Interbank Bond Market, Exchange-traded Bond Market Co-issue Supporting Measures for Connectivity
In order to lay the foundation of rules for the connectivity between the interbank bond market and the exchange-traded bond market (hereinafter referred to as the Connectivity) and ensure the regulated and orderly implementation of the Connectivity business, with the approval of the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC), the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), National Interbank Funding Center (NIFC), China Securities Depository and Clearing Co., Ltd. (CSDC), and Interbank Market Clearing House Co., Ltd. (Shanghai Clearing House) (hereinafter collectively referred to as the infrastructure institutions of the two markets) co-issued today the Interim Measures for the Connectivity Business between the Interbank Bond Market and the Exchange-traded Bond Market (the Interim Measures for short). Marking the significant progress in the construction of the connectivity mechanism for the domestic bond market, the release of the Interim Measures, an important initiative by the infrastructure institutions of the two markets, aims to implement the strategic requirements of the CPC Central Committee and the State Council, carry out the unified deployment of the PBOC and the CSRC, promote the integrated development of the domestic bond market, and enhance the ability to serve the real economy.
The Connectivity is a mechanism arrangement whereby investors in the interbank bond market and the exchange-traded bond market (hereinafter referred to as the two markets) buy and sell the tradable bonds in the two markets through the interconnection between related infrastructure institutions of the two markets. Thanks to its rapid development in recent years, China’s bond market, characterized by an increasingly complete product line and continuously diversified trading instruments, has jumped to the world’s second place in market size. However, the domestic bond market is yet open for improvement in price discovery, liquidity and other aspects due to the long-standing low level of connectivity and integration of the two markets for historical reasons. In order to further enhance the capacity of the bond market for serving the real economy, the CPC Central Committee and the State Council clearly put forward “enhancing the connectivity of the bond market” in April 2020. Issuing a joint announcement ( No. 7 Document) in July 2020, the PBOC and the CSRC approved the cooperation of the infrastructure institutions of the two markets in the Connectivity, and decided that the SSE shall head the coordination among the infrastructure institutions of the two markets to jointly advance the specific tasks in the mechanism construction.
As a move to implement the specific requirements of the joint announcement, the Interim Measures also serves as the basic business rules for the Connectivity mechanism. Consisting of 51 articles covering principle provisions, general rules, specific arrangements, monitoring and supervision requirements, the full text of the Interim Measures specifies the overall arrangements for the mechanism and the key business points, and provides the basis for the formulation of lower-level rules. According to the Interim Measures, the Connectivity has been designed to realize order routing and nominal holding through front-end and back-end infrastructure connections on the basis of respecting the existing listing and floating modes, existing account systems and transaction settlement rules of the two markets, with the connectivity including the “Interbank-bound Connect” and the “Exchange-bound Connect”. Therefore, institutional investors in the exchange-traded bond market and the participants in the interbank bond market will be entitled to “one-click access” without the need to open accounts on both sides or change their routine, thus facilitating the participation in the subscription and trading of cash bonds in the other side’s market.
Based on the principles and characteristics of the domestic bond market, and formulated after several rounds of consultation, adjustment and improvement, the Interim Measures fully reflects the following principles and guidelines. First, full coverage should be achieved. The provisions of the rules fully cover the business scope so as to provide sufficient principle basis for the operation of the mechanism. Second, the implementation should be stable. The system construction should be carried out on the principle of seeking common ground while respecting differences, and the mechanism innovation should be advanced steadily through elaborate design. Third, practical results should be attained. Efforts should be made to achieve appropriate regulation and service optimization, so as to make the Connectivity more effective in serving the real economy. Fourth, risks should be prevented. The regulation and crackdown on abnormal transactions and other violations should be enhanced to ensure the healthy and long-term development of the mechanism.
The implementation of the Connectivity through the issuance of the Interim Measures has great and far-reaching strategic significance. First, it will help facilitate the cross-market issuance and trading of bonds, promote the free flow of capital and other factors, form an integrated market and unified prices, lay a solid foundation for the smooth transmission of monetary policy and the effective implementation of macroeconomic regulation, and push forward the internationalization of the RMB. Second, it will better support the real economy by upgrading the service level and efficiency of China’s bond market infrastructure, and contributing to the creation of a customer-centered and moderately competitive service system of bond market infrastructure.
Going forward, under the guidance of the PBOC and the CSRC, the infrastructure institutions of the two markets will continue to make every effort to push forward the development of technology systems, the signing of cooperation agreements and other tasks on the basis of the joint announcement and the Interim Measures and the general principle of “steady and orderly implementation, and putting risks under control”. All this aims to clarify and improve the specific arrangements for business operations, and strive to bring the mechanism into effect on schedule. In addition, according to the joint announcement, while the Connectivity mechanism is realized, China Development Bank and other policy banks, state-owned commercial banks, joint-stock commercial banks, urban commercial banks, foreign-funded banks in China and other banks listed in China may choose to participate in the agreement-based trading of cash bonds in the exchange-traded bond market by using the Connectivity mechanism or directly opening accounts. Accordingly, the exchange-traded bond market will thus make active and steady preparations for the direct participation of the above-mentioned banks.