Bond Connect - Frequently Asked Questions for the Buy Side Investors

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1 1 September 2017 Bond Connect - Frequently Asked Questions for the Buy Side Investors What is Bond Connect? Bond Connect is a new mutual market access scheme that is established to allow Mainland China and overseas investors to trade in each other's bond markets through a linkage between the Mainland China and Hong Kong market infrastructures. Northbound trading (that is, foreign investors investing in bonds traded on the China Interbank Bond Market (CIBM)) began on 3 July 2017, while Southbound trading will be explored at a later stage. Under Bond Connect, foreign investors do not have to open onshore accounts in Mainland China to hold its CIBM bonds. Instead, CIBM bonds can be held by foreign investors through their global custodian via the Central Moneymarkets Unit (CMU). Do I need approval to trade through Bond Connect? To trade CIBM bonds through Bond Connect, you must first be registered with the People s Bank of China Shanghai Head Office (PBOC Shanghai Office) as an eligible foreign investor for the purpose of Bond Connect. Once registration is completed, there is no other formal approval required and your investment in the CIBM will not be subject to any investment quota. Registration for Bond Connect can be done through Bond Connect Company Limited (BCCL) or China Foreign Exchange Trade System & National Interbank Funding Centre (CFETS). For detailed steps and application documents for registration through BCCL, please click here. If you already have access to the CIBM via the foreign institutional investor (FII) direct access route, you could also register for Bond Connect through the settlement agent in Mainland China appointed by you under the FII direct access regime. Am I qualified as an eligible foreign investor? On what basis should I apply if I am a hedge fund or private equity fund? Bond Connect is available to eligible foreign investors, namely Qualified Foreign Institutional Investors, RMB Qualified Foreign Institutional Investors, central banks, international financial organisations and sovereign wealth funds, and FIIs who are eligible to access the CIBM via the FII direct access route (i.e. foreign financial institutions, investment products issued by foreign Bond Connect - Frequently Asked Questions for the Buy Side Investors 1

2 financial institutions and other medium to long term investors). If you are a manager of a hedge fund or private equity fund, you can consider registering the relevant fund under the category of products issued by foreign financial institutions. Can I use Bond Connect if I am already registered as an FII via the direct access route? Can I move my bonds held through the direct access route to Bond Connect and vice versa? Yes, you can trade in the CIBM via both the Bond Connect route and the FII direct access route. Your existing FII status does not prevent you from participating in Bond Connect, but you would still need to register with PBOC Shanghai Office as an eligible foreign investor. However, you cannot move the bonds directly between your direct access onshore account and your Bond Connect account, since any transfer of bonds under Bond Connect must be done through a trade concluded on the CIBM trading system with an approved onshore market maker. What currency should I use to trade in Bond Connect? How do I hedge currency risks arising from investments through Bond Connect? You can use your own source of offshore renminbi (RMB) or convert foreign currency offshore into RMB to invest in CIBM bonds under Bond Connect. If you wish to convert foreign currency at the onshore conversion rate of CFETS, you can also instruct your custodian to engage an RMB settlement bank in Hong Kong on your behalf for such foreign exchange conversion. Your custodian can also hedge the currency risk on your behalf with that RMB settlement bank in Hong Kong. However, if CIBM bonds are purchased using foreign currency converted into onshore RMB, then upon a sale of the relevant CIBM bonds, the proceeds of sale remitted out of Mainland China must be converted back into the relevant foreign currency. Does settlement in Bond Connect operate on a delivery vs payment (DvP) basis with China Central Depository & Clearing Co., Ltd. (CCDC) and Shanghai Clearing House (SHCH)? Settlement through SHCH operates on a DvP basis. In contrast, settlement through CCDC operates on a gross basis. On each settlement date, CCDC will lock up the relevant CIBM bonds in the seller s account whilst the buyer will have to transfer the settlement proceeds to the seller first. After receiving the payment completion confirmation from both the buyer and the seller, CCDC will effect the settlement on a gross basis by transferring the relevant CIBM bonds to the buyer s account. Bond Connect - Frequently Asked Questions for the Buy Side Investors 2

3 Do I have beneficial ownership in bonds held through Bond Connect? Yes, the ultimate foreign eligible investors are the beneficial owners of the relevant CIBM bonds and may exercise their rights against the bond issuer through CMU as the nominee holder. The nominee holder may exercise its creditor rights and bring actions against bond issuers in Chinese courts. In addition, ultimate investors who can prove that they are the beneficial owners of the bonds with a direct interest in the case may also bring actions against bond issuers in Chinese courts directly in their own names. Chinese courts will respect arrangements under Hong Kong law on how beneficial ownership is to be evidenced. Can I transfer the CIBM bonds held in my account with the Hong Kong custodian to another foreign investor? At present, CIBM bonds can only be transferred under Bond Connect through a trade concluded on the CIBM trading system with an approved onshore market maker, and non-trade transfer is expressly prohibited under Bond Connect, which means transfers of CIBM bonds between two CMU members, or between two CMU sub-accounts of the same CMU member are not allowed. Can I pledge my CIBM bonds held through Bond Connect to raise finance in Hong Kong and in the international market? As Bond Connect adopts a multi-tiered holding structure, an eligible foreign investor can grant security over the account or sub-account in its name at CMU, so long as there is no non-trade transfer, and subject to relevant requirements in Hong Kong and elsewhere. Did I hear that, not only can I trade in the secondary market, I can also subscribe for primary market issuance through Bond Connect? Yes, in addition to secondary market trading, eligible foreign investors can subscribe for CIBM bonds in the primary market under Bond Connect. Bond Connect is therefore broader than the existing access schemes by giving eligible foreign investors direct access to primary issuances in the CIBM. Eligible foreign investors have participated in several primary issuances through Bond Connect since its launch. What documents do I need to sign (and with which service providers) in order to trade in Bond Connect? You would need to prepare for on-boarding with the various Bond Connect intermediary entities such as an offshore electronic trading platform, a CMU member as your custodian, and maybe an RMB settlement bank, and sign up to their client terms, applicable Bond Connect supplement and/or CIBM access documentation. Bond Connect - Frequently Asked Questions for the Buy Side Investors 3

4 What legal services can Linklaters provide me to assist with my trading in Bond Connect? Linklaters can help identify and analyse key legal issues that you should be aware of to trade under Bond Connect, and can assist you in reviewing the relevant documents that you will need to sign with other Bond Connect entities, such as a CMU member as your custodian, and a RMB settlement bank in Hong Kong as your settlement bank for trades under Bond Connect. Bond Connect - Frequently Asked Questions for the Buy Side Investors 4

5 Contacts For further information please contact: Chin-Chong Liew Partner (+852) Karen Lam Counsel (+852) Simon Zhang Counsel (+852) Leo Pan Managing Associate (+852) Ying Zhou Associate (+852) Jenny Wong Senior PSL (+852) or any of your other usual Linklaters contacts. Authors: Simon Zhang, Leo Pan This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters. All Rights reserved 2017 Linklaters Hong Kong is a law firm affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on Please refer to for important information on Linklaters LLP s regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Linklaters 10th Floor, Alexandra House Chater Road Hong Kong Telephone (+852) A /1.0/01 Sep 2017