2022.01.31 XIE, Qing (Natasha)、 ZHANG, Chi、LUO Danchen
On July 19 2020, the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC), released a joint announcement (“Announcement”) approving the interconnection scheme (“Intra-Market Connect”) between financial market infrastructures (FMIs) of the interbank bond market (CIBM) and that of the exchange bond market (“Exchange Market”), and other relevant rules of the CIBM and the Exchange Market concerning bond issuance, trading, registration, depository, clearing and settlement. On January 20 2022, with the approval of the PBOC and the CSRC, the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), the China Foreign Exchange Trade System (CFETS), the Shanghai Clearing House and the China Securities Depository and Clearing Corporation Limited (CSDC) released the Interim Measures for the Businesses of Interconnection Scheme between the Interbank Bond Market and the Exchange Bond Market ("Interim Measures").
1. A Summary of the Key Points
The Intra-Market Connect refers to the scheme whereby investors of one market are permitted to buy and sell bonds tradable on the other market through the connected FMIs of the two markets. The Intra-Market Connect scheme is comprised of two connections, namely, the “Connect to the Exchange Market” and the “Connect to the CIBM”. The “Connect to the Exchange Market” allows investors of the CIBM to participate in trading in the Exchange Market via the FMIs of the CIBM and conversely, the “Connect to the CIBM” allows investors of the Exchange Market to participate in trading in the CIBM via the FMIs of the Exchange Market.
1.1 Participating Institutions
The Intra-Market Connect scheme involves arrangements for bond trading, registration, depository, clearing and settlement. FMIs, such as trading platforms, bond registration, and custodian and settlement institutions (“Clearing Houses”), as well as investment service institutions in the CIBM and Exchange Market, each play an important role and undertake essential functions to realize the interconnection between the two markets.
Main Institution
Core Functions
CFETS
As a trading venue, provides CIBM investors with bond trading services in the CIBM.
Connects systems with the SSE and SZSE respectively and jointly provides bond trading and other services to investors.
Exchanges (i.e., SSE and SZSE)
As a trading venue, provides Exchange Market investors with bond trading services in the Exchange Market.
Connects systems with the CFETS and jointly provides bond trading and other services to investors.
Duty-free Shopping Policies
Handling registration, depository and custody, clearing and settlement matters in the CIBM.
Opens nominee accounts with the CSDC for investors of the CIBM.
CSDC
Handling registration, depository and custody, clearing and settlement matters in the Exchange Market.
Opens nominee accounts with the Shanghai Clearing House for investors of the Exchange Market.
Investment Service Institutions
Providing supporting services to investors with respect to bond trading, clearing and settlement under the Intra-Market Connect scheme, including securities brokerage companies, and banks that engage in settlement agency and custody businesses.
1.2 Qualified Investors
According to the Interim Measures, institutional investors of the Exchange Market, including foreign institutions that enter the Exchange Market through channels permitted by the CSRC, may participate in the “Connect to the CIBM”. Currently, QFII/RQFIIs can trade in both the CIBM and the Exchange Market. Institutional investors other than participants of the Exchange Market may trade bonds with other investors via members of the Exchanges.
Investors of the CIBM, including foreign institutions that enter the CIBM through channels permitted by the PBOC, may participate in the “Connect to the Exchange Market”. Investors of the CIBM may trade bonds with other investors via an agent and in accordance with the relevant rules of the CIBM. Currently, foreign institutions may enter the CIBM through the CIBM Direct Access or Bond Connect, and whether these foreign institutions are permitted to participate in the “Connect to the Exchange Market” requires further clarification from the regulators. Based on the current rules and practices, only after obtaining a “No Objection Letter” from the Asset Management Association of China (AMAC) and being filed with the Shanghai Headquarter of PBOC, may private investment funds managed by a private fund manager participate in trading in the CIBM. Given that private investment funds that have been filed with the AMAC may trade in the Exchange Market as qualified investors, it remains to be clarified by the regulators whether private investment funds may directly trade in the CIBM through the “Connect to the CIBM” with no need to go through the above procedures.
1.3 Eligible Bonds
Eligible bonds under the Intra-Market Connect scheme include bonds and asset-backed securities traded in the CIBM and the Exchange Market, as well as other fixed-income-type cash bonds as agreed by the FMIs in the two markets. Currently, investment products other than cash bonds are not eligible for the scheme.
The Interim Measures allow investors to participate in bond subscription and trading through the Intra-Market Connect scheme. Investors of the Exchange Market may subscribe to bonds issued and traded in the CIBM and vice versa, which promotes the integrated development of the primary market sales of bonds in the two markets.
2. Trading Mode
Under the Intra-Market Connect scheme, systems of the CFETS and the Exchanges (collectively, the “Trading Execution Venues”) are connected to jointly provide investors with bond trading and other services. Qualified investors use securities (bonds) trading accounts and submit trading orders to the trading system of each market. The CFETS and the Exchanges then respectively transmit the trading orders and execute the transactions via their own systems. A securities (bonds) transaction is concluded and becomes effective upon confirmation of execution by the CFETS or the Exchanges. The counterparties to the bond transaction shall acknowledge the transaction and perform their settlement and delivery obligations. Below we set forth the main process for bond trading under the Inter-Market Connect scheme:
“Connect to the Exchange Market”
“Connect to the CIBM”
1. Investors of the CIBM shall apply to the CFETS for trading bonds according to the relevant rules of the Exchange Market. The trading orders may indicate details such as the stock code, buy/sell order, price, quantity, investor name, securities account (bond custodian account), clearing path, and clearing period (these can be adjusted according to the corresponding trading method);
2. The CFETS will transmit trading orders to the Exchanges in real-time;
3. Trading orders will be confirmed and executed according to the relevant rules of the Exchange Market;
4. The Exchanges will transmit information on the executed transactions to the CFETS and CSDC;
5. The CFETS will provide investors of the CIBM with a statement of the executed transactions based on the information provided by the Exchanges and according to the relevant rules of the CIBM.
1. Investors of the Exchange Market shall apply to the Exchanges to trade according to the relevant rules of the CIBM. The trading orders may indicate details such as the applicant’s account information, clearing path, counterparty’s identity information, buy/sell order, bonds code, net price, par value, and clearing period (these can be adjusted according to the corresponding trading method);
2. The Exchanges will transmit trading orders to the CFETS in real-time;
3. Trading orders will be confirmed and executed according to the relevant rules of the CIBM;
4. The CFETS will transmit information on the executed transactions to the Exchanges and Shanghai Clearing House;
5. The Exchanges will provide investors of the Exchange Market with a statement of the executed transactions based on the information provided by the CFETS and according to the relevant rules of the Exchange Market.
Eligible Bonds: the list of eligible bonds will be determined by the Exchanges and transmitted to the CFETS, which will publicize the eligible bonds list each day.
Eligible Bonds: the list of eligible bonds will be determined by the CFETS and transmitted to the Exchanges, which will publicize the eligible bonds list each day.
Trading Hours: subject to that of the Exchange Market.
Trading Hours: subject to that of the CIBM
3. Bond Depository and Settlement
Under the Intra-Market Connect scheme, systems of the Shanghai Clearing House and the CSDC are connected to jointly provide investors with bond registration, depository, clearing and settlement services. Here are the arrangements in detail:
3.1 Nominee Accounts
Both the CIBM and the Exchange Market have established rules for nominee accounts. The FMIs of the two markets have experience in implementing the nominee account systems and achieving interconnection with the Hong Kong markets through cross-border depository and settlement. Under the Intra-Market Connect scheme, the bonds acquired by investors through the Intra-Market Connect scheme shall be held by the Clearing Houses of their respective market nominally. The nominal holder under the “Connect to the Exchange Market” should be the Shanghai Clearing House while that under the “Connect to the CIBM” should be the CSDC. In practice, we understand that nominee accounts will be opened with each other between the two Clearing Houses in the CIBM (i.e., China Central Depository & Clearing Co., Ltd. and the Shanghai Clearing House), as well as between the CSDC and the Shanghai Clearing House, to record the bonds held under their names as nominal holders and for the settlement of the bonds.
According to the Interim Measures, the bond holding records provided by the aforesaid nominal holders shall be legal proof that an investor enjoys the rights and interests of the bond. The Clearing Houses shall be responsible for dividend distribution, repayment of the principal and interest, the exercise of a put option by investors, redemption, conversion of shares, and the exchange of shares with respect to the underlying bonds in each market. The nominal holders shall cooperate with the Clearing Houses to prepare the detailed bond holding information under its nominee account and provide services such as the inquiry and issuance of bond holding records for investors in their respective market. Investors may directly demonstrate to the bond issuer their ownership rights to the bonds by virtue of the bond holding records provided by the nominal holder where the nominal holder does not offer the foregoing services. In addition, the nominal holders shall handle the pledge and non-trade transfer businesses and provide assistance in law enforcement for the bonds held under their names.
3.2 Bond Settlement
Considering the differences in the rules regarding bond registration, depository, clearing and settlement between the two markets, the Interim Measures stipulate that it should follow the existing trading methods in the two markets when trading under the Intra-Market Connect scheme, and settlement should be conducted by transactions or in other ways as recognized by the Clearing Houses. With respect to the settlement of funds, the CSDC and the Shanghai Clearing House shall be responsible for the settlement of funds in accordance with the current rules. With respect to the settlement of bonds, the Clearing Houses of each market shall handle the settlement of funds based on the execution information transmitted from the trading platform of its market and then transmit the information on settlement results to the corresponding nominal holder for the recording of detailed settlement results under the nominee account. Below are details of the bond settlement process:
“Connect to the Exchange Market”
“Connect to the CIBM”
6.Upon conclusion of transactions under the “Connect to the Exchange Market”, the CSDC will conduct clearance of each transaction according to the execution data provided by the Exchanges;
7.Upon completion of clearance, investors of the CIBM shall give settlement instructions to the Shanghai Clearing House;
8.Upon receipt of settlement instructions from the investor, the Shanghai Clearing House will submit settlement instructions to the CSDC after confirmation that the investor has sufficient bonds or funds;
9.Upon receipt of settlement instructions from the Shanghai Clearing House, the CSDC will handle the settlement and delivery of bonds and funds (e.g., register the bonds under the nominee accounts of the Shanghai Clearing House) if the bonds or funds are confirmed sufficient;
10.The Shanghai Clearing House will handle the delivery of bonds and funds with investors of the “Connect to the Exchange Market” based on the settlement and delivery results between itself and the CSDC;
11.The Shanghai Clearing House shall be responsible for recording and maintaining the bond holding details under its nominee account.
6.Upon conclusion of transactions under the “Connect to the CIBM”, the Shanghai Clearing House will conduct clearance of each transaction according to the execution data provided by the CFETS;
7.Upon completion of clearance, investors of the Exchange Market shall give settlement instructions to the CSDC via the relevant settlement participants;
8.Upon receipt of settlement instructions from the investor, the CSDC will submit settlement instructions to the Shanghai Clearing House;
9.Upon receipt of settlement instructions from the CSDC, the Shanghai Clearing House will handle the settlement and delivery of bonds and funds (e.g., register the bonds under the nominee accounts of the CSDC) if the bonds or funds are confirmed sufficient;
10.The CSDC will handle the delivery of bonds and funds with the relevant settlement participant based on the settlement and delivery results between itself and the Shanghai Clearing House;
11.The CSDC shall be responsible for recording and maintaining the bond holding details under its nominee account.
4. Supervision and Regulation
The Interim Measures stipulate that investors, investment service institutions, other market participants and their relevant personnel shall abide by these Interim Measures and relevant laws, administrative regulations, departmental rules, normative documents and relevant business rules of the two markets when they conduct relevant activities under the Intra-Market Connect scheme. For example, investors of the CIBM shall comply with the relevant shareholding requirements of the Exchanges if they purchase convertible corporate bonds or exchangeable corporate bonds through the "Connect to the Exchange Market". In addition, the Interim Measures require FMIs in the two markets to conduct self-disciplinary management of the settlement and related business activities under the Intra-Market Connect scheme. The CFETS and the Exchanges shall, in accordance with their respective business rules and following the principle of “looking-through”, monitor the business activities under the Intra-Market Connect scheme and establish relevant data/information sharing mechanisms to jointly safeguard the market order and protect the legitimate rights and interests of investors. The relevant investment service institutions shall also monitor the business activities carried out by its customers and report the actual trading account information to the CFETS or the Exchanges.
According to the Interim Measures, the Trading Execution Venues and the Clearing Houses may take self-disciplinary management measures or impose disciplinary sanctions on those who violate these Interim Measures or rules of the Trading Execution Venues or the Clearing Houses. If interest tunneling, insider trading or market manipulation activities arise in the implementation of the Intra-Market Connect scheme, after taking necessary investigation measures, FMIs in the two markets shall provide evidence to their respective regulatory authorities in accordance with the relevant provisions. We believe that the unified supervision of the two bond markets still requires strengthened regulatory cooperation and coordination between the PBOC and the CSRC.
5. Outlook
Further clarification is needed from the regulators, the relevant Trading Execution Venues, and FMIs on issues concerning bond trading, depositary, clearing and settlement under the Intra-Market Connect scheme. The Interim Measures have laid down the general arrangements and key points of the relevant business of the Intra-Market Connect scheme and provide a basis for the formulation of detailed rules by the Trading Execution Venues and FMIs. The implementation date of the Intra-Market Connect scheme is yet to be announced. JunHe’s team is honored to advise CFETS in the preparation of the Intra-Market Connect scheme and we will continue to monitor the situation and keep our clients informed of any important developments.
