China Issues Rules to Open up Domestic Exchange Traded Bond Market to Foreign Institutional Investors

The SSE (Shanghai Stock Exchange) and SZSE (Shenzhen Stock Exchange) have issued new rules to open up the domestic exchange traded bond market to foreign institutional investors.

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The rules follow a May notice from regulators allowing foreign institutional investors in the interbank bond market to also invest in the Shanghai and Shenzhen exchange bond markets, either directly or via Bond Connect, and without having to undergo separate filing or approval procedures.

The notice also gave foreign institutional investors greater discretion in their choice of bond registration and settlement organisations and custodial service providers, and simplified the procedures for foreign institutional investors to enter the market.

The new rules from the SSE and SZSE will facilitate and standardise the involvement of foreign investors in the exchange bond market. They also govern the conduct of foreign institutional investors and expand the channels through which they can access the exchange's bond market.

In order to participate in bond transactions, foreign institutional investors should open accounts with domestic securities companies that have stock exchange membership. Only one participant can be designated for each securities account.

Under the rules, foreign institutional investors may participate in the subscription, transaction, or transfer of bonds (including convertible and exchangeable corporate bonds), asset-backed securities, bond lending, related derivatives for risk management, and bond funds.

Foreign institutional investors permitted to participate in the interbank bond market are also allowed to participate in both the SSE and SZSE's exchange bond markets. Separate approval is not required, but an account with a domestic securities firm must be opened.