People’s Republic China
Detailed Assessment Report: CPSS-IOSCO Recommendations for Securities Settlement Systems and Central Counterparties

A detailed assessment report on the observance of the Committee on Payment and Settlement Systems-International Organization of Securities Commissions recommendations for China’s Securities Settlement Systems and Central Counterparties is presented. The bond market comprises the interbank bond market, the exchange bond market, and the bank counter market. The two stock exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange, have been established in 1990 and offer trading in the same type of securities, being shares, bonds, funds, and warrants.

Abstract

A detailed assessment report on the observance of the Committee on Payment and Settlement Systems-International Organization of Securities Commissions recommendations for China’s Securities Settlement Systems and Central Counterparties is presented. The bond market comprises the interbank bond market, the exchange bond market, and the bank counter market. The two stock exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange, have been established in 1990 and offer trading in the same type of securities, being shares, bonds, funds, and warrants.

I. General

1. The present document is the assessment of securities and derivatives settlement systems in the PRC based on the Recommendations of the CPSS and the IOSCO for RSSS and the Recommendations of CPSS-IOSCO for Central Counterparties (RCCP). This assessment was conducted during a field mission of the Financial Sector Assessment Program to the PRC in September 2010.

2. The assessors of the RSSS and RCCP were Massimo Cirasino and Mario Guadamillas.1 The same assessors also undertook the assessment of Systemically Important Payment Systems (SIPS) in China with the CPSS Core Principles for SIPS.

II. Information and Methodology Used for Assessment

3. The information used in the assessment included relevant laws, rules and procedures governing the systems, and other available material.2 In addition, extensive discussions were held with regulators and overseers: PBC, CSRC, SSE, SHFE, DCE, ZCE, CFFEX, CCDC, SD&C, Securities Association of China (SAC), China Futures Association (CFA); several stakeholders, including banks and broker-dealers active on the SSE, SHFE, and the interbank bond market, participants of the CCDC and SD&C as well as banks that facilitate settlement and funds custody for corporate securities and futures. Three self assessments were prepared by the CCDC for the CCDC settlement system, by the SHFE for the SHFE clearing and settlement system and by the Department of Market Supervision of the CSRC for the SD&C clearing and settlement system. Other relevant information was derived by the assessment process for SIPS.

4. The assessment was conducted on processes and functions as opposed to institutions. Given that the bonds are mostly traded over the counter (OTC), the processes relating to trades outside the stock exchange were also examined.

III. Securities and Derivatives Settlement Systems Infrastructure Overview

5. The SSS in the PRC are organized around three different types of markets, which are the bond market, the corporate securities market and the futures market, see Figure 1. Volumes in these markets have been growing steadily over the last two decades, with the SSS becoming a critical component of the financial infrastructure of China.

Figure 1.
Figure 1.

China: Market structure trading, clearing and settlement in People’s Republic of China

Citation: IMF Staff Country Reports 2012, 082; 10.5089/9781475503005.002.A001

A. Clearance and Settlement Arrangements for the Interbank Bond Market and Bank Counter Market

6. The bond market in the PRC comprises the interbank bond market, the exchange bond market and the bank counter market. The interbank bond market is the most dominant market, with more than 97 percent of total bond trading volume. Bond trading on the interbank bond market is quote driven and trades are executed OTC. The types of bonds vary from government bonds, central bank bills, corporate bonds, savings bonds to asset backed securities (ABS). Total amount of issued bonds was nearly RMB 9 trillion in 2009. The most issued bonds are central bank bills (46 percent of total issuance in 2009) and government bonds (19 percent), see Figure 2. The issuance of corporate bonds and commercial bank bonds is however rapidly increasing. Investors are commercial banks, insurance companies, mutual funds, the National Social Security Fund, pension funds, corporate investors and individual investors.

Figure 2.
Figure 2.

China: Issuance of Bonds in 2009

Citation: IMF Staff Country Reports 2012, 082; 10.5089/9781475503005.002.A001

Source: CCDC, Annual Review of China’s Bond Market 2009.

7. The CCDC is the SSS as well as the CSD for bonds. It is the only institution entrusted by the MOF to be the depository for Government securities. In addition to the OTC bond market, Government securities can also be traded in the stock exchanges. For this purpose, the SD&C holds an omnibus account at the CCDC and beneficial owner securities settlement for stock exchange transactions is done through SD&C books. Cash settlement takes place in the central bank HVPS for OTC traded bonds. The CCDC was established in 1996 as a Government entity and since then it is regulated by the PBC and overseen by the PBC and MOF. In addition, the CBRC is in charge of the appointment of Executive Managers of CCDC. The number of settled transactions was nearly 340 thousand in 2009, representing a value of RMB 122 trillion. The settled volumes have grown tremendously since the last couple of years, see Figure 3.

Figure 3.
Figure 3.

China: Growth in Settlement Transactions of Bonds (Indexed at 1998)

Citation: IMF Staff Country Reports 2012, 082; 10.5089/9781475503005.002.A001

Source: CCDC, Annual Review of China’s Bond Market 2009.

8. The CCDC settles bond transactions (spot, repo, forward) on a gross basis for both bonds and funds, though CCDC management is currently considering introducing also a netting facility. Securities are held at the end-investor level in most cases (98 percent). However, for the exchange bond market and the bank counter market an indirect holding method is used, with the SD&C (for the exchange market) and the four big commercial banks (for the bank counter market) acting as sub-custodians, holding the securities in the books of the CCDC on behalf of the beneficial owners. The CCDC book entry system is interconnected with the interbank trading system (operated by the CFETS)3 supporting STP for the trading and settlement of the interbank bond market.

9. Settlement takes place on T+0 for most transactions (82.9 percent of total value settled in 2009). Market participants confirm trades on the same day. If a trade is conducted through the CFETS, the CCDC automatically receives the details of the trade and sends them to the participants for confirmation. If a trade is conducted outside the CFETS, one participant starts the settlement process sending trade details to the CCDC that, in turn, sends the information to the other counterparty for confirmation. In addition to the commonly used DvP settlement, CCDC allows for other settlement modalities, PaD, DaP, and FoP.

B. Clearance and Settlement Arrangements for the Stock Exchanges

10. There are two stock exchanges in the PRC, which are the SSE and the SZSE. Both exchanges were established in 1990 and both offer trading in the same type of securities, being shares, bonds, funds and warrants. For shares a distinction is made in A and B shares.4 A shares (99.6 percent of share turnover) listed in Shanghai and Shenzhen are denominated in RMB. Only domestic investors and a select group of foreigners, through the Qualified Foreign Institutional Investor (QFII) program launched in 2003, are allowed to trade these shares. B shares (0.4 percent of turnover) are listed in Shanghai and Shenzhen denominated in RMB and traded and settled in USD (Shanghai) or HKD (Shenzhen). Only foreign investors, investors from Hong Kong, Macau Taiwan, and individual investors from China mainland are allowed to trade these shares.

11. Turnover on both stock exchanges is relatively high and has grown tremendously during the last decade, see Figure 4. According to the World Federation of Stock Exchanges, the SSE ranks as the 3rd exchange worldwide in share trading with RMB 34 trillion, and the SZSE as the 6th with RMB 18 trillion. Market capitalization of the SSE was RMB 18 trillion at the end of 2009 and RMB 6 trillion at the SZSE. On the SSE 870 companies are listed and on the SZSE 830.

Figure 4.
Figure 4.

China: Share value of trading volume on the SSE and SZSE from 2001–2009

Citation: IMF Staff Country Reports 2012, 082; 10.5089/9781475503005.002.A001

Source: World Federation of Exchanges.

12. The SD&C is the CCP,5 SSS, as well as the CSD for all instruments traded on the SSE and SZSE. The SD&C was established in 2001 and is jointly owned by the SSE (50 percent) and the SZSE (50 percent). For the whole year 2009 total settlement volumes resulted in almost 7 billion transactions worth RMB 129 trillion. This is a strong increase compared to 2008, when trading activity had decreased because of the crisis. In 2008 the SD&C settled almost 4 billion transactions with a value of RMB 64 trillion.6 The cash settlement for exchange trades takes place through the accounts of commercial banks with the SD&C acting as the settlement agent.7

13. Securities settlement arrangements for SSE and SZSE are based on front-end availability of securities and funds, otherwise transactions do not take place. Securities are held at the investor level detail in the SD&C while funds are kept through a system of third party custodian banks with the SD&C acting as the settlement agent.

14. Each settlement participant needs to open a securities account with the SD&C to deposit the securities of its investors and its own securities (segregated). Securities are registered and kept in the SD&C at the investor level (direct holding method) except for part of B shares, for which nominee accounts are used (indirect holding method). Segregated end-investor accounts are also held in the booking systems of broker-dealers and positions are reconciled at 18:00 every day between the SD&C and broker-dealers. To perform settlement, the SD&C maintains a “Centralized Securities Settlement Account” for its role as a CCP and each settlement participant must–under its own name and legal person–open a “Securities Settlement Account” with the SD&C for securities deliveries or receipts between itself and the SD&C.

15. The SD&C also plays the role of settlement agent while “settlement” banks8 are the mechanism used to transfer funds resulting of the clearing process as well as facilitating the third party custodian system.9 The third party custodian system introduces a “look-through” feature in the system that prevents appropriation of investor’s funds by broker-dealers.

16. Figure 5 depicts the third party custodian system arrangements. Settlement participants10 should open a “Settlement Reserve Fund Cash Account” with the SD&C and notionally deposit in this account a reserve fund. Settlement participants are required to maintain a minimum level of funds in their “Settlement Reserve Fund Cash Accounts” which is certain percentage of the average daily purchase amount of the last month, and the percentage is 10 percent for bonds and 20 percent for the other securities. Balances in the “Settlement Reserve Fund Cash Account” are remunerated by the SD&C. The real transfer of funds to constitute the reserve fund and keep it at the minimum required level takes place through the “settlement” banks from the “cash accounts” under the broker-dealers to the “deposit account” of the SD&C (see Figure 6). This “Settlement Reserve Fund Cash Account” of settlement participants is also used to facilitate SD&C settlement agent role. The SD&C uses a “Centralized Fund Settlement Account” from or to which the net cash proceeds are booked to or from the “Settlement Reserve Fund Cash Account” of settlement participants. Again, the real transfer of funds takes place through the “settlement” banks.

Figure 5.
Figure 5.

China: Third Party Custodian System Arrangements

Citation: IMF Staff Country Reports 2012, 082; 10.5089/9781475503005.002.A001

Figure 6.
Figure 6.

China: SD&C Settlement Agent Role

Citation: IMF Staff Country Reports 2012, 082; 10.5089/9781475503005.002.A001

17. Investors need to place sufficient funds from their “savings accounts” to the “trading settlement fund special fund account” at the custodian deposit bank in order to be able to trade. An accounts mirror system is established at the investor level in which investors’ “management account for trading settlement” in the custodian banks and investors’ “cash accounts” in the broker-dealers exchange data on real time. The “cash account” is credited or debited with settlement proceeds and correspondently the credits and debits are mirrored in the “management account for trading settlement.” The “management account for trading settlement” is credited or debited with the investor’s cash deposits or withdrawals and correspondently the credits and debits are mirrored in the “cash account.” Investors can only withdraw cash from the “trading settlement fund special cash account.”

18. For a net seller to withdraw the cash resulting from the proceeds of his/her sale, he/she will need to wait for the reconciliation from the “management account for trading settlement” to the “trading settlement fund special fund account” that takes place at the end of every trading day. However, for trading purposes investors will have funds available once broker-dealers affects investors’ “cash accounts” as the credits and debits will be mirrored in the “management account for trading settlement.” Thus, the fact that settlement participants need to keep a minimum required level ensures a closed-end loop of funds. Then, settlement participants manage the flow of funds with their investors through debits and credits to the “investor’s cash accounts” from settlement proceeds and through the reconciliation between the “management account for trading settlement” and the “trading settlement fund special fund account.” Boxex 1 and 2 present details of the settlement cycle.

19. A similar system is established for proprietary trading by broker-dealers completely separated from the system for individual investors. It works in a similar but simplified way to the one for investors. The settlement participants open a “Proprietary Settlement Reserve Fund Special Account” with the SD&C. Broker-dealers also open a “Proprietary Trading Settlement Fund Special Cash Account” with the custodian deposit banks and keep their own “proprietary cash account.”

C. Clearance and Settlement Arrangements for the Futures Exchanges

20. There are four futures exchanges in the PRC. They include three commodities exchanges: SHFE, 11 DCE, 12 and ZCE.13 The CFFEX was established in 2006 by the SHFE, DCE, ZCE, SSE, and SZSE. Futures traded on the SHFE include copper, aluminum, zinc, steel wire rod, rebar, natural rubber, fuel oil, and gold. The DFE offers trading in futures on soybean No. 1, soybean No. 2, corn, soybean meal, soybean oil, linear low density polyethylene, RBD palm oil and PVC. The ZFE offers trading in futures on hard white wheat, strong gluten wheat, cotton, white sugar, rapeseed oil, PTA and long-grain nonglutinous rice. The SHFE ranks as the 10th derivatives exchange worldwide (see Figure 7), measured in number of contracts traded (source Futures Industry Association) and the second largest commodity exchange. Overall trading volume and value for the four futures exchanges in 2009 was 130.5 trillion RMB and 2.16 billion contracts. SHFE has seen impressive steady growth in the most recent years with trading value of 13, 23, 29, and 74 trillion RMB for 2006, 2007, 2008, and 2009 respectively. In 2009, 870 million contracts were negotiated, representing a 210 percent increase over the previous year. The DCE ranks 11th with 834 million contracts traded in 2009, representing a growth of 31 percent compared to 2008 and the ZCE ranks as the 14th derivatives exchange with 454 million contracts traded in 2009, representing an increase of 2 percent compared to the previous year.14 All the commodities exchanges were established in the early nineties.

Figure 7.
Figure 7.

China: International Derivatives Exchanges Ranked by Volume

Citation: IMF Staff Country Reports 2012, 082; 10.5089/9781475503005.002.A001

Source: Futures Industry Association.

Clearance and Settlement Process for a Typical Transaction (A Shares)

T

Buyers and sellers place their orders through broker-dealers (indeed some broker-dealers allow for investors to place their orders before T).

There is a double monitoring (by broker-dealer and stock exchange) for availability of securities and a single monitoring (by the broker-dealer) for availability of funds.

Once that front-end availability of funds and securities is ensured buying and selling orders are accepted for trading.

Matching of trading takes place during the stock exchanges operating hours (from 9:15 a.m. to 11:30 a.m. and from 1:00 p.m. to 3:00 p.m.) Matched transactions are locked-in and sent automatically to SD&C for clearance and settlement. Thus, no confirmation process is needed.

At the end of the day (6:00 p.m.) securities are settled on a net basis (for the majority of securities).

T + 1

Funds settlement takes place at 4:00 p.m. by debiting and crediting the “Reserve Fund Cash Accounts” of settlement participants. Broker-dealers can decide to keep their “Reserve Fund Cash Accounts” at a level above the minimum reserve requirement. The balances are remunerated by SD&C. Thus, net cash settlement at SD&C does not necessarily need to match with net cash movements done through the “settlement” banks.

Shares Clearance and Settlement in Shenzhen Stock Exchange

Electronic trading system is used in SSE. According to the business rules of the SSE, B shares trades are locked-in transactions which means when the orders are executed, the transactions become effective immediately and the results of which must not be revised or revoked. Both the buying and the selling parties must fulfill their settlement obligations related to those transactions.

Under the situation where clients use a custodian bank while trading B shares via a foreign broker, the settlement obligations against the SD&C for the transactions are assumed by the foreign broker. In this case, a “Second Type” Settlement Instruction is used to transfer the clients’ B shares between the custodian bank and foreign broker during the settlement process. No matter whether the Second Type Settlement Instructions were matched or not, the outcome and obligations of relevant parties of the B share transactions must not be revised or revoked, and the foreign broker should fulfill its settlement obligations against the SD&C.

As for processing procedure, foreign brokers and custodians shall submit Second Type Settlement Instruction to the SD&C respectively, and then the SD&C implements the matching process for those instructions. If the instructions cannot be matched successfully, the above two parties could modify the instructions and submit to the SD&C again no later than 3:00 p.m. on the day of T+2. For instructions matched successfully, the SD&C will implement final settlement process before 12:00 a.m. on the day of T+3.

Before 1995, trading rules of SSE required clients who use a custodian bank whilst selling B shares via a foreign broker to transfer their B shares from the custodian bank to the foreign broker prior to submitting their trading orders. In order to improve trade efficiency and meet the demands of participants, in 1995 the SSE changed the rule, allowing clients to sell their B shares via foreign broker without having to first transfer their B shares from custodian bank to foreign broker. After client’s orders are executed, the broker and custodian bank should then, according to the transaction results, complete the transfer of client’s shares between them by using the second type settlement instructions.

21. The four futures exchanges have their own clearing and settlement departments, which offer the function of a CCP. There are 210 members currently in the SHFE, among which about 80 percent (167 members) are futures brokerage firms, the rest only operate for proprietary trading. The DCE has about 200 members of which about 90 percent are brokerage firms and the ZCE also has over 200 members. Settlements can be either in cash (daily mark to market) as well as physical settlements (delivery on expiration). Cash settlement is effected through the accounts of five commercial “settlement” banks. The in-house clearing mechanism has two layers: exchange-clearing members and clearing members-clients. The exchanges operate a pre-margining system, that is, futures contracts can only be purchased under the premise of sufficient margin deposits. In addition to the premargining system the exchanges have established other risk management controls including: price limits, limits to speculative positions and large holders, compulsory closed-out of positions and a system of warning indicators. Settlement reserves have been constituted (a minimum balance of RMB 2 million for brokerage firms and RMB 500,000 for non brokerage members) in order to operate the pre-margin system. A Futures Investors Safeguarding Fund has also been constituted.

22. The CFMMC was established in 2006 as a non-profit company under the sponsorship of the three futures exchanges to guarantee the safety of futures margin. The CFMMC collects data from the futures exchanges, brokerage firms and “settlement” banks and cross check the information of the three sources to ensure consistency. In case of conflict, the exchange data would prevail. The CFMMC is subject to regulation and supervision of the CSRC.

23. The five “settlement” banks only operate as custodians for margins and facilitators for transfers of funds being the futures exchanges the settlement agents. Futures exchange members open special settlement accounts at the “settlement” banks and the futures exchanges have also accounts in each of the “settlement” banks to facilitate its settlement agent function. Investors keep ordinary accounts for investments and other purposes. The third party custodian system is similar to the one described for the operations of the SSE and SZSE.

IV. Main Findings from the Assessment with International Standards

24. The CCDC, SD&C, and SHFE/DCE/ZCE operate important securities and derivatives settlement systems both, due to the large volume and value of transactions (GDP comparison) and the fact that they support key financial sector markets (interbank bond market, stock exchanges and futures). Therefore, the CCDC and SD&C are being assessed below against the 19 RSSS and the SHFE is being assessed against the 15 RCCP. The SD&C operates as a CCP for most of the market transactions but given the “unique” features of its settlement process (front-end control of securities and funds), it is being assessed against the RSSS (instead of the RCCP). The other two commodities futures exchanges, DCE and ZCE, follow very similar settlement procedures to the SHFE (as confirmed by DCE and ZCE representatives during the September 2010 mission), thus, findings and recommendations for the SHFE are also applicable to DCE and ZCE. Finally, the CFFEX was launched in 2006 as a joint venture of the SSE, SZSE, DCE, and ZCE but still volume and value of transactions are relatively modest. Therefore, it was determined that CFFEX arrangements would not be assessed at this stage. Tables 1 to 10 present main findings and recommendations of the assessment.

Table 1.

China: Exchanges Volume and Value Compared to GDP, 2009

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Sources:a World Federation of Exchanges, b FIA, c SHFE, d World Bank estimate of China GDP in 2009 was RMB 34.1 trillion.

Trading volume figure for SHFE, DCE and ZCE include both trade legs.

Table 2.

China: Detailed Assessment of Observance of the CPSS-IOSCO Recommendations for Securities Settlement Systems—OTC Bonds Market-China Government Depositary and Clearing Corporation Limited

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Table 3.

China: Detailed Assessment of Observance of the CPSS-IOSCO Recommendations for Securities Settlement Systems—Stock Exchanges (SSE, SZSE)-the China Securities and Clearing Corporation Limited

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Table 4.

China: Detailed Assessment of Observance of the CPSS-IOSCO Recommendations for Central Counterparties—the Shanghai Futures Exchange

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Table 5.

China: Summary Assessment of Observance of CPSS-IOSCO RSSS—OTC Bonds Market-CCDC

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Table 6.

China: Summary Assessment of Observance of CPSS-IOSCO RSSS—Stock Exchange (SSE, SZSE)-SD&C

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Table 7.

China: Summary Assessment of Observance of CPSS-IOSCO RCCP—SHFE

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Table 8.

China: Recommended Actions to Improve Observance of CPSS-IOSCO RSSS—OTC Bonds Market-CCDC

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Table 9.

China: Recommended Actions to Improve Observance of CPSS-IOSCO RSSS—Stock Exchange (SSE, SZSE)-SD&C

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Table 10.

China: Recommended Actions to Improve Observance of CPSS-IOSCO RCCP—SHFE

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V. Authorities’ Response

The PBC and CSRC appreciate the significant undertaking associated with the FSAP review by the International Monetary Fund (IMF) and the World Bank in a comprehensive assessment of the SD&C, CCDC, the SHFE against the CPSS-IOSCO RSSS and for Central Counterparties (RCCP). We would like to pay a high tribute to the great efforts made by all parties involved in the assessment process and the professionalism of the assessors as demonstrated. We recognize the positive and far-reaching influence the assessment has on the stability and effective regulation and oversight of SIPS, clearing and settlement systems.

The assessment well objectively reflects the status of the settlement system in China’s security market, bond market and futures market as well as the compliance of the SD&C and CCDC with the RSSS, the compliance of the SHFE with the RCCP. The PBC and CSRC will share and analyze the comments and recommendations in the assessment with the SD&C, CCDC and SHFE, and consider absorbing and adopting the comments and recommendations in the future. All relevant parties will work together to ensure that SSS in China can operate in a secure, efficient and transparent environment.

Meanwhile, the CSRC still holds reservations about certain parts of the assessment of SHFE on its compliance with the RCCP, i.e., Recommendation 1 and Recommendation 4, for the following reasons:

1. On the issue of legal basis. Regarding China’s legislative system, laws are promulgated by the NPC, and administrative regulations are issued by the State Council. Administrative regulations constitute an important part of China’s legal system, providing legal basis for not only administrative regulation, but also the settlement of disputes and cases by judicial authorities. However, it is not an explicit clause after all. The Regulations on the Administration of Futures Trading, which is the administrative regulation governing futures trading, is the legal basis for China’s futures market. We do not believe legal gaps exist in China’s futures settlement system.

2. On the legal recognition of the use of dematerialized warehouse receipts as margin contributions. The use of standardized warehouse receipts as margin contributions is clearly stipulated in the Regulations on the Administration of Futures Trading, the Measures for the Administration of Futures Exchanges and the relevant business rules of futures exchanges. The Property Law also contains clearly-stated provisions on pledge right. In practice, the SHFE designates delivery warehouses to serve as the registration authority for the pledge of dematerialized warehouse receipts. There have never been any controversies or disputes in this regard.

The PBC holds reservations about certain parts of the assessment of CCDC on its compliance with the RSSS, i.e., Recommendation 1 and Recommendation 8. Since bond is a kind of security, the Securities Law applies to interbank bond market. Also the finality has legal certainty. The regulations issued by PBC indicates, “bond transaction settlement cannot be revoked once completed,” “the cash and bonds with the status of waiting for transfer in the settlement process and the collateral regarding to the settlement can only be used for completing the settlement and shall not be enforced compulsorily for other purposes.” The spirit and principles of the Securities Law apply to domestic securities market in China, including inter-bank bond market; despite that the Securities Law contains specific provisions more on the exchange market. Regulations promulgated by PBC, which are in accordance with the spirit and principles of the Securities Law and mainly applied to inter-bank bond market, are the special provisions in Chinese legislation system on securities. According to the Law on Legislation, regulations issued by PBC belong to broadly defined laws and have legal enforceability. Owing to these, inter-bank bond market has been operating smoothly and safely these years since its establishment.

The PBC, together with CCDC, will seriously analyze the opinions and suggestions raised in the Assessment Report and keep improving the depositary and settlement system of China’s inter-bank bond market.

1

Massimo Cirasino is Head of the Payment Systems Development Group of the Financial and Private Sector Development Vice Presidency (FPDVP) at the World Bank. Mario Guadamillas is the FSAP Manager in FPDVP at the World Bank. Office research has been conducted by Froukelien Wendt, Senior Securities Settlement Specialist at the Payment Systems Development Group of the FPDVP at the World Bank.

2

CSRC Annual Reports 2008 and 2009, CDC Annual Report of China’s Bond Market 2009, PBC responses on the FSAP questionnaire for payment systems and securities clearing and settlement; websites from CSRC, SSE, SZSE, SHFE, CDCC/Chinabond; and other relevant documents.

3

CFETS provides the electronic trading platform for interbank markets.

4

There are also H shares listed on the Hong Kong Stock Exchange, denominated, traded and settled in HKD; and N shares, listed on the New York Stock Exchange, denominated, traded and settled in USD.

5

SD&C settles most transactions as a CCP except for the following SSE operations: repurchase of T-bond buyout repos upon maturity, exercise of warrants, special floor of block trading, trading of non-novated corporate bonds, transfer of Specific Asset Management Plan (SAMP), bond placing for shareholders, seasoned offering for shareholders, corporate bond issue via exchange system.

6

Source is SD&C, Yewu tongji yuebao

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(Monthly business statistics report), December 2009, p. 2, retrieved from http://www.chinaclear.cn/main/03/0304/0304_1.html. These statistics may count both trade legs, which results in a figure which approximately is double compared to the turnover statistics of the stock exchange activity.

7

This is a function that SD&C performs de facto but is not formally included in the legal and regulatory framework.

8

“Settlement” banks are not indeed providing a settlement function that is provided by SD&C as settlement agent. Thus, “settlement” banks simply provide the accounts services that support funds transaction for both settlement and the third party custodian system.

9

“Settlement” banks play a funds custodian role but not a securities custodian role.

10

Settlement participants are brokers-dealers. According to Settlement Participant Member Rules of SD&C, only securities companies are eligible for settlement participant member of SD&C.

11

The SHFE was established in 1998 from the merger of the Shanghai Metal Exchange, Shanghai Cereals and Oil Exchange and Shanghai Commodity Exchange.

12

Established in 1993.

13

Established in 1990.

14

According to usual practices in China figures of trading volume include both legs.

People’s Republic of China: Detailed Assessment Report-CPSS-IOSCO Recommendations for Securities Settlement Systems and Central Counterparties
Author: International Monetary Fund