People's Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission, Circular on Regulating the Bond Trading Business of Bond Market Participants

Issued: December 29 2017

Effective: as of date of issuance

Applicability: For the purposes of this Circular, bond market participants refer to domestic qualified institutional investors including various types of financial institutions and non-legal-person products, as well as the asset managers and custodians of non-legal-person products that comply with the provisions on bond market access.

For the purposes of this Circular, bond trading includes qualified bond transactions such as spot trading, bond repurchase, bond futures and short sale of bonds (Article 1).

Main contents: With respect to bond repurchases, the same may not exceed 80% of the net assets of a deposit-taking institution; 120% of the net assets of other financial institutions; 20% of the total assets of an insurance company; 40% of the net assets of a public fund on the preceding day (100% of those of one operating in a closed-end manner); and 100% of the net assets of a private fund on the preceding day. In accordance with this system, the leverage ratio is “balance of total repurchase agreements ÷ net assets”, i.e. 100% (Article 9(4)).

For any bond repurchase transaction, a master repurchase agreement shall be signed, or for a forward transaction, a master derivative transaction shall be signed, and the transaction contract and relevant master agreement shall be signed in accordance with provisions. With the exception of purchase and payment on behalf of another during the bond offering and distribution period, any other manner of holding of bonds on behalf of another shall be considered an outright repurchase. “Drawer agreements” and combined transactions in a disguised form to circumvent internal controls and oversight are strictly prohibited. A participant that conducts a bond repurchase transaction shall account for such transaction by including it on the organization's balance sheet and non-legal person product statement in accordance with accounting standards (Article 6).

The maximum term of a pledge-style repurchase or outright repurchase may not exceed 365 days. Pledge-style repurchases may be settled with a bond return and outright repurchases in cash and redeemed early (Article 8).

Related legislation: Measure for the Administration of Bond Transactions in the National Interbank Bond Market, Apr 30 2000; Measures for the Administration of the Registration, Custody and Settlement of Bonds in the National Interbank Bond Market and Measures for the Administration of the Offering and Trading of Corporate Bonds, Jan 15 2015