Circular on Issues Relevant to Improving the Management of Exchange Risks by Foreign Institutional Investors on the Interbank Bond Market

(Issued by the State Administration of Foreign Exchange on January 13, 2020 and effective as of February 1, 2020.)

Hui Fa [2020] No.2

Branches and offices of the State Administration of Foreign Exchange of the provinces, autonomous regions and municipalities directly under the central government, the Shenzhen, Dalian, Qingdao, Xiamen and Ningbo municipal branches, the China Foreign Exchange Trade System and national Chinese-invested banks:

With a view to further opening the foreign exchange market to foreign investors and further facilitating the management of exchange risks on the interbank bond market by foreign institutional investors (FIIs), we, pursuant to the PRC Regulations for the Control of Foreign Exchange and relevant provisions, hereby notify you on matters relevant to the participation by FIIs in the domestic foreign exchange market as follows:

1 .   An FII may use domestic renminbi to foreign exchange derivatives (Forex Derivatives) to manage exchange risk exposures arising from investments on the interbank bond market in accordance with the hedging principle.

For the purposes of this Circular, the term "FIIs" means the various types of foreign investors that satisfy the provisions of the People's Bank of China, Announcement [2016] No.3.

2 .   A foreign bank-type investor may select at its own discretion one of the following channels to engage in Forex Derivatives trading:

(1)  directly trading with a domestic financial institution as a client;

(2)  directly entering the interbank foreign exchange market to trade by applying to become a member of the China Foreign Exchange Trading System (CFETS); or

(3)  entering the interbank foreign exchange market to trade through a prime brokerage by applying to become a CFETS member.

3 .   A foreign non-bank-type investor may select at its own discretion one of the following channels to engage in Forex Derivatives trading:

(1)  directly trading with a domestic financial institution as a client; or

(2)  entering the interbank foreign exchange market to trade through a prime brokerage by applying to become a CFETS member.

4 .   An FII that opts for the first channel set forth in Article 2 or 3 hereof shall trade with not more than three domestic financial institutions and file its list of financial institutions in advance with CFETS for the record itself or through its correspondent bank. If it is to replace a financial institution, it shall file the same in advance with CFETS for the record.

5 .   When engaging in Forex Derivatives trading, an FII shall abide by the following provisions:

(1)  there being a reasonable degree of correlation between its Forex Derivatives exposure and exchange risk exposure; the foreign exchange risk exposure includes the principal of a bond investment, interest and changes in market value;

(2)  when a change in a bond investment occurs, resulting in a change in the foreign exchange risk exposure, an adjustment to the corresponding Forex Derivatives exposure shall be made within five working days or within five working days after the end of the month;

(3)  in line with actual foreign exchange risk management needs, trading mechanisms such as extension, reversing of positions, and gross or balance settlement may be flexibly selected and settlement of the gain or loss effected in renminbi or a foreign currency; and

(4)  before engaging in Forex Derivatives trading for the first time in accordance herewith, the FII shall submit a written undertaking to the financial institution or CFETS to the effect that it will abide by the hedging principle.

6 .   If an FII opts for the first channel in Article 2 or 3 hereof and needs to open a dedicated foreign exchange account with a domestic financial institution other than its correspondent bank, it may do so on the strength of a business registration voucher specified in the State Administration of Foreign Exchange, Circular on Foreign Exchange Control Issues Relevant to the Investment on the Interbank Bond Market by Foreign Institutional Investors (Hui Fa [2016] No.12). Such account shall be used exclusively for carrying out delivery of funds, gain and loss processing, margin management, etc. in connection with the Forex Derivatives trading, and cross-border receipt and payment of funds shall be completed through the correspondent bank. Once an FII ends the Forex Derivatives trading relationship with a domestic financial institution, it shall close the dedicated foreign exchange account it opened with such institution in a timely manner.

7 .   An FII that opts to enter the interbank foreign exchange market either directly or by means of a prime brokerage shall submit relevant trading information in accordance with CFETS provisions.

8 .   A domestic financial institution that handles business for an FII in accordance with the first channel specified in Article 2 or 3 hereof shall abide by the following provisions:

(1)  submitting information on the FII's Forex Derivatives trading on a daily basis in accordance with CFETS provisions;

(2)  performing its obligations of submitting statistics and reports on its customer Forex Derivatives business to the exchange bureau; and

(3)  if it uses a third-party trading system, platform or facilities other than its own internal trading system, complying with relevant provisions of the People's Bank of China.

9 .   CFETS shall, in accordance with the requirements hereof, duly carry out market services such as FII transaction counterparty record filing, member market entry, prime brokerage business and data collection, as well as technical support work.

10 .   If an FII or domestic financial institution violates this Circular, the State Administration of Foreign Exchange will take the attendant regulatory measures in accordance with the law.

11 .   This Circular shall be effective as of February 1, 2020. The 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 (Hui Fa [2017] No.5) shall be repealed simultaneously. In the event of a discrepancy between this Circular and previous provisions, this Circular shall prevail.

Upon receipt of this Circular, branches and offices of the State Administration of Foreign Exchange are asked to forward it to relevant financial institutions in their jurisdictions in a timely manner.