Overview
Bond Connect, consisting of Northbound and Southbound, is a cooperative scheme to connect the bond markets between Mainland and Hong Kong, through which inshore and offshore investors can buy and sell bonds in both markets.
In January 2016, Bond Connect was incorporated into the 2016-2018 Strategic Plan of the HKEX for the very first time. In June 2017, the PBOC issued the Interim Measures for the Administration of Mutual Bond Market Access between Hong Kong SAR and the chinese mainland (Order No. 1 [2017] of the PBOC). Since then, Shanghai Clearing House (hereinafter SHCH) and China Central Custody & Clearing Co., Ltd (hereinafter CCDC), etc. have followed up with supporting policies and infrastructure for the development of Bond Connect.
Northbound, connects the crucial financial market infrastructures of Hong Kong and Mainland, namely the Central Moneymarkets Unit of the Hong Kong Monetary Authority (hereinafter HKMA CMU or CMU), SHCH and CCDC In particular, CMU plays an importance role as Nominee, making the global practice workable in PRC market. Under the scheme, the multi-tier custody structure (or the nominee holding arrangement) is adopted. With the cooperation among SHCH, CCDC and CMU (as the nominee), the multi-tier structure and the connection of settlement become achievable.
Moreover, connecting with CFETS, international trading platforms like Tradeweb, Bloomberg and MarketAxess, which overseas investors are accustomed to, are appliable in Northbound. Overseas investors can quote with the implanted international trading platforms like Tradeweb, Bloomberg and MarketAxess, and send it to the PRC market makers via CFETS.
There is no doubt that Bond Connect becomes an importance channel for the overseas investors to access the Chinese Capital Markets. In this regard, this article is to introduce the Scheme in details regarding Qualification & Application, Trading Rules, Clearing & Settlement and Taxation.
1. Qualification & Application
1.1 Qualification
According to the Trial Trading Rules of National Interbank Funding Center on Bond Connect (No. 223 [2017] of the CFETS, hereinafter Circular 223), qualified institutional investors shall meet the requirements of the Announcement No. 3 [2016] of the PBOC (hereinafter Circular 3). As Circular 3 defined, overseas institutional investors include not only financial institutions legally registered and established outside the chinese mainland, but also products and funds set up and managed by the above institutions and those recognized by the PBOC.
- Financial Institutions:Commercial bank, insurance company, security company, fund management company, and other asset management company.
- Products and Funds:Pension funds, charity funds, endowment funds and other funds
Moreover, pursuant to the Administrative Measures for Securities and Futures Investment Made in China by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors, the qualification requirement for QFII and RQFII is consistent with Circular 3. As the result, QFII and RQFII are qualified to participate in Bond Connect trading as such.
1.2 Application Process
i.Approach a Custodian for CMU Account
Overseas institutional investors are required to settle their Northbound transactions through a CMU member (either a global custodian or a Hong Kong local custodian). To participate in Northbound trading, overseas investors should first create a CMU Account through a CMU Member[1], 63 of which are qualified for Bond Connect service, such as Agricultural Bank of China Hong Kong Branch and Bank of China Hong Kong Branch.
ii. Access to the Recognized Platform(s)
Three trading platforms are available for overseas investors to conduct their transactions, namely Tradeweb, Bloomberg and MarketAxess. Investors can access to Bond Connect in accordance with the guideline of the platforms.
iii. Bond Connect Company Limited (hereinafter BCCL) Application Process
Step 1 Investors should complete the application in accordance with the requirements listed on Bond Connect official website[2].
As above shown, the documents consist of both filing papers for the PBOC to participating in the CIBM and application papers for opening up Bond Connect channel.
Particularly for the investment mandate and SMAs，an compliance statement(Annex) shall be submitted.
Step 2 A dedicated BCCL account manager preliminarily reviews the application and gives feedback and amendments (if any).
Step 3 Investor can engage BCCL’s translation service to translate the finalized application forms into Chinese and then BCCL submits the signed version to CFETS/PBOC.
Step 4 Further inquiries could be received from PBOC.
Step 5 Upon PBOC`s approval, the filing notice to investor will be sent from BCCL.
Step 6 CFETS will conduct settings on CMU & E-trading platform accordingly.
Step 7 Investors will be notified when the system is set up, and then investors may be ready for trading.
2. Trading Rules
2.1 Basic rules
- Types of Trading: Cash Bond（Note: bond repurchase, bond lending, bond forward, forward rate agreements and interest rate swaps are not included in Bond Connect so far.）
- Types of Bonds Tradable: Treasury bonds, local government bonds, central bank bonds, financial bonds, corporate credit bonds, interbank certificates of deposit, asset-backed securities and other securities tradable in CIBM
- Markets: Primary & Secondary markets
- Trading Time: 9:00-12:00 &13:30-16:30 Beijing time on CIBM trading days
- Limit of Investment Scale: No limit on investment scale
2.2 Distribution in Primary Market
Business Guidelines for Northbound Trading of Bond Connect (Trial Implementation) issued by SHCH (hereinafter SHCH Business Guidelines) and Interim Procedures of Bond Connect Settlement issued by CCDC (hereinafter CCDC Interim Procedures) clarify the distribution procedures of Bond Connect.
Distribution agreement is the key point in terms of trading, specifying the substantial rights and obligations between overseas investors and mainland underwriters. The parties shall enter into the agreement on their own if the distribution happens in SHCH, while the agreement is generated automatically by the system once the overseas investors input the order if the distribution happens in CCDC.
Settlement is arranged in the mode of nominee holding. Upon payment, the bond will be transferred to the nominee account of CMU. That is, the nominee holds the outstanding balance of bonds on behalf of overseas investors (as the beneficial owners).
Additionally, the issuer shall complete the Confirmation of the Receipt of Bond Subscription Payment to confirm the creditor’s right.
Ø Distribution Procedures in SHCH Business Guidelines
Ø Distribution Procedures in CCDC Interim Measures
Ø Confirmation of Creditor’s Right
SHCH
The issuer shall send the Confirmation of the Receipt of Bond Subscription Payment to SHCH before 5pm on the payment date after the domestic underwriter transfers the funds. SHCH shall proceed with confirmation of the creditor's rights based on the Confirmation and distribution results.
CCDC
The issuer shall submit the Confirmation of the Receipt of Bond Subscription Payment (see Annex 2 to CCDC Interim Procedures) to CCDC before 16:00 on the following working day after the date of payment for subscription. Upon receiving the confirmation, CCDC shall proceed with confirmation of the creditor's rights.
2.3 Trading in the Secondary Market
The transaction process is mainly completed through the interconnection between the overseas platforms and CFETS. Bond Connect adopts the RFQ (Request-for-Quote) protocol, of which the trading workflow is itemized below:
i.Requests for Quotation
Overseas investors shall send RFQs via the trading platforms to PRC market makers, and the RFQs will be transmitted to the system of the CFETS in real time. Overseas investors may send more than one RFQ. A RFQ shall include the bond code, direction (bid or offer), settlement cycle, and nominal amount (at a minimum and increment of RMB 1,000,000), valid time for the request (up to 1 h).
ii.Respond to the Request
The PRC market makers shall respond with a quoting price to the full amount requested and set a valid time for the response as well. They may also reject the requests, in particular for bonds they may not be able to trade.
iii.Confirmation & Conclusion
Investors shall confirm trade by accepting one price quote within its valid time frame. Upon confirmation, the transaction is executed. The system will generate transaction documents for processing settlement. Once a quotation has been executed, all the others shall lapse automatically.
iv. Transaction Failure
Transaction failure is basically caused by insufficient cash balance or holding position. In this regard, the default party shall be liable towards its counterparty. Neither SHCH nor CMU takes the responsibility.
Next, we will introduce Northbound in terms of settlement and taxation issues. We will focus on the two features of the mechanism--the multi-tier custody structure and the Cross-Border Interbank Payment System (CIPS). Please stay tuned!
Contacts:Norma Luo, [email protected]
Wen Liu [email protected]
[1] Check the requirements and download application forms at https://www.chinabondconnect.com/en/Northbound/Onboarding/Filing-And-Other-Forms.html
[2] The list of CMU members can be found at https://www.cmu.org.hk/tc/member-search
[3] An investment mandate is a set of instructions laying out how a pool of assets is invested. The mandate sets out rules to guide choices during investing, which may include guidelines on priorities, goals, benchmarks, risk, and types of funds to be either chosen or avoided. These rules then inform the actions of an investment manager.
[4] SMAs, referred as Separately Managed Accounts, allows investors to appoint a manager that customizes a portfolio of direct securities on their behalf. This provides investors flexibility to maximize returns according to their own guidelines.