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Shanghai Clearing House Detailed Operation Rules for Registration, Custody, Clearing and Settlement of Bond Connect Cooperation between the Mainland and Hong Kong

(Trial Implementation)

 

Article 1. In order to standardize the operation of registration, custody, clearing and settlement under the bond connect cooperation between Mainland and Hong Kong (hereinafter referred to as “Bond Connect”), the Detailed Operation Rules are formulated pursuant to the Joint Announcement of the People’s Bank of China and the Hong Kong Monetary Authority, the Interim Administrative Measures on Bond Connect Cooperation of the Mainland and Hong Kong and Business Rules on Bond Registration, Custody, Clearing and Settlement (SHCH Announcement No. 13 [2014]) of Shanghai Clearing House.

 

Article 2. Bond Connect consists of the “Northbound Trading” and the “Southbound Trading”. The Detailed Operation Rules apply to the registration, custody, clearing and settlement for “Northbound Trading”. For any issue not stipulated in the Rules, please refer to Business Rules on Bond Registration, Custody, Clearing and Settlement of Shanghai Clearing House and other applicable rules.

 

Article 3. Overseas investors from Hong Kong and other countries and regions (hereinafter referred to as “Overseas Investors”) investing in the China Interbank Bond market (hereinafter referred to as “CIBM”) through Bond Connect shall be consistent with the scope of eligible overseas investors promulgated by the People’s Bank of China (hereinafter referred to as “PBC”).

 

Article 4. With the approval of PBC, Shanghai Clearing House and the Central Moneymarkets Unit of Hong Kong Monetary Authority (hereinafter referred to as HKMA CMU) jointly provide registration, custody, clearing and settlement services to overseas investors through a connection between the two infrastructures by using the nominee holding arrangement. Shanghai Clearing House is the ultimate central securities depository (CSD) and HKMA CMU is the nominee holder of the bonds.

 

Article 5. A legal agreement is signed between Shanghai Clearing House and the Hong Kong Monetary Authority (hereinafter referred to as HKMA). In accordance with the agreement and applicable business rules of Shanghai Clearing House, two parties provide services of bond issuance and distribution, registration and custody, clearing and settlement, coupon payment and redemption, corporate actions and other relevant businesses through electronic book-keeping.

 

Article 6. HKMA opens nominee account(s) with Shanghai Clearing House, and provides bond registration and custody services for overseas investors through HKMA CMU members who have opened nominee accounts and proprietary accounts with HKMA. The aggregate amount of bonds registered for bond holders that open bond accounts with HKMA shall be equal to the outstanding of the bonds registered by Shanghai Clearing House for holders of the nominee account(s) of HKMA.

HKMA needs to submit the following documents to Shanghai Clearing House for account opening:

(1) Application Form of Bond Account Opening

(2) Signature Card for Settlement Business

 

Article 7. Bonds purchased through “Northbound Trading” by overseas investors should be registered in the nominee account(s) opened by HKMA with Shanghai Clearing House and the overseas investors shall enjoy the rights and interests of the securities according to applicable laws. HKMA shall in its own name, exercise its rights to bond issuers through Shanghai Clearing House. Prior to excising its rights to bond issuers, HKMA shall firstly consult with overseas investors and then take actions accordingly.

 

Article 8. Overseas investors shall conduct transactions and settlement abiding by the rules promulgate by regulators on the scope of eligible counterparties, trading products and underlying bonds. The settlement date of transactions through Bond Connect is based on the holiday arrangement in CIBM.

 

Article 9. Shanghai Clearing House provides clearing and settlement services on a gross basis for transactions conducted through Bond Connect. In the future, central counterparty clearing service will be provided based on actual business development and market demands, and relative rules will be announced separately.

 

Article 10. After Shanghai Clearing House receives transaction data, HKMA CMU shall complete relevant settlement operations with respect to corresponding nominee account(s) through Shanghai Clearing House’s terminal interface or straight-through processing. Shanghai Clearing House will conduct the settlement in accordance with the operation of HKMA CMU.

 

Article 11. On bond settlement date, Shanghai Clearing House and HKMA CMU provide bond settlement service as the ultimate CSD and the nominee holder of the bonds respectively.

 

Article 12. Bond transfer and fund payment service under Bond Connect are conducted via Delivery-versus-Payment (DvP). Bond transfer is processed through the nominee account opened by HKMA with Shanghai Clearing House, while fund payment is processed through the Cross-border Interbank Payment System.

In the case that the seller has sufficient bonds for settlement, Shanghai Clearing House puts the bonds on hold, credits the funds to the seller’s account, then transfers the bonds to the buyer’s account. Once the previous process is completed, the settlement is irrevocable. Based on the settlement results issued by Shanghai Clearing House, HKMA CMU completes settlement as the nominee holder of the bonds. Where there are other regulations stipulated by PBC, the DvP settlement shall be processed accordingly.

 

Article 13. Overseas investors shall ensure they have adequate bonds and funds for settlement with respect to the transactions conducted through Bond Connect. Under gross settlement, when a default is incurred due to the insufficient funds in buyer’s account or the insufficient bonds in seller’s account, the defaulting party shall assume full responsibilities to its counterparty, while Shanghai Clearing House bears no responsibility.

 

Article 14. Overseas investors engaged in Bond Connect may inquire about their bond account balances and movements at HKMA CMU through relevant HKMA CMU members, and have the right to obtain relevant reports such as settlement and delivery report and account balance report from HKMA CMU through relevant HKMA CMU members.

 

Article 15. On record date of coupon payment and redemption, Shanghai Clearing House confirms the list of bondholders, and calculates receivable amounts according to the bond balance of the nominee account(s) of HKMA.

 

Article 16. On coupon payment and redemption date, if the issuer’s payment is transferred fully within the agreed timeframe, Shanghai Clearing House shall transfer the full receivable amount to the corresponding nominee account(s) of HKMA. Overseas investors engaged in Bond Connect may obtain coupon interest payment /redemption notification reports from HKMA CMU through relevant HKMA CMU members.

 

Article 17. HKMA CMU and overseas investors shall fulfill reporting obligations as required by the mainland and Hong Kong regulators.

 

Article 18. The Detailed Operation Rules shall be interpreted by Shanghai Clearing House and come into effect since the date of promulgation.

 

 

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