Grasping Opportunities for China’s Bond Market Going Global and Sharing Innovations in Onshore Service Value Chain
-- Thematic Panel Discussion at the 2018 CCDC Overseas Investor Annual Conference
China Central Depository & Clearing Co., Ltd. (hereinafter referred to as CCDC) held the “2018 CCDC Overseas Investor Annual Conference (and the Release of ‘ChinaBond-Overseas Institution Investment Index’)” in Shanghai recently. The event was co-organized by CCDC, the International Capital Market Association (ICMA), and the Global Asset Management Association of Lujiazui (GAMAL). Leaders from financial regulatory authorities and more than 300 representatives from over 170 institutions including the World Bank, New Development Bank, Norwegian Central Bank, Bank of Thailand, and Bank of Malaysia attended the meeting.
At this meeting, CCDC held a panel discussion themed on “Innovation On the Way—Exploring Value-Added Services under China Interbank Bond Market (CIBM) Global Connect”, where leaders and experts from market participants as well as platforms and relevant intermediaries such as Citibank, SPDB, Fidelity International, SWIFT and Han Kun’s Law Firm participated in the discussion, and Echo Jiang, Head of the Cross-border Settlement Center of Shanghai Headquarters of CCDC served as the moderator.
The background of the panel discussion lies in the following facts. On one hand, in recent years, the practice of opening up of the CIBM has proved that the agency settlement model based on the direct-holding arrangement under “Global Connect/direct access” effectively supports foreign investors’ activities in China’s bond market. On the other hand, with the diversification of the types of foreign investors participating in the market and the increase in their RMB bond holdings, the demand of foreign investors tends to be more diversified and the problems they encounter are growing simultaneously. This brings new challenges and also opportunities for local CSDs and bond settlement agents as to how their services and products can be further improved. Hence, this panel focused on two topics: First, how to face up to and deal with the relationship between local practice and international practice in the bond market; Second, how to meet challenges by innovation and turn “challenges” into “opportunities”.
Different from the indirect-holding (nominee a/c) arrangement still used in many regions overseas, the CIBM adopts the direct-holding model. In this regard, Tiecheng Yang, partner of Han Kun’s Law Firm, pointed out that direct-holding and indirect-holding, from a legal perspective, mainly refers to whether the end investor is directly associated with the issuer and has ownership of the securities. The “direct-holding, agency-settlement” model established in CIBM has clear legal relationship, protects the rights and interests of investors effectively and has no impact on the value-added investor services provided by intermediaries such as custodian banks. Meanwhile, the indirect-holding arrangement may affect the clarity of ownership, which was why investors had to go through a time-consuming and costly process to prove to clearinghouses their ownership of assets after Lehman Brothers’ bankruptcy, is one of the typical cases. Finally, optimizing the local repo agreement and the local legal framework for quick disposal of collateral by taking into account both local practices and international standards is a rather sound legal approach to bond market innovation and internationalization.
From the perspective of the buy side, Senan Yuen, Head of China Business Management of Fidelity International, shared experience in accessing the CIBM. He pointed out that the direct access channel under the “Global Connect” (agency-settlement model) and the indirect access channel under the Hong Kong “Bond Connect” each had advantages. Generally, large institutional investors who want to extend their investment scopes beyond mere cash bonds and already have onshore FX trading experience prefer to enter the CIBM directly via the “Global Connect” channel. And for foreign investors, what values the most in the selection of bond settlement agents (BSA) is the latters’ capabilities to offer advice on regulatory changes, the strength of their business licenses, price competitiveness, the timeliness and flexibility of providing cash reports, dedicated customer service capabilities, and the connectivity to major global custodians.
From the perspective of the sell side, Yusheng Bi, Deputy General Manager of SPDB Hong Kong Trading Centre, and Harry Peng, China Head of Prime, Futures & Securities Services (PFSS) of Citi, discussed their experience in trade execution, market making and securities services, and the differences between local and international practices. They expressed confidence in China’s bond market, and said that we should not turn pale at the mention of “short selling”. According to them, SPDB and Citi are exploring emerging fields such as agency lending, cash management and FX services based on their comprehensive service capabilities across markets and products, and are seeking to use bond as collateral to provide services like credit facility and securities lending.
Daphne Huang, Head of China of SWIFT, a global interbank cooperative utility, shared her views from another perspective. Through the platform of SMPG (Securities Market Practice Group), SWIFT bridges differences between the international standards for the securities market and China’s local practices. She suggested that strengthening inter-industry cooperation and promoting market innovations, would be effective ways to better meet the escalating demands of market participants under the rapid development of Fintech. SWIFT recently participated in an industry discussion held by CCDC about corporate action, and that event was a good exploration for promoting industrial best practices.
Panelists agreed that the best solution to deal with the difference between local and international practices was to adopt the best practice or to harmonise the different market practices. And the most powerful approach to new challenges and opportunities is to cultivate the securities service value chain and explore innovations in products and services. In the CIBM, continuous efforts should be made to give full play to the institutional advantages of the current direct-holding model featuring safety, simplicity and transparency, align to the international standards, further leverage the BSAs’ ability to offer services to customers directly, provide multilayered services under a single-layered account structure, and keep being innovative and proactive. This should be the most effective way to improve the level of the value-added services of the settlement agency model, and enhance the internationalization capability of onshore financial institutions.
CCDC is a core financial market infrastructure in China’s bond market and consistently focuses on and commits to promoting business and product innovations. At the end of the panel discussion, Echo Jiang, Head of the Cross-border Settlement Center of the Shanghai Headquarters of CCDC, reviewed the service innovations by the company for foreign investors this year, including the promotion of the English Client Terminal of the CIOP (ChinaBond Intergrated Operation Platform) and the E-learning System, and the provision of ChinaBond Watch (an information-based monthly magazine). As the world’s largest collateral management platform, CCDC is also committed to expanding international services and cooperation, and promoting the cross-border use of RMB bond as collateral. This year, CCDC issued a new version of the business operation guideline for using bonds as futures margin collateral, optimized the use of collateral in guaranteeing when-issued transactions, and cooperated with the Shanghai International Gold Exchange to optimize the bonds as margin collateral business. In addition, Echo Jiang noted that CCDC also has had a number of innovations in the pipeline, including the implementation of tri-party repo in the CIBM and the launch of quick disposal of collateral after default. CCDC is also actively exploring several product and service programs, like the settlement facility arrangement and agency lending, so as to enrich the product line of agent banks, increase the liquidity of investors’ bond holdings, bring more options to investors, and realize a win-win situation for all.
As described in the theme of this panel discussion, market innovations are always “on the way”. CCDC is devoted to providing a full range of safe, efficient and professional services for the financial market. Work closely with BSAs and other market intermediaries, CCDC will keep innovating based on market demand, and promoting the opening up of China’s bond market.