Introduction of Free Trade Zone RMB Bond Business

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1 Introduction of Free Trade Zone RMB Bond Business Yidan WANG April 2016 London

2 Contents Company Overview Business Background Business Model Future Plan 第 四 章

3 A brief look into Shanghai Free Trade Zone A test ground of simplified foreign trade supervision procedures and China s financial reform Free movement of cash/capital between FTZ and offshore RMB market

4 Company Overview

5 Company Overview Established on 28 Nov 2009, Shanghai Clearing House (SHCH) is authorised and directed by People s Bank of China (PBOC) China s first Central Counterparty (CCP) in OTC market One of the three Central Securities Depositories (CSDs) in China s financial market As of 31 March 2016, the amount of bonds outstanding in China: CNY 53.5 trillion (USD 8 trillion approximately) In China s Interbank bond market: CNY 48.8 trillion Registered and deposited at SHCH: CNY 12.2 trillion (1/4 of China s interbank market)

6 Company Overview CSD Business The outstanding volume of bonds deposited at SHCH (CNY trillions) As of 31 March 2016, Number of issuer accounts: 3,398 Number of investor accounts: 10,440 In 2015, SHCH provided settlement service for 1 million transactions (spot and repo), with total value of CNY 83 trillion, accounting for 12% of China s bonds settlement Dec.2010 Dec.2011 Dec.2012 Dec.2013 Dec.2014 Dec.2015 March.2016

7 Company Overview CSD Business Issuance (Auction), registration, depository and real time gross settlement services Corporate Bonds, Financial Institution Bonds, Money Market Instruments and Structured Products NCD Financial AMC Bond CRMW CP CSD SCP MTN SMECN National Center of registration, depository and settlement for Corporate Bonds ABS ABN Half of China s corporate bonds outstanding. 70% of newly issued corporate bonds in Q PRN Security Firm CP PPN

8 Company Overview CCP Business Covers FICC products CCP The amount of CCP clearing The amount of total clearing (CNY trillions) 126 Bond Interest Rate Derivatives FX and Exchange Rate Derivatives Freight and Commodity Derivatives Cash bond Repo RMP Interest Swap FX Spot FX Forward FX Swap RMB FFA RMB Iron-ore Swap RMB Streamcoal Swap

9 Company Overview International Communication International organisations CCP12, ACG, ICMA Global institutions European Clearing Group, Deustsche Boerse, London Clearing House, Chicago Mercantile Exchange Group International authorities and regulators New York and Chicago Federal Reserve Bank, EU Council, AMF, US Securities and Exchange Commission

10 Business Background

11 Business Background Three objectives To boost the process of RMB internationalisation To facilitate the establishment of an international financial market An experiment window for the fully opening-up of China s bond market

12 Business Background To boost the process of RMB internationalisation RMB formally joined SDR The acceptance of RMB as reserve currency has increased RMB assets become more desirable to global investors RMB bond is an important choice to form RMB asset portfolio FTZ RMB bond business provides access to RMB bonds By the end of 2015, the total volume of offshore RMB asset was around CNH 1.53 trillion. Hong Kong accounted for the largest proportion for over 60%. Each of Taiwan and Singapore accounted for around 10%, with significant growth. By the end of 2015, total volume of RMB bonds held by foreign institutions were CNY 0.7trillion, represents less than 2% of total RMB bonds outstanding at that time. Taiwan: 5%-10% Offshore RMB asset (CNY trillions) Korea: 5%-10% Hong Kong: RMB offshore deposit Taiwan: RMB offshore deposit

13 Business Background To facilitate the establishment of an international financial market In line with State Council s objective to establish an international financial market. To promote Shanghai as an International Financial Center. To improve the participation degree of international investors.

14 Business Background An experiment window for the fully opening-up of China s bond market 18 September 2013 The State Council approved the document of (Shanghai) free trade zone overall arrangements 2 December 2013 PBOC released the document of Opinions on to support the construction of (Shanghai) free trade zone 8 April 2015 The State Council approved the document of To further implement (Shanghai) free trade zone overall arrangements 30 October 2015 PBOC announced Further arrangements to boost (Shanghai) free trade zone innovation and accelerate international financial center construction

15 Business Model

16 Business Model Shanghai Clearing House preparatory work 1 2 SHCH communicated with potential issuers and investors, connecting capital supply side and demand side; SHCH developed a technical system for FTZ bond business. Ready Sep 2013, the State Council approved the establishment of Shanghai FTZ. SHCH communicated with regulators, market participants, and international CSDs. SHCH conducted feasibility studies and developed plans , PBOC formally approved SHCH to launch FTZ RMB bond business (Yin Fa [2015] No. 506)).

17 Business Model Overview Cash Account Foreign investors: use FT or NRA account Domestic investors: use FT account Overall Framework Business Model Settlement Account Open accounts with SHCH Use account of ICSD/CSD-SHCH Link New issue model; FTZ Commercial Bank Counter model Technical system with Free Trade Unit Fixed-income products

18 Business Model New Issue Model

19 New Issue Model Introduction Issuance, trading, clearing and settlement Domestic and foreign issuers filed with PBOC or registered with NAFMII (Chinese domestic law) Issuance Book Building Distribution through SHCH Issuance disclosure - SHCH Secondary market transactions CFETS Overseas electronic trading platform Registration, depository, clearing, and settlement Collateral management 5 6 Interest and principal payment

20 New Issue Model Introduction Trading Platforms Input Instruction Buyer Transfer Instruction CFETS SHCH Clear and Settle Seller Input Instruction Seller trade Input settlement instructions Overseas electronic trading platform SHCH Clear and Settle trade Input settlement instructions Buyer

21 New Issue Model Introduction Settlement Accounts Open accounts with SHCH Open a FT or NRA account with a commercial bank Participate directly with technical connection to SHCH Participate through a settlement agent Use an ICSD-SHCH Link ICSD opens an omnibus account with a commercial bank ICSD opens an omnibus account with SHCH One point of access Internal settlements allowed

22 New Issue Model Introduction An Example SHCH Bond transfer Cash transfer (Or a local CSD which links with SHCH) ICSD Foreign investors Trade Investors who open their accounts with SHCH

23 New Issue Model Introduction Clearing and Settlement Foreign investors (Buyer, participates through internationa l custodian institutions ) 1. Input settlement instructions 6. International custodian institutions inform the buyers of the results International custodian institution (Omnibus account) 1. Transfer settlement instructions 2.Send confirmation of the matching settlement instructions 5.Settlement results SHCH 1. Receive/Generate settlement instructions 2. Match settlement instructions 3. Enough bond and cash 4.Transfer money and bond through DVP 5.Finish Transfer 1.Input settlement instructions (Transactions through international trading platform) 2.Send confirmation of the matching settlement instructions 5.Settlement results Seller (Open accounts with SHCH)

24 New Issue Model Introduction Interest and principal payment Issuer SHCH Pay the interest and principal on day T-1. ICSD Foreign investors with accounts in SHCH Interest and principal payment on day T Interest and principal payment on day T Foreign investors participate through ICSD-SHCH Link

25 Business Model FTZ Commercial Bank Counter model

26 FTZ Commercial Bank Counter Model Introduction General Arrangements 1 3 Approved pilot commercial banks FTZ branches Over-the-counter transfer the existing bonds from domestic market to the FTZ Issue new bonds over the counter of FTZ branches 2 FTZ investors open sub- accounts in these commercial banks bilateral bidding and liquidity services, Interest and principal payments 4

27 FTZ Commercial Bank Counter Model Introduction Settlement Accounts SHCH The approved pilot commercial banks Investors open sub-accounts with approved pilot commercial banks

28 FTZ Commercial Bank Counter Model Introduction Trade and settlement SHCH the approved pilot commercial banks, Market Maker Secondary depository data transfer Foreign investors Ask for quotes Ask for quotes Investors trade and settle with their commercial banks

29 FTZ Commercial Bank Counter Model Introduction Interest and principal payment Pay the interest and principal on day T-2. Transfer the interest and principal on day T-1 Issuer SHCH the approved pilot commercial banks Interest and principal payment on day T

30 FTZ Commercial Bank Counter Model Introduction FTZ Commercial Bank Counter model FTZ Commercial Bank Counter business is an extension of domestic Commercial Bank Counter Market. FTZ Commercial Bank Counter model and the New Issue Model complement each other.

31 Business Model Advantages of FTZ RMB Bond Business Diversification Provides a new market for offshore RMB. Corporate bonds with full range of credit profiles and yield to fulfill investment objectives. Flexibility Choice of settlement path and cash account arrangements. Innovative clearing and settlement process provides greater flexibility on post-trade execution. Simplicity Registration made convenient. Simpler way to participate, lower participation cost. Settlement process made simple and effective. Closer to international bond market practices. Pilot advantage The foreign investors will get a head start to enter into China s domestic bond market. Connectivity Connect to enterprises in China which may lead to further opportunities worldwide.

32 Future Plan

33 Next Step Planned Launch Time: May 2016 Will continually promote FTZ RMB bond business to domestic and foreign issuers and investors. Will Focus on market development and liquidity improvement.

34 Contacts Jianping PI Yanyan WU Chenyu LIAO Ye TAO Kangkang LU Lu XU

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