secondary depository Direct depository Settlement method Real time gross settlement Gross + net Gross + net Cash settlement Using central bank money Using commercial bank money Using central bank money

22 W.5 Law and Regulation The legal framework 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 regulators); business rules are the rules issued by the bond market infrastructures; business agreements are the service agreements signed by and between the bond market infrastructures and customers. Market laws & regulations is the general term of laws, administrative regulations and department rules. I. Bond market-related laws & regulations (I) Basic laws & regulations regarding the interbank bond market Law of the People's Republic of China on the Peoples Bank of China, implemented since 1995 and amended in 2003; Measures for the Administration of Bond Transactions in the National Interbank Bond Market, implemented since 2000; Administrative Measures for the Registration, Depository and Settlement of Bonds in the Interbank Bond Market, implemented since 2009; Measures for the Administration of the Issuance of Financial Bonds in the National Interbank Bond Market, implemented since 2005; Measures for Administration of Commercial Papers of Securities Companies, implemented since 2004; Pilot Administrative Measures for the Securitization of Credit Assets, implemented since 2005; Regulations on the Administration of the Bond Outright Repo in the Interbank Bond Market, implemented since 2004; Regulations on the Administration of the Forward Transactions of Bonds in the National Interbank Bond Market, implemented since 2005; Administrative Measures for Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market, implemented since 2008; Provisions on the Administration of Market Makers in the National Interbank Bond,implemented since 2007; Measures for the Administration of Savings Government Bonds (Electronic), implemented since 2013; Administrative Measures for OTC Business of National Interbank Bond Market, implemented since (II) Basic laws & regulations regarding the exchange bond market Securities Law of the People's Republic of China, implemented since 2006, amended in

23 and then in 2014 for the third time; Administrative Measures for the Issuance and Transactions of Corporate Bonds, implemented since 2015; Regulations on the Administration of Asset Securitization Business of Securities Companies and Subsidiaries of Fund Management Companies, implemented since (III) Basic cross-market laws & regulations Regulation on Central Government Bonds of the Peoples Republic of China, implemented since 1992 and amended in 2011; Regulations on Administration of Enterprise Bonds, implemented since 1993 and amended in 2011; Interim Measures for Administration of Central Government Bonds of the Peoples Republic of China, implemented since 1997; Administrative Measures for Central Government Bond scross-market Custodian Transfer, implemented since 2000; Administrative Measures for Subordinated Term Debts of Insurance Companies, implemented since 2004 and amended in 2013; Guidelines for Issuance of Enterprise bonds by Tender (Interim), implemented since 2014; Guidelines for Issuance of Enterprise bonds by Book-building (Interim), implemented since 2014; Interim Measures for Administration of Project Revenue Bonds, implemented since II. Regulators in the bond market In Chinas bond market, there are a number of authorities regulating different markets and bond types. Regulator PBC MOF NDRC CSRC CBRC CIRC SAFE Purview Interbank bond market; Central Bank bill, financial bond, commercial paper of securities companies, debt financing instrument of non-financial enterprises, credit asset-backed securities, Panda bond, interbank negotiable certificate of deposit (the National Association of Securities Dealers of PBC is responsible for industrial self-imposed regulation of the issuance and registration of debt financing instruments of non-financial enterprises in the interbank market) Central government bond, local government bond, Panda bond Enterprise bond, Panda bond, railway bond Exchange market, National Equities Exchange and Quotations (New Third Board); Corporate bond, commercial paper of securities companies, convertible bond, exchangeable bond, enterprise asset-backed securities, Panda bond Financial bond and credit asset-backed securities issued by banking institutions Subordinated term bond of insurance companies, and financial bond of insurance companies Panda bond

24 W.6 Bond Issuance I. Issuing methods Public offering is the main method. (I) Public offering 1. Issuance 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 bid-winning modes like equal ratio quantity, 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 government bonds, financial bonds and large-scale corporate credit bonds. 2. Offering by book-building: 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 investors 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. 3. Over-the-counter offering In general, bonds are issued synchronously in the commercial bank OTC market and the interbank market, and the issuing price is determined as per the result of tendering in the interbank bond market. Specifically, the key-term book-entry central government bonds are distributed by underwriters in the interbank bond market and the OTC bond market synchronously. The amount available to distribute over the counter is the amount the underwriter win in the issuance by tender for their proprietary business. As regards the policy bank financial bonds, the issuer shall determine the bonds to be traded over the counter and apply for additional amount for such business, and distributors will then sell them over the counter. Savings bonds can only be offered over the counter, and the issuer shall determine the issuing price independently. II. Issuance system CCDC provides an integrated general issuance service platform, to satisfy the large-scale, high-frequency, low-cost, low-risk and efficient issuing demands. First, flexibly support diversified issuance methods like offering by tender and book-building. The issuance system can support simultaneous offering of multiple bonds by tender, with diversified options such as the supplementary issuance and incemental issuance, realize many tendering ways and bid-winning ways, flexibly select the designated function for bidding according to the issuers 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

25 bond issuance. Second, meet the issuers 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, Asian Development Bank and New Development Bank have been issuing Panda 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 PBC, 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 PBC for filing; to transfer foreign exchange funds from outside for RMB bonds principal & interest payment, the issuer shall get the approval of SAFE. VI. Issuance in Free Trade Zone (FTZ) In accordance with CCDC s Bond Services Guide on China (Shanghai) Pilot Free Trade Zone, CCDC provides support for bond issuance in the FTZ. Eligible issuers shall sign the Issuance, Registration and Agency Redemption Service Agreement with CCDC, and open issuance accounts in CCDC. In December 2016, the first FTZ bond was successfully issued

26 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 adopted, while in the exchange bond market and commercial bank OTC market, secondary depository is adopted. CCDC is responsible for the general and primary depository of bonds, while the secondary depository and sub-depository institutions are, under the control of the general depository, responsible for the secondary depository of bonds. (I) Interbank bond market Any investor conforming to PBC 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 and act as the agent of type C settlement members to carry out bond settlement or work on the bond OTC 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 bondholders 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:

27 Diagram 7-1 Diagram of Relationship between Settlement Members and Bond Accounts (II) Exchange bond market In the exchange bond market, the settlement institution (CSDC) of stock exchanges opens the general bond account in CCDC and investors open the bond 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 bond account system. All bonds in the exchange market are 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 bond account system, a secondary depository system is adopted. CSDC opens an agent master account in CCDC and an exchange investor opens a securities account in CSDC who establishes a securities account in its own name, to handle centralized delivery of bonds between CSDC and all settlement participants4. 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. 4 Settlement participantsare the securities company and other institutions, with the approval of CSDC, directly participating in the bond and capital settlement & delivery organized by CSDC and undertaking the final delivery responsibility within the electronic securities registration and settlement system established and managed by CSDC

28 Diagram 7-2 Bond Account System of Exchange Bond Market (III) Commercial bank OTC market In the commercial bank OTC market, a secondary depository system is adopted, CCDC is the primary depository while the banks allowed to host bond OTC business are the secondary depository. CCDC opens proprietary and agent master accounts (primary bond accounts) for the hosting banks, recording the bonds owned by themselves and on behalf of secondary depository customers separately. CCDC is responsible for the authenticity, accuracy, completeness and safety of the primary depository accounting. The bond account (secondary account) opened for investors by the hosting banks through their business branches is used to record the bonds held by investors and changes caused due to purchase and sell activities, and handle business like bond offering, trading, pledging, freezing, non-transaction transfer, custodian transfer and principal redemption. The hosting bank is responsible for the secondary bond account. (IV) FTZ market CCDC sets up FTZ dedicated sub-accounts under investors bond accounts for the depository of FTZ bonds held by investors, so as to distinguish the bonds held by investors in the interbank bond market from those held in the FTZ bond market, thereby calculating and managing the two types separately. Investors shall apply to open dedicated sub-accounts in accordance with the Procedures for the Dedicated Sub-Accounts in China Shanghai Pilot Free Trade Zone. Eligible OTC business hosting banks in the FTZ OTC market may provide relevant services for investors. CCDC undertakes the responsibility of central registration, primary depository and settlement of FTZ bond OTC business while the hosting banks undertake the responsibility of secondary depository and settlement. III. Cross-market custodian transfer of bonds Investors can transfer their bonds between different depositories. Investors eligible to trade in the interbank market may transfer the bonds that satisfy the requirements for custodian transfer between the interbank bond market and the exchange market; investors eligible to trade in the OTC market may transfer the bonds that satisfy the requirements for custodian transfer between the OTC market and the exchange market. Besides, secondary custodian transfer may be conducted within the OTC market, for example, from one OTC business hosting bank to another

29 At present, categories of bonds of which the cross-market transfer of depository can be carried out include central government bonds, local government bonds and enterprise bonds. According to the Administrative Measures for Cross-market Custodian Transfer of Central Government Bonds of the MOF and relevant business plans, CCDC has formulated the Rules for Cross-Market Custodian Transfer of Central Government Bonds, requiring that certain preconditions should be met to handle cross-market custodian transfer of central government bonds and local government bonds. For example, the bond holder shall be qualified to trade in places where the bonds are transferred in. Before applying for custodian transfer, the bond holder shall open a bond or securities account with the depository of the trading place to which the bonds are transferred, and the name of the bond or securities account shall be identical to that in the former depository. The bonds to be transferred shall be eligible to trade in both trading places. As to the cross-market custodian transfer of enterprise bonds, CCDC s type A and B settlement members can directly apply to CCDC for handling. However, type C settlement members have to apply to the business branches of their settlement agents or bond underwriters, who will then handle such requests of Type C members through CCDC on their behalf. After accepting the application for custodian transfer, CCDC will transfer the bonds to CSDC s accounts, and the bonds transferred may be traded in the exchange market on the next day. After accepting the application for custodian transfer, CSDC has to transfer the bonds to CCDC s account, and the bonds can be traded in the interbank bond market on the next day. Diagram 7-3 Operating Mechanism of Custodian Transfer in the Interbank Bond Market and Exchange Bond Market IV. Bond principal redemption/interest payment Entrusted by the issuer, CCDC performs the obligations of paying the principal and interest of redeemed bonds and relevant income from bonds. Such STP service cuts the intermediate section and improves the bond holders capital use efficiency. After receiving the redeemed funds transferred by the issuer, CCDC shall calculate the investors funds payable and transfer the principal and interest payment of the bonds to bond investors having opened accounts in CCDC

30 through China National Advanced Payment System (CNAPS). Besides, CCDC provides management services for outstanding bonds, including option management and bond interest rate adjustment

31 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 government agencies 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, regulators and market institutions in various countries 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 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 the worlds 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. 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. As of the end of 2016, the balance of bond collateral under the management of the Central Collateral Management System amounted to RMB 12 trillion Yuan, becoming one of the largest in the world. (I) Serving commercial institutions in the securities market CCDC can provide services like collateral marking to market, replacement and adjustment for bilateral pledge business such as the pledged repo, outright repo, forward transaction and bond lending. Nowadays, more than 3,700 institutions and products have applied to do bilateral pledge business, and the related collateral management services have been put into use, almost covering all major investors in the interbank market. (II) Serving macro-control 1. Monetary policy The part in the open market operations of PBC s monetary policy that requires collateral management is the repo transaction. In 2013, the PBC created new monetary policy tools: standing lending facility (SLF) and medium-term lending facility (MLF), tools for PBC to provide financial

32 institutions with short-term liquidity, but requiring the financial institutions to provide the bond pledge. CCDC provides collateral management services for such monetary policy business. 2. Fiscal policy Treasury cash management is an important part of the fiscal policy of MOF. Nowadays, management of commercial banks time deposits as collateral for treasury cash management is carried out by CCDC. 3. Foreign exchange management 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. (III) Serving China payment & settlement systems China National Advanced Payment System (CNAPS) as the infrastructure in China s financial market includes the High Value Payment System (HVPS) and Bulk Electronic Payment System (BEPS). To guarantee the settlement efficiency and avoid liquidity shortage, both HVPS and BEPS provide member banks with liquidity support, but member banks need to pledge bonds to the PBC. As to the large-value payment system automatic pledge financing and small-amount payment system pledge quota management, CCDC has been providing collateral management services for the automatic pledge business of HVPS and the pledge amount management of BEPS. (IV) Serving social security system To strengthen investment and operation management of social security funds, guarantee the safety of funds, improve the efficiency in fund operation and further optimize operating procedures of negotiated deposits in commercial banks, CCDC starts providing collateral management services for negotiated deposits under the management of Local Social Security Fund so as to make such deposits safer and more efficient, economical and market-oriented. CCDC began to provide collateral management services for Local Social Security and Pension Fund and National Social Security Fund respectively in May 2015 and December The collateral under management amounted to around RMB 38 billion Yuan. (V) Serving the derivatives market CCDC s collateral management services are not limited to the interbank market, and have extended to central counterparties of various operating and trading venues, such as CFFEX. In January 2015, CCDC launched the business of using central government bonds as margin for futures trading, thereby extending collateral management services to the derivative market. CCDC now manages about RMB 40 million Yuan of collateral in this market. (VI) Serving the gold trading market Since 2016, CCDC s business of using central government bond as margin for gold trading was launched which as a common practice in the international market was officially introduced to the gold trading market. (VII) Serving cross-border business

33 1. Bilateral currency swap In October 2016, CCDC handled currency swap and pledge business for domestic commercial banks and overseas central banks. Overseas central banks provided guarantee for currency swap of domestic commercial banks with RMB bonds they held as collaterals. 2. Green asset-covered bond In November 2016, under the support of CCDC, the Bank of China successfully issued green asset-covered bonds in overseas markets by using the green bonds held by the bank in the domestic market as the collateral pool to guarantee its overseas debt financing activities. CCDC, acting as a collateral manager and executor in this project, assumed the responsibility of valuation, marking-to-market, collateral evaluation and monitoring of the collateral asset pool of such bonds, and will be responsible for disposing the collateral assets in the case of default. (VIII) Development plan of collateral management In future, the collateral management will be extended to more fields. First, to deepen the support for national macro-control policies, which is an important field not only for market institutions to obtain liquidity but also to promote the collateral management services. Second, to serve various central counterparties, e.g., central government bonds can be used as collateral for central government bond futures transaction, and also for stock index futures, commodity futures etc. Third, to realize that 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 supports innovative transaction varieties, such as tri-party repo or automatic short selling. Fifth, to expand cross-border collateral management service, promote cross-border recognition of collateral, and build cross-border connection between collateral. This last objective is also a field that requires CCDC s utmost effort and will be the main development direction of collateral management in the future. III. Functions of CCDC s collateral management system Major collateral management services include automatic selection and calculation of pledged bonds, marking-to-market, automatic supplementation and deduction, and automatic or manual replacement of pledged bonds and data statement. The main functions are as follows: 1. Parameter-based management CCDC s collateral management system carries out the parameter-based management for key elements. 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

34 exposure, and the collateral management system will realize automated management based on parameters. Such all-round automated management can effectively rationalize the business procedures, simplify operating process and improve collateral management efficiency. 3. Management during the pledge Collateral management focuses on whole-course monitoring and precautions against risks during the pledge. CCDC s collateral management system mainly provides such services during the pledge as daily mark-to-market, manual adjustment and substitution, replenishment, and automatic substitution upon maturity. 4. Data management 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 counterparties summary information, details of pledge collateral, marking to market result of collateral, etc. IV. Service advantages of CCDC s collateral management services (I) Scale effect of centralized management Among all kinds of bonds entrusted to CCDC, central government bonds, central bank Bills, local government bonds and policy bank bonds with the supreme credit rating are most suitable as collateral. The amount of such collateral has been up to RMB 34.5 trillion Yuan. It can be said that collateral of the highest quality in the domestic market is under CCDC s central depository, enough to support the massive financial business. Scale effect in collateral operations realized by one-stop centralized collateral management can reduce management cost. (II) Mature experience from decades of 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. (III) International advanced level in the same industry Through exchanges with advanced international depository institutions and by fully absorbing experience from the international institutions in the same industry, CCDC innovatively establishes the collateral management service system on the basis of combining experience with theory. With the late-mover advantages over its peers at home and abroad, CCSC s collateral management services cover extensive business lines and has reached international advanced level in terms of service functionality. (IV) 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. (V) Real value of collateral embodied by fair value

35 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. Therefore, collateral value calculation is more fair, scientific and authoritative. To sum up, CCDC has established an all-round, multi-level and multi-field collateral management service pattern. In other words, such services serve both government agencies and commercial institutions, both the spot market and the futures market, both the securities market and the money market, both bilateral transactions and centralized transactions, not only domestic market and onshore market but also cross-border market and offshore market, and support both standard contracts and non-standard individualized contracts

36 W.9 Bond Transaction I. Market structure So far, a unified and multi-layered market system has been formed in China s bond market, mainly inclusive of four sub-markets, namely the interbank bond market, the exchange bond market, the commercial bank OTC market and the FTZ market. 1. Interbank bond market: As the main body of China s bond market, this market occupies about 91% 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 main settlement method is the real-time gross trade-by-trade settlement. 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. 3. Commercial bank OTC market: As an extension of the interbank market, this market is also a retail market. In the OTC market, a two-level settlement system is in operation, in which CCDC is the general depository responsible for opening bond proprietary accounts and master agent accounts for hosting banks. The hosting banks as secondary depositories are responsible for recording subsidiary accounts of exchange investors. CCDC is not directly responsible for with OTC investors. Different from the exchange market, by the end of day, data about changes in the balance shall be delivered to CCDC by the hosting bank, and in the meantime, CCDC shall provide OTC investors with the balance enquiry service which becomes an important way to protect investors rights and interests. 4. FTZ bond market: As an extension of interbank bond market, FTZ bond market is defined as domestic offshore market. It is an important trial for the open development of China s bond markets, attracting foreign investors to participate in domestic bond markets, diversifying the community of bond issuers and investors, expanding backflow channels of offshore RMB funds and accelerating RMB internalization. The FTZ bond market is a special geographical area inside the border that follows the principle of opening at the front line, strict control at the secondary line for cash entry and exit administration. In other words, overseas assets can freely enter the FTZ, but the trading of assets between inside and outside the FTZ shall abide by relevant regulatory requirements. CCDC provides integrated services including issuance, registration, depository, interest payment and principal redemption, valuation and information disclosure for FTZ bonds

37 Investors can invest via FTZ e-platform or hosting banks of the FTZ OTC market. Tale 9-1 Pattern of Transactions in China s Bond Market in 2016 (Unit: RMB trillion Yuan) Interbank bond market Exchange market Commercial bank OTC market FTZ bond market Issuance amount Transaction amount Depository amount Data source: CCDC II. Transaction types (I) 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. (II) Repo transaction Repo has always been the most important transaction variety in 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 outright 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. - Outright 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 from the reverse repurchasing party. Different from the pledged repo, during the outright 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 outright repo, both parties of the settlement can negotiate based on the transaction counterparties 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 providers bond account and unfrozen when

38 settlement of the repo is normally carried out upon its expiration. 2. Repo in the exchange market (a case of the Shanghai Stock Exchange) - Central government bond outright repo: When a central government bond owner sells a central government bond, the owner and the buyer agree that, on a certain date in the future, the seller shall buy back the central government bond at the stipulated price from the buyer. The transaction subjects are confined to institutional investors who open securities accounts in the name of a legal person in CSDC Shanghai Branch; besides, before the outright 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 central government bond outright repo transaction, the performance bond is implemented. - Bond pledged repo by negotiation: Two parties to the repo transaction 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, securities company, fund company as well as the bank wealth management product, trust product, securities company assets management product, and so on. Pledged bonds include central government 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 Repo by Negotiation 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 systems 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 securities 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 securities 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 securities 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. (III) 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

39 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. (IV) Transaction of bond derivatives 1. Bond forward: Both parties of a transaction agree on that, on 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 SHCH for settlement. 2. Central government bond futures: It is a voucher for certain amounts of central government 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 central government bond transaction. There are two varieties of the central government bond futures contract so far, respectively the 5-year type and the 10-year type. For central government bond futures, delivery settlement is adopted; the deliverable central government bond must be the book-entry central government bond that is traded in the interbank bond market and Shanghai/Shenzhen Stock Exchange, and if taking part in the central government bond futures delivery, investors must apply to CFFEX for central government bond accounts through CFFEX members. (V) Treasury cash management 1. Central treasury cash management: It refers to a series of 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 central government bonds back, central government bond repo and reverse repo, etc. During the early stage, fixed-time depositing in commercial banks and buying central government 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 deposits 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

40 PBC, and it shall be determined by commercial banks based on the business principle. The banking consortium members participating in the fixed-time depositing in 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. (VI) 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 PBC, 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 PBC, 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 (I) Way of transactions in the interbank bond market Transactions in the interbank bond market are concluded mainly through the transactions-involved two parties independent 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 quotation (unilateral quotation) are included. The former quoting way refers to the offer regarding the buying and selling price & quantity of one

41 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. (II) 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 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. (III) Way of transactions in the commercial bank counter market Nowadays, only the book-entry central government 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 investors 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 carrying out a counter transaction, an investor shall open a bond account with his/her true identity and open or designate a corresponding capital account according to the administering banks 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) Way of transactions in the FTZ market

42 As required by regulatory authorities and Shanghai Free Trade Zone (SFTZ) trading front office, CCDC handles the pre-trading listing procedures for bonds issued in the FTZ and publicize key elements of bond trading to the market through Investors can invest via FTZ e-platform or hosting banks of the FTZ OTC market. Specific procedures can be learned from the aforesaid ways of transactions in the interbank market and OTC market. 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 bonds 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 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 PBC 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 retail investor. With the Shanghai Stock Exchange as an example, qualified investors cover financial institutions like securities companies, fund management companies and their subsidiaries, futures companies, insurance companies and trust companies, unincorporated institutional investors like securities 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 trading; the qualified investors can participate in central government bond pre-issuance transactions, cash bond transactions and pledged repo transactions. Retail investors can participate in the cash bond transaction and pledged repo transaction. 3. Commercial bank OTC market investor: Individual investors, corporate investors, unit investors, etc. are included in

43 4. FTZ market investor: In accordance with CCDC s Bond Services Guide on China (Shanghai) Pilot Free Trade Zone, eligible institutions with the following criteria may apply to open bond accounts in CCDC and FTZ dedicated sub-accounts to directly participate in the FTZ bond business: domestic institutions that have set up an approved FTZ Separate Accounting Unit, domestic or overseas institutions with a Free Trade Account (FTA), overseas institutions with a Non-Resident Account (NRA), and other qualified overseas institutions. Overseas institutions could either participate in FTZ bond business by themselves or entrust settlement agents or qualified international securities custodian institutions. Investors already having CCDC accounts shall use their existing accounts for FTZ bond, and only need to open FTZ dedicated sub-accounts to directly participate in FTZ bond business

44 W.10 Bond Settlement I. Settlement methods (I) Classified by whether the settlement position is netted 1. Gross settlement: At present, CCDC provides adopts the real-time gross settlement method, which is the prevailing settlement method in the interbank bond market. 2. Net settlement: At present, CSDC and SHCH provide net settlement services. The exchange bond market is dominated by this settlement method. (II) Classified by the relationship between bond delivery and cash payment 1. Delivery versus Payment (DVP): It refers to a settlement method by which bond delivery and cash payment are carried out simultaneously and mutually conditional at the settlement date. In 2004, by linking ChinaBond Integrated Operating Platform to HVPS, CCDC became a special participant in HVPS, 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 cash settlement accounts: direct participants in PBC s HVPS can complete DVP cash settlement through the settlement accounts set up in their own payment system; direct participants not in the HVPS can complete DVP cash settlement through the bond settlement dedicated cash accounts established in CCDC s cash 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 ChinaBond Integrated Operating Platform, 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 Settlement cycles of cash bond transactions in the interbank bond market currently are either T+0 or T+1, T as the transaction concluding date. III. Settlement period 1. 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 outright repo period is 91 days at most. 2. Bond forward transaction: During the handling of a bond forward transaction, both parties

45 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. 3. 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. IV. Settlement systems and their connection modes Bond settlement systems are the infrastructure used to handle the whole process of bond settlement services. (I) ChinaBond Integrated Operation Platform (CIOP) CIOP is an electronic 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 Operation System, Bond Issuance System, Bond OTC Service Center Processing System, Advanced 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 systems security level is the same as that of CNAPS, belonging to the civil highest level. (II) Cash payment system China s national payment system mainly consists of the High Value Payment System (HVPS) and Bulk Electronic Payment System (BEPS). Also known as the real-time gross transfer system, HVPS 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 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 Cash Accounts. (III) Straight through Processing (STP)

46 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 CIOP in real time which will generate the settlement 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; CIOP will handle settlement according to the order confirmed by transaction-related two parties. 2. Internetworking with the payment system In 2004, CIOP was connected to PBC 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, CIOP 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 CIOP through the 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. V. Settlement process (I) 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 PBOCs relevant stipulations, to realize the system internetworking with China Foreign Exchange Trade System and CCDC

47 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, the transaction-involved two parties complete the settlement and delivery of back-stage bonds and funds through CCDC s CIOP. 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 transaction data will be automatically sent to CCDC s system and generate a settlement instruction waiting for the confirmation of the settlement-involved two parties. Step 2: Before the end of the settlement day, the relevant back-office settlement function will check and confirm the settlement instruction as a third party through CIOP. Step 3: The settlement instruction after confirmed will generate a settlement contract. Step 4: At the settlement date designated in the contract, the CIOP 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. Diagram 10-1 Flow Chart of Settlement of Bond Transactions in Interbank Bond Market

48 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 systems operation time at the settlement date, the system will put the contract in the queue. 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. (II) 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 securities 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 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. (III) FTZ market CCDC provides transaction settlement services for FTZ bonds and open FT cash settlement accounts for investors having FTZ dedicated sub-accounts specially for handling cash clearing and settlement of FTZ bond business. Investors shall sign relevant agreements including Commitment Letter for Bond Settlement in China (Shanghai) Pilot Free Trade Zone, Agreement on Bond Trade DVP Settlement in FTZ and Agreement on Using Cash Settlement Account in FTZ, and install CCDC s operating terminal. Please refer to the settlement procedures in the interbank market for settlement procedures hereof. CCDC handle the settlement in the form of DVP pursuant to the

49 transaction instruction confirmed by the two parties involved. Where the bond-paying party does not have enough bonds or the payer does not have enough funds at the end of delivery day, the settlement shall be deemed as failure. VI. Handling of special cases (I) Settlement failure In the interbank bond market, settlement failures are mainly caused by the sellers insufficient amount of bonds or the buyers inadequate amount of funds, which will result in a failure to perform 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. (II) Emergency settlement When a terminal for the system (CIOP) 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 systems operation, 16:30 at present. VII. 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. 5 To do this, CCDC has established a whole set of monitoring systems and approaches, utilizing multiple methods like data supervision and field investigation to monitor bond-related risk. As per the competent departments requirements, settlement members shall submit the instruction filing report of the involved transactions to CCDC before the concluding of the abnormal price transaction. VIII. 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 5 There are three firewalls for market monitoring& management; the first is internal control of the members front stage or back stage; the second the intermediaries monitoring and management, and CCDC is a core institution for the operation of the interbank market, so it is endowed with the first-line market monitoring function; the third the governments supervision

50 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 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 lending, bond forward, interest rate swap, forward rate agreement and other transactions. In February 2016, PBC released the Public Note [2016] No. 3, allowing foreign institutional investors including financial institutions like commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions that are legally registered and founded outside the People s Republic of China, investment products issued by the aforesaid institutions to customers in a legal and compliant manner and other long-term institutional investors approved by the PBC such as pension fund, charitable fund and donation fund to invest in the interbank bond market and conduct cash bond transactions and hedging demand-based bond lending, bond forward, forward interest rate agreement, interest rate swap and other related transactions without an investment limit, which further facilitated the investment of foreign institutional investors in the interbank bond market. With the acceleration of the opening up of the interbank bond market, the amount of overseas institutions entering in the bond market increases rapidly. By the end of 2016, more than 400 overseas institutions have entered the interbank bond market, holding bonds worth RMB 800 billion Yuan. The interbank bond market thereby becomes the main market among Chinas bond markets that opens up 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 PBC 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

51 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 and principal payment 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-service disclosure system, CIOP 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. To support the overall opening up of bond markets, CCDC continuously enhances internationalization competence building, starts to develop system user terminals for international clients, builds the English company website and enriches its content. II. Statistics on bonds CCDC, as a Central Securities Depository, is responsible for 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

52 statistics will issue 24 monthly reports with the fixed pattern at 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 markets 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 institutions. III. ChinaBond Pricing products 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 six major product lines, respectively Chinabond yield curve, Chinabond valuation, ChinaBond market implied credit rating, Chinabond index, Chinabond VaR and my statistics. Whats 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, PBC, CBRC, CSRC and CIRC, widely used by market participants, and been one of core pricing benchmarks for China s financial market. (I) 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 central government 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, including the yield curves of the central government bonds, Central Bank Bill, local government bonds, policy financial bonds, railway bonds, commercial bank bonds, enterprise bonds, city investment bonds, medium-short-term bills

53 and asset-backed securities. By the end of 2016, the number of various yield curves issued by CCDC at the end of each day had been beyond 1,300. As the basis of ChinaBond price index systems, the ChinaBond central government bond yield curve, functioning as a leading indicator for domestic economy and the pricing reference 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 central government bond futures, loans & deposits in commercial banks and internal transfer pricing, as well as pricing of contracted deposits. Since 2004, PBC 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 funds. In 2007, CBRC determined to use ChinaBond yield curves as the measurement benchmark for risk-based regulation by banks internal market risk management and supervisory authorities risk monitoring and measurement. In 2009, the local government bonds issued by tender by MOF as agent begun to take the ChinaBond interbank fixed-rate central government bond curve as the pricing benchmark. In 2010, the CIRC took the 3-year moving average of spot rate yield curves of the ChinaBond interbank fixed-rate central government bond as the reference for measurement of insurance reserves in the insurance industry. In 2011, the ChinaBond interbank fixed-rate central government bond curve was taken as the pricing benchmark for the 50-year-period fixed-rate book-entry central government bonds issued by MOF by tender. In 2012, the ChinaBond Credit Rating Co., Ltd. used the ChinaBond yield curve as reference to calculate the implied rating of bond issuers. In 2014, China s key term central government bond yield curve was published on the website of MOF daily. In December 2015, the International Monetary Fund (IMF) approved to include ChinaBond three-month central government bond yield into the SDR interest rate basket to represent the interest rate of RMB short-term debt instruments. Such central government bond yield thus became one of the five interest rates constituting SDR interest rate, and was officially adopted on October 1, Since June 15, 2016, PBC has been releasing ChinaBond central government bond yield curve, Chinabond commercial bank bond yield curve and Chinabond medium and short-term note yield curve on its website. In 2016, China Development Bank, Agricultural Development Bank of China and Export-Import Bank of China displayed on their respective websites ChinaBond CDB bond yield curve, Chinabond ADBC bond yield curve and Chinabond EIBC bond yield curve. At present, issuers of over 100 securities including MTNs, securities companies subordinated debts and preferred stocks use the ChinaBond interbank fixed-rate central government bond yield curve as the pricing benchmark spontaneously. Some institutions begin to adopt the Chinabond CDB bond yield curve spontaneously as the pricing benchmark for bond issuance. (II) 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

54 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 RMB bonds, including nearly 30 varieties, valuates over 40,000 bonds each day, and also offers valuations of financial management direct financing tools, preferred shares of non-standard bank assets and some derivatives like credit risk mitigation tools. The number of valuation results totals over 60,000 in a single day. 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 securities 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. (III) ChinaBond market implied credit rating ChinaBond market implied credit rating - bond rating is a rating developed by combing market price indicators and information disclosed by issuers to dynamically reflect market investors evaluation for the credit level of bonds. It is the revision and supplement to the rating by rating agencies, and an important ChinaBond pricing product. Currently, ChinaBond market implied credit rating - bond rating has covered all the onshore RMB credit bonds, and releases more than 20,000 rating results every day. In the meantime, it provides rating services for nearly 800 bonds that are not rated by rating institutions. Compared with the rating service provided by rating institutions, ChinaBond market implied credit rating bond rating is distinctive by providing credit risk warning, filling in gaps of rating institutions, enabling mutual verification with the rating results of rating institutions and discovering investment opportunities. In recent years, major credit events have happened frequently in bond markets, resulting in more market attention to ChinaBond market implied credit rating - bond rating and making it a significant reference for credit risk rating. In addition, in the expected credit loss (ECL) model stipulated in the new rules of IFRS9, the adjusted ChinaBond market implied credit rating - bond rating can be used to judge whether the credit risk of bonds is increased, confirm the credit loss of outstanding bonds as per changes in valuation and yield. (IV) ChinaBond index The ChinaBond index is a series of bond indexes aimed to objectively reflect the price trend of China s bond market. Since its launch in 2002, through unremitting improvements, it has formed an extensive system with abundant indexes. ChinaBond index product system contains six major categories, including the overall index, component index, strategy-type index, investor classification index, position index and customized index. The ChinaBond overall index family is compiled to capture the overall price trends of all bonds

55 or a certain kind of bond in the market. One or more of the elements like the bonds remaining maturity, issuer type, type of trading venue, interest payment method and credit rating are taken as the criteria to screen and decide the scope of component bonds, but the quantity of component bonds is not preset. Index values and related indexes of the ChinaBond overall index family shall be weighted based on the market value of the bond balances. At present, the ChinaBond overall index family can be classified into comprehensive index, classification index and green index. Among them, comprehensive indexes are broad-based indexes, which can represent the bond prices in the entire market (such as ChinaBond-comprehensive index, ChinaBond-new comprehensive index), or the overall price trend of interest rate bond (such as ChinaBond-overall index), or the overall price trend of credit bonds (ChinaBond-overall index of credit bond, ChinaBond-corporate credit bond index). Classification index can be classified into 7 categories by interest calculation mode, issuer type, trading venue, credit rating, term to maturity, maturity, etc. Green index, including ChinaBond China green bond index, ChinaBond green bond select index and ChinaBond climate-aligned bond index reflects the development of China s green bond market and provides investors with reference benchmark and object of green bond index. Overall indexes that is widely accepted in the bond markets include ChinaBond comprehensive index, ChinaBond new comprehensive index, ChinaBond overall central government bond index and ChinaBond overall enterprise bond index. 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 bonds remaining period, issuer type, type of trading venue, interest payment method and credit rating are taken as the criteria to select and decide the scope of component bonds. But different from the ChinaBond overall index family, the quantity of component bonds in the component index is set in advance. For example, component bonds of ChinaBond short-term financing 50 index are the top 50 eligible short-term financing bonds. Index value and relevant indexes of ChinaBond component index family shall be weighted based on the weight of market value of the bond balance. As to the ChinaBond strategy-type index, the non-market value-based weighting method is used, accompanied by the weight setting and other component selection criteria, to simulate the bond indexes of one type of investment strategy, suitable as investment objects. The ChinaBond position index is constructed on the basis of bond accounts opened by institutions at CCDC. The bond balances (excluding USD bond and ABS) on an account will be used as a collection of component bonds. There will be a position index of each account. Different from the ChinaBond overall index family and ChinaBond component index family, the ChinaBond position index shall be weighted based on the weight of the positions market value in each account. Such index is only used by account holders for internal performance evaluation and risk control and is not open to the public. The ChinaBond investor classification index uses the compsitions of bonds, excluding USD

56 bond and ABS, held by different investor classes in CCDC as the component bonds, and is calculated based on the weights indicative of the bond positions market value. Investors can select the investor indexes for the class to which they belong as the reference for horizontal comparison of performance. 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 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. (3) Customers can directly designate index component bonds (or negative list of component bonds), and ChinaBond index team shall be responsible for the maintenance and index calculation of component bonds. Such index customers can decide whether to make the indexes open to the public and through which channels to do so. 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 Central Government 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 been widely used by the domestic and foreign investors regarding funds, banks and insurance, and the bond funds are dominated by Chinabond Index. In 2016, the first batch of green bond-themed indexes and the world s first climate-aligned bond index, and cooperated with a fund company to issue CDB index fund. At present, Chinabond Index releases more than 60 indexes and more than 400 sub-indexes to the public, covering the major bond varieties in China s bond markets

57 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: December 31, 2016 Data source: Wind Information (IV) 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 VaR/CVaR 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. (VI) My statistics My statistics is the statistics statement provided exclusively for investors in the bond market for their bond businesses. Now close to 3,000 investors are receiving this service. This function provides nearly 70 bond business-related statistics statements, covering bidding and tendering in the primary market, settlement of transactions in the secondary market, bond investment performance evaluation, position structure, and risk monitoring indexes. My statistics conducts multi-dimensional analysis of customers accounting data by using the ChinaBond price indexes and statistics, and supports the in-depth application of these information by the front, middle and back offices of investment institutions. It can free up customers manual resources from collection and analyses of statistics, enrich investors performance evaluation metrics, facilitate customers operation management, investment decision analysis and bond investment performance evaluation, and help investment institutions to improve their bond business management level and efficiency

58 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 Peoples Republic of China [9] People's Bank of China [10] National Development and Reform Commission of the Peoples Republic of China [11] Interbank Market Clearing House Co., Ltd. [12] Shanghai Stock Exchange [13] Shenzhen Stock Exchange

59 Appendix I: Status of Operation of China s Bond Market (2016) I. Operation status of China s bond market in 2016 (I) Money market rate showed stable performance Compared with last year, money market rate has been stable in Specifically, the rate saw relatively large fluctuations in Q1 with a peak in February. Then it slightly declined to the annual average in Q2, and remained stable over Q3. In Q4 due to increased credit risk events in the bond market, the rate displayed an upward trend (see Figure 1). Daily average of interbank overnight repo rate increased by bp to 2.11% while that of 7-day repo rate decreased by bp to 2.55%. Figure 1 Trends of Shibor since 2016(%) Data source: Shanghai Interbank Offered Rate (SHIBOR) In 2016, PBC maintained its prudent and neutral stance on monetary policy and ensured the stability of the money market rate in spite of the impact of RMB devaluation, continuous decline of funds outstanding for foreign exchange and other liquidity gaps. In March, PBC lowered the required reserve ratio by 0.5 percentage point, and shifted to MLF, PSL, reverse repo and other monetary policy instruments to maintain the liquidity of financial market. The total social financing cost decreased in general over Indirect financing cost was the lowest since As for direct financing cost, the average issuance interest rate of enterprise bonds was 4.5% in 2016, a decrease of 120 bp from 5.7% in However, starting from Q4, bond market yield has kept increasing due to multiple factors, and credit spread has risen due to the increase of credit defaults, resulting in growing enterprise financing cost. (II) Bond index fell at the end of year, and yield curve trended up amidst fluctuations From January to November 2016, bond price indexes went up amidst fluctuations, but started to fall at the beginning of November. On October 21, ChinaBond New Composite Index

60 (net price) reached the annual high of with a rise of 0.56% over the beginning of the year, began to fall at the end of October and reached the annual low of on December 20 with a decline of 4.03% compared to the high point (see Figure 2). Figure 2 Chinabond New Composite Net Price Index Trend Data source: Central government bond yield curve climbs up in fluctuations. Compared to Q1, central government bond yield curve moved up obviously in Q2, especially in April, and went sharply down to below the average level of Q1. But in Q4, the yield picked up and continued to move up substantially (see Figure 3). On an annual basis, the central government bond yield curve rose at the end of the year compared to the beginning Figure 3 Changes in Chinas Central Government Bond Yield Curve Data source: (III) Total issuance amount in bond market increased stably yet at a lower speed In 2016, bond issuance altogether reached RMB 22 trillion Yuan, with a year-on-year increase of 25% (see Figure 4). Specifically, RMB 14 trillion Yuan of bonds were issued through

61 CCDC, accounting for 63% of the total, RMB 5 trillion Yuan issued at SHCH, accounting for 24%, and RMB 3 trillion Yuan issued on exchanges, accounting for 13% (see Table 1). Table 1 Issuance in the Bond Market Issuance amount (RMB 100 million) Whole market 223, CCDC 141, SHCH 53, CSDC 28, Data source: and wind database Figure 4 Trend of Bond Market Issuance Amount from 2005 to 2016 (Unit: RMB 100 million) Data source: and wind database In terms of bond issuance in the interbank bond market, at CCDC, central government bonds of RMB 3 trillion Yuan were issued, with a year-on-year increase of 52%; local government bonds of RMB 6 trillion Yuan were issued, with a year-on-year increase of 58%; policy bank bonds of RMB 3 trillion Yuan were issued, with a year-on-year increase of 30%; commercial bank bonds of RMB 0.37 trillion Yuan were issued, with a year-on-year increase of 82%; credit asset-backed securities of RMB 0.35 trillion Yuan were issued, with a year-on-year decline of 12%. In SHCH, medium-term notes of RMB 1 trillion Yuan were issued, with a year-on-year decrease of 9%; short-term commercial papers (including super-short-term commercial papers) of RMB 3 trillion Yuan were issued, with a year-on-year rise of 4%; PPNs of RMB 0.60 trillion Yuan were issued, with a year-on-year fall of 31% (see Figure 5). 6 The statistics excludes negotiable certificates of deposit. The issuance amount in the year is about RMB 13 trillion Yuan, and the balance is about RMB 6.27 trillion Yuan at the end of the year

62 Figure 5 Issuance Amount by Bond Type in the Interbank Bond Market in 2016 Data source: (IV) Total depository amount in the bond market kept increasing At the end of 2016, the existing depository amount in China s bond market reached RMB 56 trillion Yuan, with a year-on-year growth of 26%. Specifically, CCDC had RMB 44 trillion Yuan of bonds under depository, occupying 78% of the total (see Figure 9 for the share of different bond types); SHCH had RMB 8 trillion Yuan of bonds under depository, accounting for 14% of the total; and exchanges had RMB 4 trillion Yuan of bonds under depository, representing 8% of the total (see Table 2). Table 2 Bond Balance in the Bond Market in 2016 Balance (RMB 100 million) Whole market 563, Bonds under the depository of CCDC 437, Bonds under the depository of SHCH 81, Bonds under the depository of CSDC 44, Data source: and wind database Investors holding structure had the following characteristics at the end of 2016 (see Table 3): 1. In 2016, local government debt replacement continued. Local government bonds of RMB 6.04 trillion Yuan were issued throughout the year, among which local debt replacement amounted to RMB 4.87 trillion Yuan. The largest holders of local government bonds were commercial banks which held RMB trillion Yuan of such bonds, up by RMB trillion Yuan or 110% year-on-year. The amount held by insurance companies and funds grew a

63 high speed, up by 370% and 202% respectively year-on-year, but the total amount remained small. 2. The outstanding amount of enterprise bonds continued to increase, reaching over RMB 3.5 trillion Yuan, with a year-on-year growth of 12%. The bonds held by non-banking financial institutions and exchanges increased while that held by commercial banks, credit cooperatives, securities companies, insurance companies and non-financial institutions slightly declined. 3. The bonds held by fund investors (including supplementary pensions, social security funds and fund products) increased rapidly. As of the end of year, fund investors held more than RMB 7 trillion Yuan of bonds, mainly financial bonds and enterprise bonds, with a year-on-year growth of 51%. Among them, policy bank financial bonds were RMB trillion Yuan, accounting for 39% while enterprise bonds were RMB trillion Yuan, accounting for 23%. 4. The interbank bond market has been steadily opening up. Type of bonds held by overseas institutions remained basically the same. Until the end of 2016, bonds of overseas institutions under depository in the interbank bond market increased by 29%, accounting for 2% of the total amount of outstanding bonds in the market, a slight increase. In terms of bond types, overseas institutions increasingly preferred central government bonds and policy bank bonds, the sum of which accounted for 93% of the total amount they held, a rise of 11% over It is noteworthy that local government bonds had a rapid growth rate among all the bond types held by overseas institutions, the depository amount of which increased to RMB 53 trillion Yuan from RMB 4 trillion Yuan at the end of Figure 6 Proportion of Different Bond Types under the Depository of CCDC at the end of 2016 Data source: