With the approval of the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC), Shenzhen Stock Exchange (SZSE), the Shanghai Stock Exchange (SSE), the National Interbank Funding Center, Shanghai Clearing House, and China Securities Depository and Clearing Corporation Limited (CSDC) (hereinafter referred to the infrastructure institutions of the two markets) jointly released the Interim Measures for Interbank-exchange-traded bond Market Connect Business (hereinafter referred to as the Interim Measures).

This move is deigned to build the rules foundation for the connect between the interbank and exchange-traded bond markets (hereinafter referred to as the Connect) and make sure the business relating to the Connect is conducted in a standard and orderly manner. It indicates a major progress in the building of the domestic bond market connect mechanism. It is an important action of the infrastructure institutions of the two markets to implement the strategic requirements of the CPC Central Committee and the State Council, put in place the unified plans of PBOC and CSRC, promote the integrated development of domestic bond markets, and improve the capabilities in serving the real economy.

The Connect is an institutional arrangement that connects investors of the interbank bond market and the exchange-traded bond market through relevant infrastructure institutions of the two markets, so they can buy and sell the bonds traded in the two markets. In recent years, the China bond market has seen rapid development and ranked the second in the world in terms of size, with more diversified products and transaction instruments. However, for historical reasons, the two markets hadn’t been connected or integrated very well with each other for a long time, resulting in deficiencies in price discovery, liquidity, etc. in domestic bond markets. To further strengthen the capabilities of the bond markets in serving the real economy, the CPC Central Committee and the State Council required “enhancing the interconnection of bond markets” in April 2020. PBOC and CSRC issued a joint announcement ([2020] No. 7) in July 2020, approving the infrastructure institutions of the two markets to develop cooperation in such interconnection and deciding that the infrastructure institutions of the two markets should jointly advance work relating to the building of relevant mechanism.

The Interim Measures is not only a concrete product of the implementation of the joint announcement but also a basic business rule of the Connect mechanism. The Interim Measures has a total of 51 articles that cover principles, common rules, specific arrangements, monitoring & regulation, etc. It has laid down the general arrangements and business priorities of the mechanism and provided a basis for the preparation of lower-level rules. According to the Interim Measures, based on the existing listing and circulation model of the two markets, existing account system and transaction settlement rules, the Connect plans to realize order routing and nominal holding through the connection of front-office and back-office infrastructures. The connecting directions include “Connect to the Interbank Bond Market” and “Connect to the exchange-traded bond Market”. Therefore, the institutional investors of the exchange-traded bond market and the members of the interbank bond market can “access with one point” without opening an account in both markets or changing their trading practices, and effectively and conveniently participate in bond subscription and trading in the other market.

The Interim Measures is based on the laws and characteristics of domestic bond markets and was formed after several rounds of opinion seeking, adjustment and improvement. Its content has fully reflected the following principles. First, full coverage. Its rules and articles cover the whole business scope and all business procedures to provide a sufficient principled basis for the operation of the mechanism. Second, stable operation. It promotes the building of the mechanism in line with the market- and law-based principle. It has carefully studied and fully absorbed reasonable opinions and suggestions from market participants, and it steadily promotes innovation in the mechanism through micro-design. Third, pragmatism. It focuses on achieving moderate regulation and service optimization so as to give better play to the efficiency of the Connect in serving the real economy. Fourth, risk prevention. It has strengthened regulation and punishment of abnormal transactions, to ensure the stable and healthy development of the markets.

Promoting the steady implementation of the interconnection of bond market infrastructure based on the Interim Measures is of great strategic significance. First, it can facilitate cross-market bond issuance and trading, promote free flow of elements like capital, and form a unified market and unified price, thus laying a solid foundation for the smooth transmission of monetary policy and the effective implementation of macro control and further promoting the liberalization of the RMB. Second, it can help improve the service level and efficiency of the infrastructure of Chinese bond markets, contribute to the development of a customer-centric bond market infrastructure service system with moderate competition, and better serve the real economy.

Next, under the guidance of PBOC and CSRC, the infrastructure institutions of the two markets will, based on the joint announcement and the Interim Measures and following the general principles of “being steady and orderly and keeping risks under control”, continue to spare no effort to advance relevant work including building of technical systems, signing of cooperation agreements, etc. In the meantime, they will make and improve special arrangements for business operation and strive to launch the mechanism as scheduled. Moreover, according to the joint announcement, China Development Bank and other policy-related banks, state-owned commercial banks, joint-equity commercial banks, city commercial banks, foreign-funded banks in China and other banks listed in China can participate in spot trading by agreement in the exchange-traded bond market via the Connect mechanism or by opening an account. The exchange-traded bond market will actively make proper preparations for the foregoing matters in which those banks participate.

Source: press release