State Administration of Foreign Exchange, Circular on Issues Relevant to Control of the Foreign Exchange Risks of Foreign Institutional Investors on the Interbank Bond Market

Main contents: A domestic financial institution that has received the approval of the State Administration of Foreign Exchange, has the qualifications to act for clients in renminbi to foreign exchange derivatives business (Derivatives Business) and that satisfies the conditions for an interbank market settlement agent specified in the People's Bank of China, Announcement [2016] No.3 (a Settlement Agent) may carry out Derivatives Business related matters for foreign investors for whom it has accepted to provide trading and settlement services on an agency basis (Article 1).

The foreign exchange derivatives trading of foreign investors shall be limited to hedging their exchange risk exposure arising from their investments on the interbank bond market of funds remitted into China from abroad, and there shall be a reasonable correspondence between their foreign exchange derivatives exposure and their exchange risk exposure arising from the bond investments underlying the transactions (Article 2).

The types of foreign exchange derivatives that a Settlement Agent can handle for foreign investors include the forwards, foreign exchange swaps, currency swaps and options specified in the Implementing Rules for the Measures for the Administration of the Handling of the Settlement and Sale of Foreign Exchange by Banks (Hui Fa [2014] No.53).

As actually and reasonably required for exchange risk control, a Settlement Agent may flexibly provide trading mechanisms such as reverse position closing, and full or balance settlement for the Derivatives Business for foreign investors (Article 3).

Related legislation: People's Bank of China, Announcement [2016] No.3, Implementing Rules for the Measures for the Administration of the Handling of the Settlement and Sale of Foreign Exchange by Banks, Circular on Foreign Exchange Control Issues Relevant to the Investment on the Interbank Bond Market by Foreign Institutional Investors

Issued: February 24 2017

Effective: as of date of issuance

Applicability: For the purposes of this Circular, the term “foreign investors” means various foreign investors satisfying the provisions of the People's Bank of China, Announcement [2016] No.3.

In the event of a discrepancy between the provisions for the administration of the Derivatives Business handled by banks for clients and this Circular, this Circular shall prevail (Article 6).

Main contents: A domestic financial institution that has received the approval of the State Administration of Foreign Exchange, has the qualifications to act for clients in renminbi to foreign exchange derivatives business (Derivatives Business) and that satisfies the conditions for an interbank market settlement agent specified in the People's Bank of China, Announcement [2016] No.3 (a Settlement Agent) may carry out Derivatives Business related matters for foreign investors for whom it has accepted to provide trading and settlement services on an agency basis (Article 1).

The foreign exchange derivatives trading of foreign investors shall be limited to hedging their exchange risk exposure arising from their investments on the interbank bond market of funds remitted into China from abroad, and there shall be a reasonable correspondence between their foreign exchange derivatives exposure and their exchange risk exposure arising from the bond investments underlying the transactions (Article 2).

The types of foreign exchange derivatives that a Settlement Agent can handle for foreign investors include the forwards, foreign exchange swaps, currency swaps and options specified in the Implementing Rules for the Measures for the Administration of the Handling of the Settlement and Sale of Foreign Exchange by Banks (Hui Fa [2014] No.53).

As actually and reasonably required for exchange risk control, a Settlement Agent may flexibly provide trading mechanisms such as reverse position closing, and full or balance settlement for the Derivatives Business for foreign investors (Article 3).

Related legislation: People's Bank of China, Announcement [2016] No.3, Implementing Rules for the Measures for the Administration of the Handling of the Settlement and Sale of Foreign Exchange by Banks, Circular on Foreign Exchange Control Issues Relevant to the Investment on the Interbank Bond Market by Foreign Institutional Investors