National Interbank Funding Center, China Central Depository & Clearing Co., Ltd., Interbank Market Clearing House Co., Ltd., China International Payment Service Corp., interbank bond market makers and trial market makers, and Bank of China (Hong Kong) Limited:
For the purposes of further regulating the settlement of “Bond Connect” and ensuring the smooth operation of “Northbound Connect”, in accordance with the Interim Measures for the Administration of Mutual Bond Market Access between Hong Kong SAR and Mainland China (Order No. 1 [2017] of the People's Bank of China), the Settlement Rules for Bond Connect (Northbound Connect) is hereby issued to you for your conscientious compliance and implementation.
Annex
Settlement Rules for Bond Connect (Northbound Connect)
Article 1 These Rules shall apply to the settlement business of Northbound Connect. The Cross-border Interbank Payment System (CIPS) shall establish an automatic connection with the bond bookkeeping system of domestic custodian institutions, and conduct the real-time settlement of bonds and capital of Northbound Connect under the trade-for-trade and DvP arrangements.
Article 2 Domestic custodian institutions shall access the CIPS as direct participants. Overseas custodian institutions shall open fund accounts with overseas direct CIPS participants.
The domestic Northbound Connect quotation institutions that are non-direct CIPS participants (hereinafter referred to as quotation institutions) shall open fund accounts with domestic direct CIPS participants as banks.
Article 3 Quotation institutions or overseas custodian institutions shall, before carrying out business, designate to domestic custodian institutions their CIPS fund accounts for the Northbound Connect settlement.
Article 4 Quotation institutions shall, in accordance with the operating instructions issued by the National Interbank Funding Center (hereinafter referred to as the Center), conduct maintenance, correlation, and change of information on fund accounts and custody accounts as well as other relevant trading operations.
Article 5 Both parties of the Northbound Connect transaction shall conduct transactions according to the trading rules related to Northbound Connect issued by the Center.
When the quotation institution makes a request for quotation reply, the CIPS capital account shall be selected for the “capital account information” item to conduct capital settlement.
Article 6 When an overseas investor strikes a deal with a quotation institution, it shall explicitly select one of the following two settlement initiation modes for settlement.
1. The payer initiates DvP settlement.
The payer shall submit settlement instructions to the CIPS and handle the DvP settlement through the connection established between the CIPS and domestic custodian institutions. If the payer is a non-direct CIPS participant, settlement instructions shall be submitted to the CIPS through its corresponding direct participant in the CIPS.
2. The domestic custodian institution directly initiates the DvP settlement.
The domestic custodian institution shall directly initiate the settlement process according to the entrustment by both parties of settlement, and perform DvP settlement through the connection with CIPS.
The Center shall transmit the contract note and the information about settlement initiation mode confirmed by both parties to the domestic custodian institution. The domestic custodian institution and the CIPS shall improve relevant systems to fully support the settlement under two modes. After the consensus is reached, the time limit for each business link to be confirmed under the two modes shall be made clear to market participants, and reported to the People's Bank of China.
Article 7 The following procedures shall be followed when the payer initiates the DvP settlement:
1. After receiving the transaction data from the trading platform, the payer (if it is a direct CIPS participant) or a direct CIPS participant entrusted by the payer shall send the CIPS133 message with information on financial market transaction to the CIPS on the settlement date. According to the CIPS133 message received, the CIPS will check the account balance of the direct CIPS participant who has made payment. If the balance is insufficient, the CIPS900 message will inform the direct CIPS participant who has made payment of payment failure. If the balance is sufficient, the relevant settlement amount shall be frozen, and the CIPS133 message shall be forwarded to the domestic custodian institution and the direct CIPS participant who has received the payment.
2. The domestic custodian institution shall, according to the CIPS133 message received, generate settlement instructions and send them to the bond giver for settlement confirmation, and inform the payer of information about settlement instructions and confirmation status.
3. If the bond giver agrees to give bonds after verifying information about settlement instructions, it shall click “settlement confirmed” to feed “agreeing to perform bond transfer” back to the domestic custodian institution. The domestic custodian institution shall check the position in the underlying bonds of the bond giver according to the results of settlement confirmation.
If the underlying bonds provided by the bond giver is insufficient, the domestic custodian institution shall determine the failure of settlement and feed the results back to the CIPS through the CIPS134 message. The CIPS shall, according to the CIPS134 message, unfreeze the funds of the direct CIPS participant who has made payment, and inform the domestic custodian institution, the direct CIPS participant who has made payment and the direct CIPS participant who has received payment of the processing results.
If the underlying bonds provided by the bond giver is sufficient, the domestic custodian institution shall freeze the bonds provided by the bond giver in full amount, and provide through the CIPS134 message to the CIPS feedback on the fact that the bonds have been frozen. The CIPS shall transfer the settlement amount from the payer's fund account of the payee's fund account according to the CIPS134 message, and inform the domestic custodian institution of the results of such fund transfer through the CIPS601 message. The domestic custodian institution shall, according to the CIPS601 message, transfer the full amount of the underlying bonds from the custody account of the bond giver to that of the bond recipient, and issue the notice of successful settlement.
4. If the bond giver refuses to give bonds after verifying information on settlement instructions, it shall click “settlement refused” to feed refusal to perform bond transfer back to the domestic custodian institution. The domestic custodian institution shall decide the failure of settlement, and feed the results back to the CIPS through the CIPS134 message. The CIPS shall, according to the CIPS134 message, unfreeze the funds of the direct CIPS participant who has made payment, and inform the domestic custodian institution, the direct CIPS participant who has made payment and the direct CIPS participant who has received payment of the processing results.
5. If the bond giver still fails to click “settlement confirmed” to the domestic custodian institution or refuses to reply at the prescribed time point on the settlement date for the domestic custodian institution, the custodian institution shall determine the failure of settlement. The CIPS shall unfreeze the funds of the direct CIPS participant who has made payment, and inform the domestic custodian institution, the direct CIPS participant who has made payment and the direct CIPS participant who has received payment of the processing results.
Article 8 The following procedures shall be followed when the domestic custodian institution initiates the DvP settlement:
1. After receiving the contract note, the domestic custodian institution shall generate and send settlement instructions, and both parties of settlement shall click “settlement confirmed”. On the settlement date, the domestic custodian institution shall freeze the full amount of the underlying bonds of the bond giver based on the results of settlement confirmation by the payer and the bond giver.
2. After the full amount of the bonds are frozen, the domestic custodian institution shall send to the CIPS the CIPS135 message with information on financial market transaction. The CIPS shall forward the CIPS135 message to the direct CIPS participant who has made payment and the direct CIPS participant who has received payment.
3. If the payer verifies that the payment information in the CIPS135 message is consistent with the transaction information in the financial market and agrees to pay, the payer (if it is a direct CIPS participant) or a CIPS direct participant entrusted by the payer shall, via the CIPS136 message, provide to the CIPS feedback on agreeing to perform transfer of funds. The CIPS shall perform transfer of funds according to the CIPS136 message, and feed through the CIPS601 message the results of fund transfer back to the domestic custodian institution, the direct CIPS participant who has made payment and the direct CIPS participant who has received payment. The domestic custodian institution shall handle the bond transfer according to the results of fund transfer, and issue the notice of successful settlement.
If the funds from the direct CIPS participant who has made payment are still insufficient at the prescribed time point on the settlement date for the domestic custodian institution, the domestic custodian institution shall determine the failure of settlement and unfreeze the underlying bonds provided by the bond giver.
4. If the payer refuses to pay after verifying that the payment information in the CIPS135 message is consistent with the transaction information in the financial market, the payer (if it is a direct CIPS participant) or a CIPS direct participant entrusted by the payer shall, via the CIPS136 message, give the CIPS feedback on information about refusal to make payment. The domestic custodian institution shall decide the failure of settlement according to the CIPS601 message received, and unfreeze the underlying bonds provided by the bond giver.
5. If the payer still fails to reply via the CIPS136 message at the prescribed time point on the settlement date for the domestic custodian institution, the domestic custodian institution shall determine the failure of settlement and unfreeze the underlying bonds provided by the bond giver.
Article 9 The quotation institution (if it is a direct CIPS participant) or a CIPS direct participant entrusted by it, an overseas direct CIPS participant entrusted by the overseas custodian institution and the domestic custodian institution shall complete message elements in strict accordance with the CIPS message standards to ensure that the message elements are true, accurate and complete. For specific implementation, refer to relevant message specifications.
Article 10 Domestic underwriters may distribute the underwritten bonds to overseas investors, which may register them in the name of the overseas custodian institution. The domestic underwriters participating in the Bond Connect distribution business shall open CIPS fund accounts. The domestic underwriters that are non-direct CIPS participants shall open fund accounts with domestic direct CIPS participants as banks, and provide information on the fund accounts to the domestic custodian institution. Overseas investors participating in the Bond Connect distribution business shall complete transfer of funds through the CIPS.
Article 11 The distribution process of bonds is as follows:
1. Domestic underwriters shall input distribution and settlement instructions. Distribution and settlement instructions shall contain the both parties' custody account number, product code, settlement denomination, settlement amount, responsibility period and other elements. Notably, the custody account of the buyer shall be the notional holder bond account opened by the overseas custodian institution with the domestic custodian institution.
2. The domestic custodian institution shall, according to the distribution and settlement instructions confirmed by the overseas custodian institution, freeze the full amount of underwritten bonds distributed by domestic underwriters before sending to the CIPS the CIPS135 message with information on financial market transaction. The CIPS shall forward the CIPS135 message to the direct CIPS participant who has made payment and the direct CIPS participant who has received payment.
3. If the payer verifies that the payment information in the CIPS135 message is consistent with the transaction information in the financial market and agrees to pay, the payer (if it is a direct CIPS participant) or a CIPS direct participant entrusted by the payer shall, via the CIPS136 message, provide to the CIPS feedback on agreeing to perform transfer of funds. The CIPS shall perform transfer of funds according to the CIPS136 message, and feed through the CIPS601 message the results of fund transfer back to the domestic custodian institution, the direct CIPS participant who has made payment and the direct CIPS participant who has received payment. The domestic custodian institution shall perform transfer of bond underwriting limits according to the results of fund transfer, and issue the notice of successful settlement.
If the funds from the direct CIPS participant who has made payment are still insufficient at the prescribed time point on the settlement date for the domestic custodian institution, the domestic custodian institution shall determine the failure of settlement and unfreeze the underwriting limits for the underlying bonds provided by the bond giver.
4. If the payer refuses to pay after verifying that the payment information in the CIPS135 message is consistent with the transaction information in the financial market, the payer (if it is a direct CIPS participant) or a CIPS direct participant entrusted by the payer shall, via the CIPS136 message, give the CIPS feedback on information about refusal to make payment. The domestic custodian institution shall decide the failure of settlement according to the CIPS601 message received, and unfreeze the underwriting limits for the underlying bonds provided by the bond giver.
5. If the payer still fails to reply via the CIPS136 message at the prescribed time point on the settlement date for the domestic custodian institution, the domestic custodian institution shall determine the failure of settlement and unfreeze the underwriting limits for the underlying bonds provided by the bond giver.
6. After the domestic underwriter transfers the full amount of the raised funds to the account designated by the issuer, the issuer shall send the Confirmation Letter on Receipt of Funds from Issuance to the domestic custodian institution within the specified time. The domestic custodian institution shall handle the registration and confirmation of bonds according to the Confirmation Letter and the issuance and distribution results.
Article 12 If any domestic and overseas custodian institution or any direct CIPS participant fails to provide the Northbound Connect settlement service pursuant to these Rules, the People's Bank of China shall punish such institution or participant in accordance with the Law of the People's Republic of China on the People's Bank of China.
Article 13 These Rules shall come into force on the date of issuance. The Interim Settlement Rules for Bond Connect (No. 137 [2017] of the General Office of the People's Bank of China) shall be repealed concurrently.
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