NATIONAL ASSOCIATION OF FINANCIAL MARKET INSTITUTIONAL INVESTORS 2012 July http://www.nafmii.org.cn/site/home/en INSIDE THIS ISSUE MARKET NEWS 2 Bond Market Macroeconomy NAFMII NEWS 4 NAFMII RESEARCH 8 MARKET NEWS Bond Market News Memorandum of Cooperation on Listing and Trading of RMB Government Bonds Signed in Hong Kong China Will Launch Central Counterparty Clearing Mechanism for Interest Rate Swaps Market Macroeconomic News Deposit and Lending Interest Rates of RMB Achieving Two-way Fluctuation for the First Time RMB Capital Account Convertibility to Be Piloted in Shenzhen Qianhai District NAFMII NEWS NAFMII Issues Self-regulatory Disciplinary Rules for the Debt Financing Instrument Market of Non-financial Enterprises NAFMII signs Trilateral MOU with Three Provinces and Local Central Sub-branches of PBC NAFMII held the First Meeting of Second Bond Market Committee Finance Serves Real Economy to Revive Steel & Energy Sectors and Transportation Industry Secretary-General Shi Wenchao Meets Chairman of the City of London Corporation Contact information: Fan Shilei fanshilei@nafmii.org.cn Zhou Ying zhouying@nafmii.org.cn International Corporation Department National Association of Financial Market Institutional Investors Inauguration Meeting & First Session of the Second NAFMII Financial Derivatives Committee Smoothly Held NAFMII RESEARCH Financial Market Research (Inaugurated) Three Research Reports on Credit Risk Mitigation Instruments
Market News Bond market Memorandum of Cooperation on Listing and Trading of RMB Government Bonds Signed in Hong Kong On June 22, Sun Xiaoxia, Director of the Finance Department under the Ministry of Finance, and Li Xiaojia, President of Hong Kong Exchanges and Clearing Limited (HKEX), signed a memorandum of cooperation in Hong Kong, with a consensus reached on the listing and trading of RMB dominated treasury bonds on the HKEx. As an important move to deepen fiscal and financial cooperation between Chinese mainland and Hong Kong, this will facilitate trading of RMB government bonds at the bourse, and enhance the liquidity of these bonds on the secondary market. The Ministry of Finance will issue treasury bonds with a total value of 23 billion yuan in Hong Kong during this year. The bonds will include 5.5 billion for individual investors, 15.5 billion for institutional investors and 2 billion for foreign central banks. These bonds will be listed and traded on the HKEx after issuance. China Will Launch Central Counterparty Clearing Mechanism for Interest Rate Swaps Market Xu Zhen, Chairman of Shanghai Clearing House, said on June 29 that China plans to launch the central counterparty clearing mechanism for the interest rate swaps market this year to accelerate market-oriented reform of interest rates. The central counterparty clearing mechanism is a clearing mechanism that the clearing house, as a central counterparty, becomes the counterparty to both parties of the original derivatives contract to ensure execution of the contract as usual when one party fails to fulfill the contract. This is the Chinese Government s response to the appeal of G20 to clear all standardized OTC derivatives through the central counterparty before 2012. Xu Zhen also noted that Shanghai Clearing House plans to expand the mechanism to cover exchange rate derivatives, and launch central counterparty clearing when the market conditions permit. Macroeconomic News 2
Guidelines on Accelerating Cultivation of New Advantages in International Cooperation and Competition Officially Published On June 1, the National Development and Reform Commission (NDRC) and other authorities published the Guidelines on Accelerating Cultivation of New Advantages in International Cooperation and Competition, outlining the landscape of the reform, opening and internationalization of the Chinese financial sector. The Guidelines points out that the global economic structure will suffer from a profound adjustment for the present and for a period in the future, competition in market, resources, talents, technology, criterions and other fields will grow increasingly fierce, and the external environment China faces will become more complex. All these make it an urgent need to accelerate cultivation of new advantages in international cooperation and competition. The Guidelines was jointly formulated by eight ministries and commissions, including NDRC, the Ministry of Finance and the People s Bank of China. The document includes 18 measures in three parts - guiding thoughts and basic principles, targets and tasks, supporting measures. The targets and tasks established by the Guidelines include optimizing foreign trade structure, promoting utilization of foreign investment, accelerating the implementation of the going-out strategy, refining the regional opening landscape, building an open innovation system, building up the international competitiveness of industries, carrying forward financial internationalization steadily, and deepening international economic cooperation. The Guidelines also provides a series of supporting measures, which include improving foreign trade policy, and accelerating transformation of foreign trade development pattern; refining the scientific & technological opening mechanism and enhancing core competitiveness; carrying forward financial reform and innovation, and deepening financial opening; and reforming the foreign economic mechanism, and lifting the level of macroeconomic management. Deposit and Lending Interest Rates of RMB Achieving Two-way Fluctuation for the First Time The People s Bank of China (PBC), the central bank, decides to cut the benchmark deposit and lending interest rates of the financial institutions as of June 8, 2012, and the demand deposit interest rate is 0.4% after the adjustment. Meanwhile, the PBC has increased the upper limit of the floating range of the deposit interest rate of the financial institutions to 3
110% of the benchmark interest rate, and reduced the lower limit of the floating range of the loan interest rate of the financial institutions to 80% of the benchmark interest rate. RMB Capital Account Convertibility to Be Piloted in Shenzhen Qianhai District The central delegation bound for Hong Kong SAR to celebrate the 15th anniversary of Hong Kong s return held a press release on June 28 in Hong Kong. The leader of the news release center of the central delegation announced the Chinese central government would soon launch more than 30 measures, covering economy and trade, finance, education, science and technology, tourism, and Guangdong-Hong Kong cooperation, to enhance cooperation between Chinese mainland and Hong Kong. These measures for financial cooperation include launching a pilot for free convertibility under the capital accounts to further promote mutual investment and financial cooperation between Hong Kong and Shenzhen. The Central Bank Issues New Policy to Regulate RMB FDI On June 14, the People s Bank of China issued the Notice of the People s Bank of China on Elaborating the Operating Rules of the Renminbi Settlement Business for Foreign Direct Investment, specifying that some accounts cannot invest in securities, derivatives or real estate. Specifically, foreign investors shall not use funds in their special deposit accounts for preliminary expenses in RMB for land bidding or real estate purchase. RMB funds in special deposit accounts for RMB capital and general deposit accounts for RMB overseas loans should not be invested in securities or financial derivatives, entrustment loans, wealth investment products or real estates not for their own use. NAFMII NEWS NAFMII Issues Self-regulatory Disciplinary Rules for the Debt Financing Instrument Market of Non-financial Enterprises To enhance self-regulatory management of the interbank market, safeguard normal market operation and protect the legitimate rights and interests of market players, the National Association of Financial Market Institutional Investors (NAFMII) organized its members to formulate a Self-regulatory Disciplinary Rules for the Debt Financing Instrument Market of Non-financial Enterprises (the Rules). Examined and adopted by the first meeting of the Third NAFMII Council on March 1, 2012 and approved by the People s Bank of China (PBOC), the Rules was released on June 18, 4
2012 and will be implemented as of October 1, 2012. The Rules adheres to the concept of market orientation, focuses on maintaining the balance of the original self-regulatory code system, and guarantees the justice and soundness of the self-regulatory disciplinary procedure through constructing a systematic and sound self-regulatory code system. Besides, the Rules enrich the effective and moderate self-regulatory action measures, and balances working efficiency and operability. With a total of 31 articles, the Rules contains five parts General Provisions, Self-regulatory Disciplinary Action Determination Mechanism, Investigation Stage, Self-regulatory Disciplinary Action Determination Stage and Supplementary Provisions, which specifies that the disciplinary action implements such a system that the self-regulatory disciplinary action meeting determines the penalties, whereby the market experts jointly review the noncompliant conduct and make disciplinary decision or opinion. Besides, the Rules defines the authorities and responsibilities of relevant entities, such as the Executive Council, the Self-regulatory Disciplinary Action Meeting and the Special Meeting of NAFMII Secretariat, in the work of self-regulatory action, sets forth major flows, such as investigation before self-regulatory penalty, disciplinary action decision and review, and lists all self-regulatory disciplinary measures for the first time in the light-heavy order, such as reputational penalty and behavioral penalty. The Rules integrates the existing self-regulatory disciplinary action system, enriches the levels of self-regulatory disciplinary measures, and regulates the operating procedures for self-regulatory actions. This guarantees the objectivity, equality and efficiency of self-regulatory actions, fully realizes the restriction of powers and sharing of responsibilities, and adapts to the trend of in-depth market development. NAFMII signs Trilateral MOU with Three Provinces and Local Central Sub-branches of PBC NAFMII conducted promotional activities on the debt capital market, and signed three trilateral MOU with three provinces, the People s Government of Henan Province, Shaanxi Province and Sichuan Province, and with the PBC central sub-branches in Zhengzhou, Xi an, Chengdu. NAFMII will establish a routine communication platform with the three provinces and relevant financial regulators. NAFMII held the First Meeting of Second Bond Market Committee On June 12, 2012, the inauguration conference and first meeting of NAFMII Second Bond Market Committee was held smoothly in Beijing. Gu Yu, Chairman of the Committee, presided over the meeting, and Secretary-General Shi Wenchao and Deputy Secretary-General Yang Nong 5
attended the meeting. Secretary-General Shi Wenchao pointed out that since the establishment of the committee, the members of the first committee have performed their duties in earnest, displayed their diligence and devotion, fully exerted the functions of expert discussion and decision, and made outstanding contributions to the product innovation, system construction, self-regulatory management and industry regulation of China s interbank bond market. NAFMII fully recognized the work of the first committee, and greatly appreciated the members for their hard work and efforts. NAFMII elected the second Bond Market Committee according to the Measures of National Association of Financial Market Institutional Investors for the Management of Special Committees. Secretary-General Shi granted the letters of appointment to the members of the second committee. On behalf of the committee, Chairman Gu Yu said that the new committee assembled more famous experts and scholars, which has made the committee more professional and authoritative. The new committee will take the interbank bond market to a new stage by adhering to the tradition, pooling collective wisdom and seeking truth. Finance Serves Real Economy to Revive Steel & Energy Sectors and Transportation Industry To carry out the spirit of "adhering to serving the real economy with financial services put forward by the central economic work conference and the national financial work conference, NAFMII held two special seminars for members of the steel, energy and transportation industries in an aim to help these enterprises realize sustainable development through the debt capital market, promote the development concept of the interbank market, and provide special services to market members on June 7 and 27. Representatives from more than 100 enterprises from these industries attended the meeting. Yang Nong, the deputy Secretary-General of NAFMII, attended the meeting and delivered a summary speech.. Secretary-General Shi Wenchao Meets Chairman of the City of London Corporation On the afternoon of July 3, Secretary-General Shi Wenchao met visiting guest Mark Boleat, Chairman of the Policy and Resources Committee of the City of London Corporation. During the meeting, secretary-general Shi briefed the development status of the Chinese bond market, the working mechanism of NAFMII, and other key work, such as innovation, self-regulation and member service. Secretary-General Shi said as a self-regulatory organization, NAFMII 6
proactively implements relevant policies of the government on financial market construction and echoes the common wishes of market members for market development in a commitment to explore ways to drive efficient and healthy development of the Chinese financial market together with market participants. Mark Boleat extolled the work the NAFMII has done to drive development of the Chinese interbank bond market and promote interaction with the international financial market, and expressed his hopes to enhance exchanges with NAFMII. Both parties also discussed topics such as further efforts to push forward cooperation between different markets, and expressed their willingness to keep further communication about issues of common concerns in joint efforts to boost exchange and cooperation between the Chinese interbank market and the London financial market. Inauguration Meeting & First Session of the Second NAFMII Financial Derivatives Committee Smoothly Held On July 3, 2012, the Inauguration Meeting & First Session of the Second NAFMII Financial Derivatives Committee was held smoothly in Beijing. NAFMII elected the Second Financial Derivatives Committee according to relevant regulations of the Administrative Measures of the National Association of Financial Market Institutional Investors for Professional Committee. Secretary-General Shi Wenchao granted the letters of appointment to members of the Second Committee. On behalf of the Committee, Chairman Liu Jun said the composition of the new committee was further optimized to enable greater market coverage. Observing the uniform deployment and instruction of NAFMII, the Committee will persist in diligence, responsibility, reform and innovation, in a bid to become the most professional and authoritative expert think tank in the market, so as to make its due contributions to the development of the Chinese financial derivatives market. China s First Credit Derivative on the Financial Market Has Been Running Steadily Since Launch Since the launch on the interbank bonds market on July 5, the first credit derivative the credit risk mitigation (CRM) instrument has run in a stable manner. So far, 44 institutions have registered as CRM traders, and 26 ones have registered as core traders. Meanwhile, 29 institutions have registered as issuer of the credit risk mitigation warrant. To date, 15 CRM traders have reached 42 CRMA deals, involving a notional principal of RMB 3.69 billion, and 6 institutions have created 9 CRMW instruments, involving a notional principal of RMB 740 million. 7
NAFMII RESEARCHES Financial Market Research (Inaugurated) The Financial Market Research is a financial monthly journal supervised by the People s Bank of China and sponsored by NAFMII. The journal focuses on theories on Chinese and foreign financial market development, practice and theory review, regimes comparison, market innovation s theoretical logics, upholds the frontier, innovation and practicality concept, sticks to the market, provides a platform for people watching, caring about and driving the reform and development of the Chinese financial market to exchange and discuss economic and financial problems, and presents the latest research results. Highlighting research and commentary articles, the periodical journal mainly targets practitioners in financial institutions, researchers in the economic and financial field, and other readers interested in the financial market. Research on Capital Mitigation Function of Credit Risk Mitigation (CRM) Instruments On October 29, 2010, NAFMII officially launched the credit risk mitigation (CRM) instrument, which now includes CRM agreement (CRMA) and CRM warrant (CRMW). According to participants in the market, if the regulator specifies the capital mitigation function of the CRM instrument, this will encourage domestic commercial banks to use this market-oriented instrument to transfer and share the credit risk at a faster pace. To fully learn the international experience, this report reviews the regulatory provisions of the Basel II Capital Accord of the Basel Committee on Banking Supervision and the regulators of major countries (territories) worldwide regarding the capital mitigation function of the credit derivatives. Meanwhile, this report combs the evolution of China s relevant regulatory provisions, and conducts international comparative analysis based on the Measures for the Capital Management in Commercial Banks (Tentative) promulgated by China Banking Regulatory Commission on June 8, 2012 as the blueprint. On this basis, this report suggests the regulators learn from the international practices, define the capital mitigation function of the CRM instrument under the weighing approach, and confirm the qualified credit derivatives include CRM to effectively help Chinese commercial banks to improve risk management, and reshape the operating mode. 8
Research on Diversification of Participants in Credit Risk Mitigation (CRM) Instrument In October 2010, NAFMII organized its members to launch the credit risk mitigation (CRM) instrument. However, CRM participants are not diversified, and their trading demands are homogenous at present, which curbs the risk management requirements of different participants to a large extent, and also hinders the market development. This report explores in depth the relation between diversification of participants and development of the CRM market, reviews international market development practices, and analyzes the importance of diversification of participants to the development of the Chinese credit derivatives market. Besides, considering that the domestic financial industries are supervised by sector and the operating differentiation of different institutions in China, this report mainly states the necessity and feasibility of various major financial institutions in China to participate in the domestic credit derivatives market, and aims to provide policy implications and decision-making basis for the regulatory authorities to further drive the market development as well as provide a guide for different kinds of institutions to participate in the domestic CRM market in market positioning and trading strategy. Research on Determination of Credit Events and Auction Settlement Mechanism of Credit Risk Mitigation (CRM) Instrument After the outbreak of the global financial crisis, two important mechanisms were implemented in the international credit derivatives market: Credit event determination mechanism and auction settlement mechanism. Studying the background and details of both mechanisms in depth, this report explores the necessity and feasibility to establish similar mechanisms in China, and gives policy suggestions concerning the introduction of relevant mechanisms to China. This research report studies in depth the credit derivatives determination committee mechanism and the auction settlement mechanism introduced by the International Swaps and Derivatives Association (ISDA), and explores their cause, details and effects in the crisis. Then, this report studies the domestic financial environment, and notes the establishment of both mechanisms in China will conduce to sustainable development of the credit derivatives market and even the entire bond market. Besides, the launch of both mechanisms commensurate with the actual conditions in China has been made possible by the thriving development of the domestic credit market, the 9
gradual improvement of the standard agreement, and the long-term efforts of relevant industry self-regulation organizations. Finally, this report gives policy suggestions concerning the overall framework for the establishment of both mechanisms, designs the concrete operating mechanism with general applicability based on the international experience, moderately adjusts some mechanisms to align with the actual conditions in China, and provides the reference for the introduction of relevant mechanisms to China. Disclaimer: NAFMII does not guarantee the accuracy of the information available through its newsletter. The materials and data provided through this newsletter are intended for general informational purposes only, and are not intended to provide specific investing, tax, business or legal advice to any individual or entity. Certain contents of this newsletter are copyrighted by NAFMII. You agree that information provided on this newsletter will be used solely for your own personal, noncommercial use and benefit, and this information is not to be distributed, sold, transferred or otherwise made available to third parties. You may not copy, recompile or create derivative works from the information provided on this newsletter. Readers are urged to consult with their own advisors before taking action based on any information appearing on this newsletter. 10