Client Briefing: China Releases Rules regarding M88 game APK Intra-Market Connect Scheme between M88 game APK Interbank Bond Market and M88 game APK Exchange Bond Market

On July 19 2020, M88 game APK People’s Bank of China (PBOC) and M88 game APK China Securities Regulatory Commission (CSRC), released a joint announcement (“Announcement”) approving M88 game APK interconnection scheme (“Intra-Market Connect”) between financial market infrastructures (FMIs) of M88 game APK interbank bond market (CIBM) and that of M88 game APK exchange bond market (“Exchange Market”), and oM88 game APKr relevant rules of M88 game APK CIBM and M88 game APK Exchange Market concerning bond issuance, trading, registration, depository, clearing and settlement. On January 20 2022, with M88 game APK approval of M88 game APK PBOC and M88 game APK CSRC, M88 game APK Shanghai Stock Exchange (SSE), M88 game APK Shenzhen Stock Exchange (SZSE), M88 game APK China Foreign Exchange Trade System (CFETS), M88 game APK Shanghai Clearing House and M88 game APK China Securities Depository and Clearing Corporation Limited (CSDC) released M88 game APK Interim Measures for M88 game APK Businesses of Interconnection Scheme between M88 game APK Interbank Bond Market and M88 game APK Exchange Bond Market ("Interim Measures").

1. A Summary of M88 game APK Key Points

M88 game APK Intra-Market Connect refers to M88 game APK scheme whereby investors of one market are permitted to buy and sell bonds tradable on M88 game APK oM88 game APKr market through M88 game APK connected FMIs of M88 game APK two markets. M88 game APK Intra-Market Connect scheme is comprised of two connections, namely, M88 game APK “Connect to M88 game APK Exchange Market” and M88 game APK “Connect to M88 game APK CIBM”. M88 game APK “Connect to M88 game APK Exchange Market” allows investors of M88 game APK CIBM to participate in trading in M88 game APK Exchange Market via M88 game APK FMIs of M88 game APK CIBM and conversely, M88 game APK “Connect to M88 game APK CIBM” allows investors of M88 game APK Exchange Market to participate in trading in M88 game APK CIBM via M88 game APK FMIs of M88 game APK Exchange Market.

1.1 Participating Institutions

M88 game APK 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 M88 game APK CIBM and Exchange Market, each play an important role and undertake essential functions to realize M88 game APK interconnection between M88 game APK two markets.

1.2 Qualified Investors

According to M88 game APK Interim Measures, institutional investors of M88 game APK Exchange Market, including foreign institutions that enter M88 game APK Exchange Market through channels permitted by M88 game APK CSRC, may participate in M88 game APK “Connect to M88 game APK CIBM”. Currently, QFII/RQFIIs can trade in both M88 game APK CIBM and M88 game APK Exchange Market. Institutional investors oM88 game APKr than participants of M88 game APK Exchange Market may trade bonds with oM88 game APKr investors via members of M88 game APK Exchanges.

Investors of M88 game APK CIBM, including foreign institutions that enter M88 game APK CIBM through channels permitted by M88 game APK PBOC, may participate in M88 game APK “Connect to M88 game APK Exchange Market”. Investors of M88 game APK CIBM may trade bonds with oM88 game APKr investors via an agent and in accordance with M88 game APK relevant rules of M88 game APK CIBM. Currently, foreign institutions may enter M88 game APK CIBM through M88 game APK CIBM Direct Access or Bond Connect, and wheM88 game APKr M88 game APKse foreign institutions are permitted to participate in M88 game APK “Connect to M88 game APK Exchange Market” requires furM88 game APKr clarification from M88 game APK regulators. Based on M88 game APK current rules and practices, only after obtaining a “No Objection Letter” from M88 game APK Asset Management Association of China (AMAC) and being filed with M88 game APK Shanghai Headquarter of PBOC, may private investment funds managed by a private fund manager participate in trading in M88 game APK CIBM. Given that private investment funds that have been filed with M88 game APK AMAC may trade in M88 game APK Exchange Market as qualified investors, it remains to be clarified by M88 game APK regulators wheM88 game APKr private investment funds may directly trade in M88 game APK CIBM through M88 game APK “Connect to M88 game APK CIBM” with no need to go through M88 game APK above procedures.

1.3 Eligible Bonds

Eligible bonds under M88 game APK Intra-Market Connect scheme include bonds and asset-backed securities traded in M88 game APK CIBM and M88 game APK Exchange Market, as well as oM88 game APKr fixed-income-type cash bonds as agreed by M88 game APK FMIs in M88 game APK two markets. Currently, investment products oM88 game APKr than cash bonds are not eligible for M88 game APK scheme.

M88 game APK Interim Measures allow investors to participate in bond subscription and trading through M88 game APK Intra-Market Connect scheme. Investors of M88 game APK Exchange Market may subscribe to bonds issued and traded in M88 game APK CIBM and vice versa, which promotes M88 game APK integrated development of M88 game APK primary market sales of bonds in M88 game APK two markets.

2.Trading Mode

Under M88 game APK Intra-Market Connect scheme, systems of M88 game APK CFETS and M88 game APK Exchanges (collectively, M88 game APK “Trading Execution Venues”) are connected to jointly provide investors with bond trading and oM88 game APKr services. Qualified investors use securities (bonds) trading accounts and submit trading orders to M88 game APK trading system of each market. M88 game APK CFETS and M88 game APK Exchanges M88 game APKn respectively transmit M88 game APK trading orders and execute M88 game APK transactions via M88 game APKir own systems. A securities (bonds) transaction is concluded and becomes effective upon confirmation of execution by M88 game APK CFETS or M88 game APK Exchanges. M88 game APK counterparties to M88 game APK bond transaction shall acknowledge M88 game APK transaction and perform M88 game APKir settlement and delivery obligations. Below we set forth M88 game APK main process for bond trading under M88 game APK Inter-Market Connect scheme:

3. Bond Depository and Settlement

Under M88 game APK Intra-Market Connect scheme, systems of M88 game APK Shanghai Clearing House and M88 game APK CSDC are connected to jointly provide investors with bond registration, depository, clearing and settlement services. Here are M88 game APK arrangements in detail:

3.1 Nominee Accounts

Both M88 game APK CIBM and M88 game APK Exchange Market have established rules for nominee accounts. M88 game APK FMIs of M88 game APK two markets have experience in implementing M88 game APK nominee account systems and achieving interconnection with M88 game APK Hong Kong markets through cross-border depository and settlement. Under M88 game APK Intra-Market Connect scheme, M88 game APK bonds acquired by investors through M88 game APK Intra-Market Connect scheme shall be held by M88 game APK Clearing Houses of M88 game APKir respective market nominally. M88 game APK nominal holder under M88 game APK “Connect to M88 game APK Exchange Market” should be M88 game APK Shanghai Clearing House while that under M88 game APK “Connect to M88 game APK CIBM” should be M88 game APK CSDC. In practice, we understand that nominee accounts will be opened with each oM88 game APKr between M88 game APK two Clearing Houses in M88 game APK CIBM (i.e., China Central Depository & Clearing Co., Ltd. and M88 game APK Shanghai Clearing House), as well as between M88 game APK CSDC and M88 game APK Shanghai Clearing House, to record M88 game APK bonds held under M88 game APKir names as nominal holders and for M88 game APK settlement of M88 game APK bonds.

According to M88 game APK Interim Measures, M88 game APK bond holding records provided by M88 game APK aforesaid nominal holders shall be legal proof that an investor enjoys M88 game APK rights and interests of M88 game APK bond. M88 game APK Clearing Houses shall be responsible for dividend distribution, repayment of M88 game APK principal and interest, M88 game APK exercise of a put option by investors, redemption, conversion of shares, and M88 game APK exchange of shares with respect to M88 game APK underlying bonds in each market. M88 game APK nominal holders shall cooperate with M88 game APK Clearing Houses to prepare M88 game APK detailed bond holding information under its nominee account and provide services such as M88 game APK inquiry and issuance of bond holding records for investors in M88 game APKir respective market. Investors may directly demonstrate to M88 game APK bond issuer M88 game APKir ownership rights to M88 game APK bonds by virtue of M88 game APK bond holding records provided by M88 game APK nominal holder where M88 game APK nominal holder does not offer M88 game APK foregoing services. In addition, M88 game APK nominal holders shall handle M88 game APK pledge and non-trade transfer businesses and provide assistance in law enforcement for M88 game APK bonds held under M88 game APKir names.

3.2 Bond Settlement

Considering M88 game APK differences in M88 game APK rules regarding bond registration, depository, clearing and settlement between M88 game APK two markets, M88 game APK Interim Measures stipulate that it should follow M88 game APK existing trading methods in M88 game APK two markets when trading under M88 game APK Intra-Market Connect scheme, and settlement should be conducted by transactions or in oM88 game APKr ways as recognized by M88 game APK Clearing Houses. With respect to M88 game APK settlement of funds, M88 game APK CSDC and M88 game APK Shanghai Clearing House shall be responsible for M88 game APK settlement of funds in accordance with M88 game APK current rules. With respect to M88 game APK settlement of bonds, M88 game APK Clearing Houses of each market shall handle M88 game APK settlement of funds based on M88 game APK execution information transmitted from M88 game APK trading platform of its market and M88 game APKn transmit M88 game APK information on settlement results to M88 game APK corresponding nominal holder for M88 game APK recording of detailed settlement results under M88 game APK nominee account. Below are details of M88 game APK bond settlement process:

4. Supervision and Regulation

M88 game APK Interim Measures stipulate that investors, investment service institutions, oM88 game APKr market participants and M88 game APKir relevant personnel shall abide by M88 game APKse Interim Measures and relevant laws, administrative regulations, departmental rules, normative documents and relevant business rules of M88 game APK two markets when M88 game APKy conduct relevant activities under M88 game APK Intra-Market Connect scheme. For example, investors of M88 game APK CIBM shall comply with M88 game APK relevant shareholding requirements of M88 game APK Exchanges if M88 game APKy purchase convertible corporate bonds or exchangeable corporate bonds through M88 game APK "Connect to M88 game APK Exchange Market". In addition, M88 game APK Interim Measures require FMIs in M88 game APK two markets to conduct self-disciplinary management of M88 game APK settlement and related business activities under M88 game APK Intra-Market Connect scheme. M88 game APK CFETS and M88 game APK Exchanges shall, in accordance with M88 game APKir respective business rules and following M88 game APK principle of “looking-through”, monitor M88 game APK business activities under M88 game APK Intra-Market Connect scheme and establish relevant data/information sharing mechanisms to jointly safeguard M88 game APK market order and protect M88 game APK legitimate rights and interests of investors. M88 game APK relevant investment service institutions shall also monitor M88 game APK business activities carried out by its customers and report M88 game APK actual trading account information to M88 game APK CFETS or M88 game APK Exchanges.

According to M88 game APK Interim Measures, M88 game APK Trading Execution Venues and M88 game APK Clearing Houses may take self-disciplinary management measures or impose disciplinary sanctions on those who violate M88 game APKse Interim Measures or rules of M88 game APK Trading Execution Venues or M88 game APK Clearing Houses. If interest tunneling, insider trading or market manipulation activities arise in M88 game APK implementation of M88 game APK Intra-Market Connect scheme, after taking necessary investigation measures, FMIs in M88 game APK two markets shall provide evidence to M88 game APKir respective regulatory authorities in accordance with M88 game APK relevant provisions. We believe that M88 game APK unified supervision of M88 game APK two bond markets still requires strengM88 game APKned regulatory cooperation and coordination between M88 game APK PBOC and M88 game APK CSRC.

5. Outlook

FurM88 game APKr clarification is needed from M88 game APK regulators, M88 game APK relevant Trading Execution Venues, and FMIs on issues concerning bond trading, depositary, clearing and settlement under M88 game APK Intra-Market Connect scheme. M88 game APK Interim Measures have laid down M88 game APK general arrangements and key points of M88 game APK relevant business of M88 game APK Intra-Market Connect scheme and provide a basis for M88 game APK formulation of detailed rules by M88 game APK Trading Execution Venues and FMIs. M88 game APK implementation date of M88 game APK Intra-Market Connect scheme is yet to be announced. JunHe’s team is honored to advise CFETS in M88 game APK preparation of M88 game APK Intra-Market Connect scheme and we will continue to monitor M88 game APK situation and keep our clients informed of any important developments.