Embed Size (px)
Citation preview
China Interbank Market Widens Access to Overseas Participants 1
August 2015
China Interbank Market Widens Access to Overseas Participants
Introduction
On 14 July 2015, the People’s Bank of China (“PBOC”) opened the door to
central banks and monetary authorities from various jurisdictions,
international financial organisations and foreign sovereign wealth funds
(together, “Foreign Sovereign Entities”) to enter into bond repurchase
transactions as well as certain derivative transactions in the rapidly growing
China inter-bank market (the “Inter-bank Market”)1. Previously on 28 May
2015, PBOC had issued a separate circular which enabled offshore RMB
clearing banks and offshore RMB participating banks (together, the “Offshore
RMB Banks”) to carry out bond repurchase transactions on the Inter-bank
Market2.
Bonds repurchase (or “repo”) transactions conducted on the Inter-bank
Market include “title transfer repurchase” and “pledge repurchase”
transactions, both of which are, as required by the PBOC, documented under
the China Inter-bank Market Bond Repurchase Master Agreement (the
“NAFMII Repo Agreement”) published by the National Association of
Financial Market Institutional Investors (“NAFMII”). The NAFMII Repo
Agreement consists of general terms that are applicable to all repo
transactions and certain terms and supplements which apply specifically to
pledge repos and title transfer repos, as the case may be. For further details
on the main provisions, execution, net settlement practice and other key
features of this agreement, please click here for Linklater’s previous client
publication in respect of the NAFMII Repo Agreement.
In the case of derivatives transactions, it is a requirement of the PBOC that
certain types of transactions (including interest rate, currency, bonds, credit
and gold derivative transactions) are to be documented under the China Inter-
bank Market Financial Derivative Transactions Master Agreement (the
“NAFMII Derivatives Agreement”) (together with the NAFMII Repo
Agreement, the “NAFMII Master Agreements”). The NAFMII Derivatives
Agreement is part of a suite of industry-standard derivatives documentation
which also comprises credit support documents and product definitions. For
further information on the NAFMII Derivatives Agreement and a more detailed
1 The PBOC Circular on Matters Relating to RMB Investment in Inter-bank Market by Offshore
Central Banks, International Financial Organizations & Sovereign Wealth Funds. 2 The PBOC Circular on Offshore RMB Clearing Banks, Offshore Participating Banks
Transacting in Bond Repurchase Transactions on Inter-bank Bond Market.
Contents Introduction ....................... 1
Key Legal and Documentation Issues ...... 2
Looking Forward ............... 3
China Interbank Market Widens Access to Overseas Participants 2
analysis of the documentation structure, please click here for Linklaters’
previous client publication on these issues.
With the now-permitted entry of certain overseas institutions into the Inter-
bank Market repo and derivative business comes certain new legal and
documentation issues. We briefly discuss some of these issues below.
Key Legal and Documentation Issues
Execution of NAFMII letter of undertaking: The NAFMII Master
Agreements are developed by NAFMII for its members. Foreign Sovereign
Entities and Offshore RMB Banks not being members of NAFMII, will need to
obtain permission from NAFMII before executing either NAFMII Master
Agreement and entering into any repo or derivatives transactions on the Inter-
bank Market. NAFMII has a standard letter of undertaking for each NAFMII
Master Agreement. Overseas participants are required to execute the letter of
undertaking for licensing and authorisation purposes, and submit the
executed letter to NAFMII. Overseas participants will undertake in the letter
that, among other things, it will not amend the provisions that are identified as
non-amendable in the relevant NAFMII Master Agreement and will comply
with the rules promulgated by NAFMII when entering into and performing
transactions under any NAFMII Master Agreement. Such rules seek to
regulate the conduct of business in the derivatives and repo markets and
include rules that relate to risk control, trade filing and reporting, and trading
conduct.
Mandatory application of PRC law and domestic dispute resolution:
Each NAFMII Master Agreement specifies PRC law as the governing law of
the agreement and requires any dispute to be resolved in the PRC (whether
by litigation or arbitration). These provisions are non-amendable in the sense
described in the above paragraph. A query that has been raised is whether
market participants can submit to another jurisdiction, for example Hong
Kong. Whilst this is possible as a matter of contract, it is unlikely to take place
as a matter of practice given such approach would be contrary to the
provisions of the relevant NAFMII Master Agreement and the terms of the
particular overseas participant’s letter of undertaking. Furthermore, when (as
required by NAFMII rules) an executed NAFMII Master Agreement containing
such terms is submitted to NAFMII for its records, NAFMII may well reject the
submission, which would mean that the particular agreement would not be
eligible to be used for transactions.
Immunity of Foreign Sovereign Entities: When entering into transactions
with Foreign Sovereign Entities, an important point to consider is whether
such entities enjoy immunity under PRC law. The PRC espouses the
“absolute immunity” principle, meaning that as a matter a matter of PRC law a
foreign state (or sovereign entity) will enjoy immunity from jurisdiction as well
as from enforcement. The PRC government, by applicable treaties and
international agreements, has also recognised the immunity of certain
international financial organisations (such as the International Financial
Corporation and the Asian Development Bank). In addition, laws have been
China Interbank Market Widens Access to Overseas Participants 3
promulgated in the PRC to recognise the immunity of foreign central banks.
According to the PRC Law on Judicial Enforcement Immunity for Foreign
Central Banks’ Property, foreign central banks enjoy immunity during the
process of enforcement. Market participants will want to bear these
considerations in mind when executing the NAFMII Master Agreements with
Foreign Sovereign Entities.
Inter-affiliate and intra-company transactions: It may also be of interest to
Offshore RMB Banks with PRC affiliates to note the regulatory changes in
relation to inter-affiliate and intra-company transactions on the Inter-bank
Market. When the PBOC admitted Foreign Sovereign Entities and Offshore
RMB Banks to trade bond spot transactions on the Inter-bank Market in 2012,
it explicitly prohibited any offshore entity from entering into bond transactions
with its parent company, subsidiaries of its parent company, or other affiliates
and branch offices. However, the prohibition was lifted in May 2015 prior to
the further opening of the Inter-bank Market to such Offshore RMB Banks, so
that inter-affiliate and intra-company transactions are no longer prohibited,
except that inter-affiliate and inter-company transactions may be carried out,
subject to the satisfaction of certain disclosure requirements.
Looking Forward
According to the RMB Internationalisation Report published by the PBOC in
June 2015, by the end of May 2015, PBOC had entered into bilateral
currency swap agreements with the central banks and monetary authorities of
32 different jurisdictions, and has also designated offshore RMB clearing
banks for 15 different offshore markets. One can probably expect this number
to continue to increase as internationalisation of the Renminbi gathers further
momentum. The admission of a large number of overseas participants is a
significant step forward in terms of the development of market standard for
derivative and repo transactions in China. It will also help NAFMII to develop
its status in the international financial markets by moving one step closer
toward becoming a major platform for overseas participants to conduct
derivative and repo transactions.
*Linklaters is proud to have advised a group of over 20 major banks on the NAFMII
Repo Agreement and advised a group of over 30 banks on the 2009 NAFMII
Derivatives Agreement. Linklaters was the only foreign law firm that was a member of
the drafting committee for both the 2007 NAFMII Derivatives Agreement and the 2009
NAFMII Derivatives Agreement. The firm also prepared the official English translation
of the 2009 NAFMII Derivatives Agreement. Our close involvement and long-standing
expertise in China’s developing derivatives market mean that we are uniquely
positioned to assist market participants to navigate the new regulatory framework
landscape in China including transactional matters in relation to the NAFMII suite of
documentation.
China Interbank Market Widens Access to Overseas Participants 4
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.
© Linklaters. All Rights reserved 2015
Linklaters Hong Kong is a law firm affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com.
Please refer to www.linklaters.com/regulation for important information on our regulatory position.
We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications.
We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms.
If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at [email protected].
Contacts
For further information
please contact:
Chin-Chong Liew
Partner
(+852) 2842 4857
Simon Zhang
Counsel
(+852) 2842 4844
Stephen Song
Managing Associate
(+852) 2901 5440
Wayne Huang
Associate
(+852) 2901 5432
Ying Zhou
Associate
(+852) 2842 4153
Leo Pan
PRC Advisor
(+852) 2901 5436
Jodie Cheng
PRC Advisor
(+852) 2901 5221
or any of your usual contacts
10th Floor, Alexandra House
Chater Road
Hong Kong
Telephone (+852) 2842 4888
Facsimile (+852) 2810 8133 /
(+852) 2810 1695
Linklaters.com
