The People’s Bank of China (the PBC) issued the Administrative Measures on Automatic Pledge Financing (the PBC Public Notice [2017] No.18, hereinafter referred to as the Administrative Measures), which will take effect from January 29, 2018. At the same time, the Provisional Administrative Measures on Automatic Pledge Financing (the PBC Public Notice [2005] No. 25, hereinafter referred to as the Provisional Measures) will be abolished. Recently, an official from the PBC answered questions from the press.
Q: Please introduce the background and considerations behind the Administrative Measures.
A: Automatic pledge financing is a supporting mechanism of the payment system through which a deposit taking financial institution can automatically get financing by pledging bonds to the PBC when it has insufficient fund in the clearing and settlement accounts. Such a mechanism can reduce queuing in clearing and settlement and ensure the safety of the business. The Provisional Measures took effect in 2005. It contained outdated provisions in terms of the upper limit of the financing balance and interest rates of financing, and could be improved in the provisions of eligible pledges and qualification of participating institutions. To further optimize the automatic pledge financing business and improve the efficiency of payment, clearing and settlement, the PBC has decided to update the Provisional Measures to the Administrative Measures. Automatic pledge financing is triggered by a relatively high threshold, i.e. when a financial institution finds itself in a position failing to meet a settlement obligation even after exhausting all reserves. Therefore, it is essentially a settlement facility arrangement rather than a liquidity facility. Moreover, most of the financing, as an intraday draft, are returned at the end of the day, so the operation has no impact on the total base money or banking system liquidity management by the PBC.
Q: What are the key differences between the Administrative Measures and Provisional Measures?
A: First, higher financing limits. For development and policy banks, state-owned commercial banks and postal savings banks, the upper limit of financing balance is increased from 2% to 4% of the paid-in capital; for national joint-stock banks, the upper limit is increased from 2% to 10% of paid-in capital; for city commercial banks and other financial institutions, the limit is up from 5% to 15%. As small and medium-sized deposit taking financial institutions have less paid-in capital and reserves, relatively larger upward adjustments are made in their financing limit to prevent queuing in large-value clearing. In addition, the PBC could also adjust the relevant parameters to meet the need of macro prudential requirement and in view of the specific circumstances of participating institutions.
Second, unified interest rates of automatic pledge financing. The intraday and overnight interest rates of automatic pledge financing are determined based on the overnight SLF rates when the operation occurs. The intraday financing interests are calculated by hours and the overnight financing interests by the actual days of fund use, in order to provide an incentive for institutions to shorten fund-use time.
Third, a larger scope of eligible bonds for pledge. The scope of eligible bonds for pledge has been expanded to include local government bonds and other securities accepted by the PBC, in addition to the original scope of government bonds, central bank bonds and policy bank financial bonds .
