China opens up interbank bond market to foreign institutional investors.pdf

Hong Kong Reporting Bulletin 1 June 2016 China opens up interbank bond market to foreign institutional investors Introduction In February 2016, the People’s Bank of China (“PBOC”) in a significant move announced the opening of China’s interbank bond market to a wide array of foreign institutional investors. Further to that announcement, on 27 May 2016, the Shanghai headquarters of PBOC (“PBOC Shanghai”) and the State Administration for Foreign Exchange (“SAFE”) published the much anticipated rules (the “Foreign Institutional Investor Rules”) implementing the opening up of the interbank bond market. Following these developments, a wide range of foreign institutional investors can now invest in China’s burgeoning interbank bond market without prior approval or licence from Chinese regulators. We set out below: the key features of the framework under the Foreign Institutional Investor Rules; and a discussion of certain key legal and documentation issues to be considered under the Foreign Institutional Investor Rules. Key Features Who are eligible investors? “Eligible Investors” that are permitted to invest in the interbank bond market are: foreign banks, insurers, securities brokers, fund managers and other financial institutions; investment products issued by the financial institutions mentioned above; and other medium or long-term institutional investors (such as pension funds, charity funds and donation funds) recognised by PBOC. Contents Introduction ....................... 1 Key Features .................... 1 Key Legal and Documentation Issues ...... 3 The Way Forward ............. 6 2 What products can be traded? An Eligible Investor can: trade bonds in the inter-bank bond market; and based on its hedging needs, enter in transactions such as: bond lending; bond forwards; forward interest agreements; and interest rate swaps (“IRS”). Where to trade and settle? Eligible I