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A New Chapter in the Bond Market – Observations on the Intra-Market Connect Scheme between the Inter-bank Bond Market and the Exchange Bond Market

2020.07.28 XIE, Qing (Natasha)、ZHANG, Chi

On July 19, 2020, the People’s Bank of China (PBOC) and China Securities Regulatory Commission (CSRC) issued a joint announcement (“Announcement”), approving the interconnection scheme (“Intra-Market Connect”) between relevant financial market infrastructures (FMIs) of the inter-bank bond market (CIBM) and that of the exchange bond market (“Exchange Market”). The Intra-Market Connect refers to a scheme whereby qualified investors are allowed to buy and sell bonds tradable on both markets through the connected FMIs of the two markets. The FMIs including the bond registration, custodian and settlement institutions (“Clearing Houses”) may jointly provide bond issuers and investors with services related to bond issuance, registration and depositary, clearing and settlement, and repayment of principal and interest. A summary of the key points of the Announcement is listed as follows.


i. Connection between Trading Platforms


The Intra-Market Connect scheme is comprised of the connection between trading platforms and the connection between the Clearing Houses. Pursuant to the Announcement, the connection between trading platforms refers to the electronic trading platforms of the CIBM and the Exchange Market jointly providing bond trading and other services for investors; that is, the China Foreign Exchange Trading System (CFETS), the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”, collectively, “Exchanges”) will establish a system connection to provide trading services for investors. The regulators will, as we anticipate, work out detailed rules, among which include, (i) how the scheme allows qualified investors trading on one market to trade on the other market; (ii) whether qualified investors will be required to open and maintain accounts with depository and custody institutions to support trades on both trading platforms; and (iii) whether qualified investors trading on one market may trade other types of bond products available in the other market other than cash bonds.


ii. Market Access by Qualified Investors


With regard to market access, the Announcement clearly pointed out that the Intra-Market Connect scheme shall abide by relevant provisions of the PBOC and the CSRC pertaining to investor suitability. We understand a qualified investor should be allowed to trade the bonds of both markets through the Intra-Market Connect scheme as long as such investor meets the qualification requirement in either of the markets. Notably, for foreign investors, only QFII/RQFII can currently trade in both the CIBM and Exchange Market. We look forward to detailed rules explicitly allowing foreign institutional investors that enter the CIBM through the CIBM Direct Access or Bond Connect to trade bonds listed on the Exchanges through the Intra-Market Connect scheme.


iii. Mutual Opening of Nominee Holder Accounts by FMIs


For the purpose of interconnection, the Announcement required nominee accounts to be opened with each other between the two Clearing Houses in the CIBM, as well as among the Clearing Houses respectively in the CIBM and the Exchange Market, to record the balance of bonds held under their names as nominal holders. The bond holding record provided by the aforesaid nominal holders shall be the legal proof that an investor enjoys the rights and interests of the bond. 


The Administrative Measures for the Securities Registration and Settlement issued by the CSRC dating back to 20091 stipulate that nominal holders shall mean institutions that are designated by others and hold the securities on behalf thereof. Bonds listed on the Exchanges may be recorded in the securities holders’ own securities accounts or in the accounts of nominal holders. In practice, China Securities Depository and Clearing Corporation Limited ("CSDC"), as the Clearing House of the Exchange Market, has opened a nominee account with China Central Depository & Clearing Co., Ltd. (“CCDC”) of the CIBM, so as to serve as the secondary custodian institution being responsible for the sub-custody of treasury bonds, local government bonds and corporate bonds. 


The concept of nominal holders also applies to the CIBM. Although the CIBM-related laws and regulations do not explicitly elaborate on a nominee holder protocol, in a press conference held by the PBOC to answer questions regarding the Interim Measures for the Administration of Mutual Bond Market Access between Mainland China and Hong Kong SAR, officials of the PBOC stated that a foreign custody institution shall open a nominee holder account at a domestic custody institution to record the balance of all bonds held nominally, which means that foreign investors under the Northbound Trading Link shall hold bonds through HKMA Central Moneymarkets Unit (CMU) and enjoy the rights and interests of bonds purchased through the Northbound Trading Link. The CMU, as the nominal holder of foreign investors, is registered as a bond holder and thus can exercise the relevant creditors’ rights and initiate litigations. Foreign investors, as actual beneficial owners of the relevant bonds, shall exercise creditors’ rights in accordance with the relevant Hong Kong laws and regulations in regard to nominal holders.


In view of the fact that the FMIs of the two markets have already had experience in establishing a connect scheme with the Hong Kong market, the CSDC of the Exchange Market and the CCDC and the Shanghai Clearing House of the CIBM may, following the practice of the Stock Connect and the Bond Connect, open nominee holder accounts for each other and achieve interconnection through a secondary custody and multi-layered settlement mode. Certainly, in practice, as there are still some differences between the two markets in terms of the bond registration, custody and settlement systems, we envisaged more regulatory coordination among the regulators. 


iv. Unified Administration


In terms of administration and law enforcement in the bond markets, following the Opinions on Further Strengthening the Law Enforcement in the Bond Market specifying that the CSRC should exercise a unified law enforcement power over both the CIBM and the Exchange Market, the Announcement reiterated that the PBOC and the CSRC shall strengthen regulatory cooperation and coordination and jointly supervise and administer the activities relating to bond issuance, registration, trading, custody, clearing, and settlement under the Intra-Market Connect scheme.


In our observation, the PBOC and the CSRC have been closely working together to promote the interconnection between the two bond markets in recent years. With respect to credit rating, regulators aim to promote a unified regulation of the rating market, including unifying the market entry thresholds and mutual recognition of qualification of rating agencies in the two markets, strengthening sharing of supervisory information on rating agencies and joint law enforcement actions over violations. In terms of dispute resolution, the Meeting Minutes of National Courts’ Trial of Cases Concerning Bond Disputes issued by the Supreme People's Court on July 15, 2020 have made it clear that disputes involving corporate bonds, enterprise bonds and debt financing instruments of non-financial enterprises with the common nature of repaying the principal and interest, though issued and traded in different markets, shall be resolved based on the same legal standards. The regulatory authorities vigorously promote the unification of the policies and rules of the two markets with a view to establish a unified set of standards and rules aiming better quality and efficiency of services, which may also promote the further opening up of China’s bond market. 


We will continue to monitor the situation and keep our clients apprised of any important developments. 



1. The latest amendment took effect on September 15, 2018.

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