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1、Use of RMB-denominated Bonds as Collateral for Global Repo TransactionsA CCDC-ICMA Joint White PaperWith the growth and the integration of global financial markets,the international repo market has entered a new stage of accelerated transformation.On the one hand,as the financial industry pays more

2、attention to the balance between risk and efficiency,collateral has become a key factor in the decision-making process of repo transactions.Thus,the supply of high-quality collateral assets has become the new focus of the market.On the other hand,with the opening-up and the development of Chinas bon

3、d market,the higher profile of RMB bonds have introduced a new option to the global collateral market.As the CSD of Chinas bond market,China Central Depository&Clearing Co.,Ltd.(CCDC)shoulders the mission of market opening-up by providing high-quality collateral management services for global invest

4、ors,and has become one of the worlds largest collateral management platforms.With solid expertise in the field of cross-border collateral cooperation,CCDC and the International Capital Market Association(ICMA),jointly present this white paper to explore the feasibility of using RMB bonds collateral

5、in global repo transactions through a comprehensive analysis of key elements of Chinese and international repo markets including market structures,regulations,risk management and interoperability,so as to provide ideas and references for global investors.As a Chinese saying goes,“With relentless pur

6、suit,we will usher in a bright future.”Promoting RMB bonds as widely accepted qualified collateral offshore is a highly professional and systematic project.We hope that the white paper can help build consensus and promote practical cooperation.CCDC will continue to work together with market particip

7、ants,embrace the opportunities and challenges brought by the global financial transformation,and contribute to the high-quality development of Chinas financial market.Wang DaqingChairmanChina Central Depository&Clearing Co.,LtdMessage from Chairman of CCDCSince its launch in 1991,Chinas repo market

8、has grown to become one of the most important liquidity management tools for financial market participants onshore,with a transaction volume exceeding USD 250 trillion in 2022.In particular,the rapid development of the interbank bond repo market,now accounting for over three quarters of the Chinese

9、institutional repo market,is distinct in its predominant use of pledged collateral as opposed to the classic title transfer underlying the Global Master Repurchase Agreement(GMRA)used in the international repo market.As publisher of the GMRA,the International Capital Market Association(ICMA)plays a

10、significant role in promoting the interests and activities of the international repo market,and of the product itself.Through the foundation of the European Repo and Collateral Council(ERCC),established by ICMA in December 1999 to represent the cross-border repo and collateral markets in Europe,comp

11、lemented more recently by the Global Repo and Collateral Forum(GRCF),ICMA has become the industry representative body globally that develops consensus solutions to issues arising in a rapidly evolving marketplace,and consolidates and codifies best market practice.In China,ICMA has been working close

12、ly with relevant regulators on issues concerning the development and internationalization of the domestic repo market,including the interpretation and confirmation of the effectiveness of close-out netting under the current Chinese legal system.Since the concept of netting was introduced in China at

13、 the legislative level via the Draft Amendment to the Law of the Peoples Republic of China on Commercial Banks,announced in October 2020,both domestic and foreign investors have paid great attention to the establishment of the termination netting system in the Chinese market.It is expected that such

14、 a system would promote further integration of Chinas regulatory framework with that of major global financial markets,providing a more effective legal basis for domestic and foreign investors to participate in the domestic repo market.Co-authored with the CCDC,this white paper provides a valuable r

15、eference of the technical differences between the domestic and international market structure,trade mechanism and documentation,providing the necessary clarity for global market participants wishing to trade in Chinas repo market.In line with the pace of internationalization of the RMB bond market,i

16、t is hoped that the opening of Chinas repo market will see further convergence in institutional rules,as channels for mutual recognition of cross-border collateral between China and foreign markets are established.Bryan PascoeICMA Chief ExecutiveMessage from CEO of ICMA(1)Overview of Chinas Repo Mar

17、ket 1.1 Market Basics 1.2 Market Structure and Trading Mechanism 1.3 Collateral Composition 1.4 Latest DevelopmentColumn#1:Development of Tri-party Repo in Chinas Interbank MarketColumn#2:Collateral Enforcement in Chinas Repo Market(2)Overview of the Global Repo Market 2.1 US Repo Market 2.2 Europea

18、n Repo Market 2.3 Latest Developments(1)Emerging Technology 1.1 The Rise of Fintech 1.2 Repo&Sustainability Becomes an Industry focusColumn#3:Development of Sustainability-related Repo Products and Transactions in Global Market1.Overview of Chinas and Global Repo Markets2.Latest Trends in the Global

19、 Repo Market3.The Basis and Elements of RMB Bonds Collateral Participating in Global Bond Repurchase(1)Deeper Opening-up of Chinas Bond Market 1.1 Chinas Macroeconomic Outlook is Stable and Promising,and RMB Internationalization has Achieved Significant Progress 1.2 Gradual Opening of Chinas Bond Ma

20、rket 1.3 Trends and Prospects of Chinas Bond Market(2)Internationalization of RMB Bonds Collateral 2.1 Gradual Convergence with International Legal Systems and Rules 2.2 Cross-border Connectivity between Domestic and Foreign Markets is IncreasingColumn#4:Cases of RMB Bonds Cross-border Application(3

21、)Core Elements Affecting the Use of RMB Bonds as Collateral in Global Repo Transactions 3.1 Agreement Element:Compatibility and Integration between Domestic and Foreign Master Repo Agreements 3.2 Systematic Element:Implementation of Close-out Netting 3.3 Risk Management Element:Clarifying the Outbou

22、nd Fund Flow Path after Enforcement 3.4 Interoperability Element:Building a Cross-Border Custody System(1)Short-term Preparations and Arrangements 1.1 Regulatory Level:Expanding Repo Market Access and Improving Enforcement Procedures 1.2 Infrastructure Level:Achieving Efficient Linkages and Promotin

23、g Interconnectivity(2)Medium and Long-term Recommendations 2.1 Extending the Legal Certainty of Close-out Netting and Promoting the Compatibility among Agreements 2.2 Expanding the Two-way Opening-up of Financial Markets and Encouraging the Development of Multi-level MarketsCONTENTAppendix 1:Offshor

24、e RMB Market and RMB Bond CollateralAppendix 2:Get Ready for Onshore Repo Documentation:A High-level Comparison between NAFMII MRA and GMRA4.Prospects and Suggestions1Overview of Chinas and Global Repo Markets11 Considering the dominant position of the interbank bond repo market,this White Paper wil

25、l take interbank bond repo market as the main object of analysis.Fig.1:Annual cumulative transaction volume of Chinas repo market Sources:PBOC,SSE,SZSEExchange repo market volume(left axis,in RMB trillion)Inter-bank repo market volume(left axis,in RMB trillion)Proportion of interbank market volume(r

26、ight axis,%)90%2000201320142015201620172018201920202021202216001200800400080%70%60%50%40%30%(1)Overview of Chinas Repo MarketIn just over half a century,the repo market has become one of the most liq-uid and actively traded markets in many countries.Since the official launch of bond repo business in

27、 Chinas financial market in 1991,it has attracted a wide range of market participants.After more than 30 years of devel-opment,the volume of repo transactions in China has been rising year by year,with continuous improvement of systems and infrastructures as well as ongoing innovation and the introd

28、uction of new products.Repo has also become the most important liquidity management tool for financial institutions.Chinas repo market has two seg-ments:the interbank market and the exchange-traded market,with a structure that is dominated by the interbank market and supple-mented by the exchange-tr

29、aded market.In 2022,the cumulative transaction volume in the in-terbank market amounted to RMB1,380.2 trillion,accounting for about 77%of the total repo mar-ket1.(See Fig.1)1.1 Market Basics2Fig.2:Proportions and weighted average interest rates of pledged and outright repos(2012-2023)Source:WindIn t

30、erms of transaction volume,pledged repo occupies a dominant position in Chinas interbank repo market,with a cumulative volume of RMB1,374.6 trillion in 2022,ac-counting for more than 95%of the interbank bond repo market(see Fig.2).According to the Measures for the Administration of Bond Transac-tion

31、s in the National Interbank Bond Market,pledged repo is defined as a loan consisting of a principal amount equal to the repayment amount and secured by the relevant bonds as collateral.In 2004,the Peoples Bank of China(hereinafter referred to as“PBOC”)issued the Provisions for the Administration of

32、Bonds Outright Repurchase Agreements Business in the National Interbank Bond Market,marking the introduction of outright repo.Unlike pledged repo,outright repo does not involve the creation of a pledge for the repo bonds under Chinese law and is closer to the“title transfer”repo used in the global m

33、arket.Appendix 2 includes a more detailed discussion of the differenc-es between the legal structures that are used in the Chinese repo market.Broadly speaking,the divergence in the transaction volume between pledged repo and outright repo can be attributed to three main reasons:First,in terms of ma

34、rket practice and collateral selection,pledged repo was launched in 1997 upon the establishment of the interbank Proportion of pledged repo transactions(left axis)Proportion of outright repo transactions(left axis)Weighted average interest rate of pledged repo(right axis)Weighted average interest ra

35、te of outright repo(right axis)3Fig.3:Statistics of interbank market members (left panel）3Fig.4:Proportion of outstanding repo volume(right panel)Source:C2 The Provisions for the Administration of Bonds Outright Repurchase Agreements Business in the National Interbank Bond Market clearly specifies t

36、hat,“when conducting outright repo,both parties to the transaction may negotiate to set margin or guaranty bonds in accordance with the credit status of the counterparty.In the case of setting guaranty bonds,the guaranty bond shall be frozen in the escrow account of the provider of the repo during t

37、he repo period.”3 The statistics do not include:1.market members who have been delisted;2.market members who have applied to join the interbank market but have not yet completed the networking procedures.1.2 Market Structure and Trading MechanismAs of May 2023,there were about 50,000 participants in

38、 the interbank repo market.In terms of distribution,the number of non-bank institutions such as brokerage firms and asset management firms,wealth man-agement firms,insurance firms,and other fund-based financial institu-tions accounted for more than 90%of the total(see Fig.3);in terms of the share of

39、 institutional repo,banking institutions accounted for about 40%and non-bank institutions accounted for 60%(see Fig.4).(1)Structure of Market ParticipantsBrokerages and funds asset management businessLarge Commercial BanksWealth management,funds,insurance and otherJoint-stock CommercialBanksFund-bas

40、ed financial institutionsUrban Commercial BanksEnterprise and occupational annuityRural Commercial Banks and Cooperative BanksBanking institutionsSecurities FirmsOthersOthersmarket.With a long history and wide recognition,pledged repo supports multi-bond pledges.In contrast,outright repo was not lau

41、nched un-til 2004,and for a long time it only supported single-bond pledge on a transaction-by-transaction basis.Sec-ond,in terms of the legal regime,outright repo is similar to a simulta-neous sale and repurchase of a cash bond with nested margin and guar-anty bonds2,while the legal status for pled

42、ged repo is often perceived as more straightforward.Third,in terms of the function of securities lending,as the ownership of repo bonds is transferred,outright repo is also endowed with the function of securities lending.However,with the development of a separate secu-rities lending market in recent

43、 years,this function has been made largely redundant,further reducing the activ-ity of outright repo transactions.4Overall,the interbank market main-ly uses repo transactions as the means to facilitate the flow of funds from large banks to small banks and non-bank institutions(see Fig.5).This struct

44、ural feature is due to the fact that policy banks,joint-stock banks,and money market funds are the most important lenders in the market,while non-bank insti-tutions such as funds,brokerage firms,and insurance are the main borrowers.Besides,large commer-cial banks and joint-stock banks generally only

45、 receive rate bonds as collateral,while the main holdings of asset management products are credit bonds.Therefore,in addition to their own liquidity needs,urban and rural commercial banks often assume the role of capital bridges,absorbing funds from large state-owned banks,while financing asset mana

46、gement products.Fig.5:Structure of interbank bond repo market participantsSmall deposit institutions,non-bank institutions,asset management productsLarge deposit institutionsCapitalBondCapital demand sideUrban,rural commercial banksFund companies,financial brokerages,insurance institutionsAsset mana

47、gement productsCapital supply sidePolicy banksLarge state-owned banksJoint-stock banksMoney market fundsIn order to meet the diversified mar-ket demand,the interbank market has introduced various trading mech-anisms(see Table 1).In pledged repo transactions,both parties agree on the transaction deta

48、ils such as interest rate,quantity,maturity,pledged bond type and haircuts via the electronic platform of China Foreign Exchange Trade System(hereinafter referred to as“CFETS”),and the settlement is conducted by the China Central De-pository&Clearing Co.,Ltd.(herein-after referred to as“CCDC”)or the

49、 Shanghai Clearing House(hereinafter referred to as“SHCH”)upon the conclusion of the transaction.To further enrich the trading mecha-nism of the interbank bond repo mar-ket,X-Repo and netting pledged repo have been launched to optimize the processes of transaction confirma-tion,collateral selection,

50、and clearing and settlement.However,along with the rapid development of Chinas bond repo market,investors have(2)Trading MechanismTable 1:Comparison of trading mechanisms of major trading varieties in Chinas interbank bond repo marketChinas interbank bond repo marketTrading mechanismX-RepoPledged re

51、poSHCH netting pledged repoMarket participantsAll domestic institutions in the interbank market and some overseas institutions(overseas RMB clearing banks and participating banks,overseas central banks,international financial organizations and sovereign wealth funds)are allowed to participatePre-tra

52、nsaction preparationSigning the Master Repurchase Agreement on Interbank MarketSigning the Delivery Versus Payment Agreement on Bonds Transaction and other documents with the CCDCSigning Netting Agreement on Bonds Transaction with SHCHTrading mechanismSubmitting quotations anonymously through the X-

53、Repo system of CFETS;bilateral credit-granting is required in the trading system before conducting businessCompleting through the local currency trading system of CFETSImplementing the over-the-counter market system,allowing independent negotiation between the parties themselvesChoosing netting sett

54、lement independently at the closing session or other approaches specified by SHCHCollateral managementOnly applicable to repo transactions with rate securities as pledged bonds;the variety of pledged bonds,conversion rate and valuation are in accordance with the Rules for Standard Conversion Rate of

55、 Pledged Bonds in the Interbank Bond MarketThe range of eligible collateral and haircuts shall be determined by the parties themselves through negotiationThe haircut of pledged bonds included in netting settlement shall be calculated by SHCH based on the credit ratings,historical price fluctuations

56、and market liquidityCollateral enforcement in the event of defaultEntrusting collateral management agencies to conduct agreed enforcement methods such as conversion-to-value,auction and sale1.Suspend the business permission of the defaulting party and charge default fees on a daily basis;2.Activate

57、the emergency mechanism of bank credit and complete the settlement of the non-defaulting party;3.Freeze and auction pledged bonds5asked for efficiency improvement and risk reduction.In particular,they aim to focus on financial integration and liquidity management by participat-ing in tri-party repo

58、to reduce costs and increase efficiency.6The rapid development of the inter-bank bond repo market cannot be achieved without institutional guaran-tee.In order to regulate the market and legal environment,in 2013,the Nation-al Association of Financial Market Insti-tutional Investors(hereafter referre

59、d to as“NAFMII”)issued the 2013 version of the Master Agreement for Bond Repurchase Transactions in Chinas Interbank-Market(hereafter referred to as the“Master Agreement”).Based on practice in Chinas local market,the Master Agreement fully drew on inter-national experience and established Chinese st

60、andards that are in line with international practices:First,in terms of the framework structure,the Mas-ter Agreement introduces the frame-work of general provisions plus special terms,reducing the costs of transaction negotiation and text management,while leaving room for future innova-tion in repo

61、 transaction mechanisms.Secondly,with regard to the con-tent,the Master Agreement improves the identification and treatment of default and termination events in the repo master agreement,introduced a single agreement and close-out netting mechanism,establishes a dynamic adjustment mechanism for bond

62、s repurchase,and improves the market risk management for bond repo transactions.Third,regarding the signing method,the Master Agreement is signed bilaterally and multilaterally to provide autonomy for customized trading needs among market participants.(3)Institutional Framework1.3 Collateral Composi

63、tionIn terms of collateral composition,(quasi-)sovereign bonds such as government bonds and policy bank bonds occupy the dominant position in the inter-bank bond repo market.By May 2023,the balance of pledged repo collateral4 was RMB7.84 trillion,mainly composed of policy bank bonds,government bonds

64、,local government bonds,enterprise bonds and other bonds5(see Fig.6)and the balance of(quasi-)sovereign bond pledges accounted for 87.6%;during the same period,the balance of underlying bonds outright repo was RMB 86 billion,and the balance of(quasi-)sovereign bonds account-ed for 90.82%(see Fig.7).

65、4 Only contains the bond collateral held by CCDC as custodian is counted,the same below5 Including government-backed institutional bonds,asset-backed institutional bonds,asset-backed securities,non-bank financial institution bonds,insurance company financial bonds,project revenue bonds,central bank

66、bills,central enterprise bonds,medium-term notes7Fig.8:Overall coverage ratio of repo transactionsSource:CCDCInfluenced by the risk appetite of lending institutions and the position preference of borrowing institutions,the interbank bond repo market also exhibits the following characteristics:First,

67、the overall coverage ratio6 of repo transactions remains in a stable range.By May 2023,the overall coverage ratio of outstanding pledged repo was 109.62%while that of outstanding outright repo stood at 113.49%(see Fig.8),with the overall coverage ratio maintain-ing reasonable fluctuations.6 The over

68、all coverage ratio of repo is the ratio of the market value of collateral for outstanding repo transactions to the amount due.The overall coverage ratio=(market value of pledged securities or transferred securities for outstanding repo transactions at full price)/(amount due for repo),with a higher

69、coverage ratio representing greater sufficiency in the value of collateral.Fig.6:Composition of pledged repo collateral(left panel)Fig.7:Composition of underlying bonds in outright repo(right panel)Source:CCDCPolicy bank bondsBook-entry corporatebondsLocal government bondsOther tier-1 capital instru

70、mentsLocal government bondsCommercial bank bondsOthersPolicy bank bondsBook-entry governmentbondsLocal government bondsOther tier-1 capital instrumentsTier-2 capital instrumentsLocal corporate bondsCommercial bank bondsOthers8Second,the proportion of(quasi-)sovereign bond collateral is in-creasing.A

71、fter 2019,the proportion of(quasi-)sovereign bond collateral remained high due to the tightening risk appetite of financial institutions as a result of credit events in finan-cial markets(see Fig.9 and Fig.10)Third,there is divergence in bonds used as collateral,with policy bank bonds and government

72、 bonds be-ing the most popular collateral.As rate securities,policy bank bonds and government bonds are characterized by low credit risk and high liquidity,with a relatively large scale of single bond issuance,which makes them easier to meet the market demand for repo transactions and become the mos

73、t preferred collateral for financial institutions.In addition,the higher reopening frequency and better li-quidity of policy bank bond makes it easier to become the linkage between the primary and secondary markets.The policy bank bonds are held by a large number of non-bank institutions which are m

74、ainly on the borrowing side.On the other hand,local govern-ment bonds,which have the largest outstanding share in the bond market,account for a relatively small propor-tion,which is related to the structure of bond holders.Over 85%of local government bonds are held by com-mercial banks,especially la

75、rge state-owned banks and joint-stock banks,and these two types of institutions are on the cash lending side,so local government bonds are not the main collateral for repo transactions despite their large balance.Fig.9:Composition of pledged repo with(quasi-)sovereign bond as collateral;left-axis un

76、it:RMB 100 million(left panel)Fig.10:Composition of outright repo with(quasi-)sovereign bond as underlying securities;left-axis unit:RMB 100 million(right panel)Source:CCDC91.4 Latest DevelopmentIn recent years,with the continuous development of Chinas bond market,Chinas bond repo market has witness

77、ed a period of rapid development,with product and system innovations continuing to emerge.The trading mechanism and instru-ments of the interbank repo market are continuously optimized,but there is still more room for development,especially as the market is calling for the launch of tri-party repo.T

78、ri-party repo is one of the major repurchase instruments in the global market,the core mechanism of which is to pro-vide centralized and unified collateral management services by a central custodian as a third party,so as to build itself into a more standardized money market instrument.Enjoying the

79、advantages of economies of scale,tri-party repo reduces risks such as settlement failures,while ensur-ing that risk exposures are effectively covered during the duration of the transaction,providing enhancements in risk prevention and control capa-bilities.In October 2018,PBOC issued an announcement

80、 officially introduc-ing the tri-party repo business in the interbank market,allowing bond reg-istration and settlement institutions in the interbank market to act as agents providing tri-party repo services.(1)Strong Momentum for Tri-party RepoTri-party repo is prevalent in the global market.The(I)

81、CSDs or custodians,acting as a third par-ty,provide integrated collateral management services and aim to build a more standardized money market instrument.For the time being,major tri-party collateral management service providers are large custodian banks or(I)CSDs.These institutions can combine the

82、ir strength in bond custody and settlement with the automated collateral management system,so as to effectively utilize small-hold-ing bonds and achieve significant economies of scale.In October 2018,the Peoples Bank of China issued an announcement to introduce the tri-party repo busi-Column#1:Devel

83、opment of Tri-party Repo in Chinas Interbank Market10ness in the interbank market.As an important infrastructure of Chinas bond market,CCDC has complet-ed the institutional and techni-cal preparation for the interbank tri-party repo business based on an in-depth study of the experi-ence of the inter

84、national peer and the direction of market reform.First,there is a tri-party repo parameter schedule to ensure safety and efficiency.An eligible collateral list and haircut schedule are keys to tri-party repo transac-tions.Taking market needs,oper-ational efficiency,risk control and other factors,CCD

85、C has formed a tri-party repo parameters schedule,which can be adjusted according to market conditions.Secondly,multiple risk manage-ment tools are offered during the process of a tri-party repo trans-action.CCDC provides investors with the toolkit including mark-to-market valuation,automatic supple

86、ment or return of collateral,collateral replacement and adjust-ments,so as to facilitate risk man-agement.Third,quick collateral enforce-ment in the event of default completes the collateral man-agement cycle.In June 2019,CCDC issued guidelines on collateral en-forcement where CCDC acts as the third

87、 party to ensure a timely and fair disposition of collateral.This completes the collateral manage-ment cycle.In 2018,FX repo with bonds in for-eign currencies as collateral was launched in the interbank market.However,the scale of the business grew slowly due to difficulties in risk management of bo

88、nds in for-eign currency,the complexity of the agreement signing process and a lack of clearing and settlement back-office support.It was not until 2019 that the FX repo business with RMB bonds as collateral was offi-cially launched,and FX repo trans-actions became increasingly active.FX repo includ

89、es three modes:tri-party repo,pledged repo and outright repo.In particular,the tri-party mode has effectively reduced credit risk and financing cost and improved asset alloca-tion efficiency,which has received wide recognition from the mar-ket.In 2021,CCDC,cooperating with CFETS,introduced automatic

90、 collateral selection to FX repo.CCDC,as an independent tri-party(2)Rapid Development of FX Repo11Fig.11:Cumulative volume of the FX repo with bonds under CCDCs custody(2022-2023),unit:RMB 100 millionSource:CCDCSince the mainstream pledge model in Chinas bond repo market is dif-ferent from the guara

91、ntee provided by the title transfer model popular in the international market,it makes the disposal of collateral in the event of default a business pain point where relevant domestic and overseas laws fail to observe effective convergence.With the opening-up and continuous development of Chinas bon

92、d market,the disposal mechanism of collateral after default has been continuously improved and optimized at the prac-tical and legislative levels,providing clear guidelines for the exploration of collateral disposal in the case of default in the bond repo market.This has been significant in eliminat

93、ing market investors concerns about the realization of security rights and un-derpinning the role of risk mitigation of bond collateral.At a practical level,in 2019,un-der the guidance of the PBOC,the interbank market officially launched the collateral enforce-ment mechanism,which ensures the quick

94、disposal of collateral in an autonomous and flexible(3)Improvement of Collateral Enforcementagent,provides investors with full life-cycle collateral management services.Subsequently,benefiting from the optimization of the busi-ness model and the enrichment of bond collateral categories,the scale of

95、FX repo has grown rapidly.By May 2023,the cumulative busi-ness volume of the FX repo busi-ness using bonds held by CCDC as the custodian as collateral has exceeded RMB 4.7 trillion(see Fig.11),an increase of over 300%year-on-year.12manner through methods such as conversion-to-value,auction and sale.

96、At the same time,the dis-posal information is not publicly disclosed in order to minimize the impact and to ensure the smooth operation of the market.At the legislative level,since 2020,col-lateral enforcement is further sup-ported in the Civil Code of the Peo-ples Republic of China(hereinafter refe

97、rred to as the“Civil Code”).The Futures and Derivatives Law of the Peoples Republic of Chi-na(hereinafter referred to as the“Futures and Derivatives Law”)implemented in 2022 also further strengthened the legal basis.On the one hand,the implementa-tion of a collateral enforcement mechanism completes

98、the loop of collateral management services.On the other hand,it has served to effectively alleviate the market liquidity shortage and resolve the potential market systemic risks.Collateral management is an im-portant aspect of risk manage-ment and liquidity management in the repo market,while collat

99、eral enforcement is an important and indispensable part of collateral management and the last shield of credit risk management.The international market has estab-lished a relatively sound policy system-in the case of default,the secured party can quickly realize the security interests and rights thr

100、ough conversion-to-value,auction,debt offset,direct pos-session,etc.,without institutional barriers.Due to the provisions of the Property Law and the Security Law on the“prohibition of liq-uid pledge”,the secured party cannot directly take possession of the collateral to quickly realize the security

101、 interests.Therefore,when a default event occurs,market institutions mainly rely on judicial or negotiated solvency transfer to dispose of collateral,which greatly affects the disposal efficiency.With the rapid development of Chinas financial market and the corre-sponding increase in market risk exp

102、osure,market institutions have an increasingly urgent need for an efficient and fast way to dispose of collateral.On May 28,2020,the Third Session Column#2:Collateral Enforcement in Chinas Repo Market13of the 13th National Peoples Con-gress voted through the Civil Code of the Peoples Republic of Chi

103、na,which has an extremely profound impact on the civil and commercial activities of all subjects and has“milestone”significance.Previ-ously,the Property Law prohibited creditors from directly acquiring ownership of collateral in the event that the debtors could not fulfill their obligations as they

104、fell due,largely out of consideration for the interests of the debtor.In judicial practice,such agreements were often found to be invalid,i.e.,“prohibition of strict foreclo-sure”.The legislative approach adopted in this provision,which does not evaluate validity but only provides for legal conseque

105、nces,gives certain flexibility to trading arrangements that may constitute a foreclosure,such as paying a debt in kind or sale guarantees,and to some extent balances the interests of creditors.It is worth noting that Article 428 of the Civ-il Code does not specify that the parties involved shall not

106、 agree on a foreclosure clause,which is similar to the disposal of the legal consequences of a vesting-type transfer guarantee that violates the prohibition of foreclosure in the Summaries of the National Conference for Work of Courts on the Trial of Civil and Commercial Cases.At the same time,Artic

107、le 436 of the Civil Code maintains the same expression as Article 219 of the Property Law,which still recognizes the pledgees self-re-lief by means of agreed discount,auction or sale when the pledger breaches the contract.It is under the guidance of this legal spirit that CCDC issued the Guidelines

108、for Collateral Default Disposal of China Central Depos-itory&Clearing Co.,Ltd.(Trial)in June 2019,which supports three methods of collateral default dis-posal,namely conversion-to-val-ue,auction,and sale,and is char-acterized by complete disposal methods,advanced supporting technologies and rich pra

109、ctical experience.Through prior authori-zation of the central depository by both parties to the transaction,in the event of default by the pledg-er,the disposal agency has the right to quickly dispose of the un-derlying bonds to clear off debts in accordance with the unilateral application of the pl

110、edger.This can effectively enhance market efficiency with well-defined legal relationships,clear and stream-lined operational processes and shorter duration.147 FICC,known as Fixed Income Clearing Corporation,is the fixed income division of the US Depository Trust and Clearing Corporation(DTCC)which

111、 is the main clearing agency for US treasuries.8 Due to the relative inaccessibility to the specific transaction data for the NCCBR market,only transaction data for the other three types of repo are included.(2)Overview of Global Repo MarketIn the international market,repo transactions play multiple

112、 roles.Repo transactions are not only the most important means for var-ious types of financial institutions to manage their capital,bond positions and liquidity,driven by various regulatory requirements such as the Liquidity Coverage Ratio(LCR)and Net Stable Fund-ing Ratio(NSFR),but also a vital cha

113、nnel for central banks to manage liquidity and conduct monetary policy.Repo markets in different countries and regions have evolved their own market and product structures during the course of their development.In the following,this paper focuses on the U.S.and the European repo market as the two do

114、minant markets in the world in terms of market size and depth.The US repo market can be broadly divided into four sections:Tri-party Repo.Bank of New York Mellon acts as the tri-party agent providing collateral manage-ment services.Tri-party repo is one of the primary funding facili-ties in the US r

115、epo market.Non-centrally cleared bilateral repo(NCCBR),where counter-parties negotiate details of their trades,such as the eligible col-lateral and the corresponding haircuts.FICC DVP,centrally cleared bilat-eral repo,which only introduces Fixed Income Clearing Corpora-tion7(FICC)as the central coun

116、-terparty(CCP),without third-par-ty custodians.FICC General Collateral Finance(GCF).In GCF repo,Bank of New York Mellon also acts as a tri-party agent,with the differ-ence that it introduces FICC as a CCP.GCF repo is concluded en-tirely through inter-dealer bro-kers(IDBs),ensuring anonymity througho

117、ut the transaction.The overall scale of the US bond repo market has grown rapidly over the past years.In particular,the daily transaction volume of tri-par-ty repo8 has risen from USD1 trillion in 2019 to nearly USD3.8 trillion by the end of 2022(see Fig.12).2.1 US Repo MarketFig.12:Daily transactio

118、n volume in the US repo market(2019-2022)Sources:OFR,ICMAWith respect to participants in the US bond repo market,securities firms and dealers are at the center of the bond repo market,acting as market makers to connect cash and bonds among participants.Insti-tutions that provide cash funding mainly

119、include money market funds,banks and insurance companies,stock and derivatives exchanges,etc.Among them,money market funds account for more than half of the investment volume and are the most important suppliers of liquidity in the market.Parties receiving cash mainly include hedge funds,collaterali

120、zed debt REITS,market makers,etc.Among them,hedge funds are the most important source of demand for funds in the market(see Fig.13).Fig.13:Structure of participants in the US repo marketBond borrowersBorrowers of fundHedge funds,collateralized debt REITs,market makersHedge funds,market makersBond le

121、ndersPensions,sovereign wealth funds,mutual funds,insurance companies,exchange traded fundsCapital flowBilateral transactionsTri-party transactionsBond flowBilateral transactionsLenders of fundGovernment authorityCentral bankInsurance companyGCF repurchaseSecurities firms,brokersMoney market funds,f

122、ederally backed onenies,Federal Reserve reverse repo instruments1516As for the trading mechanism,dealers are the primary source of liquidity,providing pricing and assuming principal risk(known as“matched-book”trading).In the bilateral repo market,the dealer exchanges collateral di-rectly with its co

123、unterparty.In the tri-party repo market,after the trading parties negotiate and determine the main trading ele-ments,both parties transmit the trading orders to the Bank of New York Mellon instantly.In terms of clearing and set-tlement,dealers usually act as custodian banks for their cus-tomers to s

124、ettle inter-customer repos in the bilateral repo market.Inter-dealer repo transactions are generally sent to the FICC for netting and are then cleared through Fedwire or DTCC.In the tri-party repo market,Bank of New York Mellon completes the settlement and ownership trans-fer of repo transactions on

125、 the same day and provides collateral management services during the life of the repo,and the clearing bank will transfer the ownership of funds and bonds again on the repurchase date.In terms of collateral composi-tion,the US repo market primarily relies on high-grade government bonds as the main t

126、ype of collat-eral.By the end of 2022,among primary dealer repo transactions in the US repo market,US gov-ernment bonds(US T-bonds and government agency bonds)ac-counted for more than 90%of all collateral used(see Fig.19).Fig.14:Primary dealer repos by collateral type-US marketSources:ICMA,OFR17Fig.

127、15:The total value of repos and reverse repos outstanding in the European repo market(2001-2022)2.2 European Repo MarketThe European repo market has been growing significantly over the past years.By December 2022,the overall size of the market in terms of the val-ue of outstanding repo transactions

128、was estimated at over EUR 10 trillion according to ICMAs European Repo Market Survey(see Fig.15 below).It is important to note that this measures the stock of outstanding repo transac-tions at a specific point in time as opposed to turnover or flow data.In terms of market structure,the European repo

129、 market can be broadly categorized with respect to three levels of activity:(i)trading(negotiation and execution),which can be direct be-tween two counterparties or via a trad-ing platform,(ii)clearing(bilateral or CCP),and(iii)collateral management,which can be bilateral or outsourced to a triparty

130、 agent.Similar to the US repo market,dealers are the primary source of liquidity,acting as intermediaries by providing pricing and assuming risk onto their balance sheets.The three principal trading models are:Traditional OTC repo(bilateral clear-ing and collateral management),which remains dominant

131、 in terms of the value of outstanding repo with a share of around 50%by the end of 2022.Electronic trading on an automat-ic trading system(ATS),which is overwhelmingly CCP-cleared,with bilateral collateral management,accounts for around 30%in terms of the value of outstanding repo;Triparty repo,in w

132、hich the collateral management function is outsourced to one of the triparty agents.This category includes traditional tri-party(directly traded and non-CCP 18cleared)and GC financing(electron-ically traded,CCP-cleared).Overall,triparty repo typically accounts for up to 10%of the total market in ter

133、ms of the value of outstanding transactions.Other scenarios are possible and ac-count for the remainder of the total.These include direct trading with post-trade registration at a CCP.It is important to note that most re-pos that are traded electronically and cleared by a CCP are very short-term tra

134、nsactions(mostly overnight repos).This means that their share expressed in terms of turnover(as opposed to outstanding)would be significantly higher,probably around 60-70%of the total repo flow.9 As regards participants in the Eu-ropean repo market,the structure is broadly similar to the US.The prin

135、cipal users of repo on the sellers side of the market are securities market inter-mediaries(market-makers and other securities dealers)and leveraged and other bond investors seeking funding.On the buyers side,the main users have traditionally been cash investors seeking secure short-term investments

136、,many of whom are highly risk-averse.These include large commercial banks,central banks investing foreign currency reserves,international financial insti-tutions,money market mutual funds,agents investing cash collateral re-ceived by their securities lending clients,asset managers with temporary cas

137、h surpluses and the treasuries of large non-financial corporates and financial market infrastructures such as central counterparties(CCPs)and central secu-rity depositories(CSDs).Since the Finan-cial Crisis,because of generally higher risk aversion and regulatory pressure,repo has reportedly been at

138、tracting smaller commercial banks,as well as a greater number of non-bank financials such as sovereign wealth funds.As for trading,clearing and settle-ment,as noted above,the main trad-ing models include direct trading(via telephone or electronic messaging),intermediation by voice brokers,or trading

139、 on electronic trading platforms.For the latter,so-called automatic trading systems(ATS)which are mainly used in the inter-dealer market can be distinguished from automated trading platforms which are increasingly used in the D2C market connecting custom-ers to multiple dealers through request-for-q

140、uote(RFQ)systems.Most electron-ic trading platforms support straight-through processing and offer direct connectivity to CCPs,triparty agents and CSDs.The overwhelming majority of repos 9 Some turnover figures are available for instance from data reported under the EU SFT Regulation,which is availab

141、le in an aggregated form on the ICMA website.19traded electronically via an ATS are CCP-cleared.The two main CCPs active in the European repo market are LCH SA and Eurex Clearing,but a number of other CCPs exist as well.As mentioned above,it is also possible to register a bi-laterally executed repo

142、transaction with a CCP post-trade.In terms of settlement of the transaction,this can take place either in one of the domestic central securities depositories(CSDs),in which case payment is generally in central bank money,or alternatively in one of the two international CSDs(ICSDs)(Eu-roclear Bank an

143、d Clearstream Banking Luxembourg),in which case payment is generally in commercial bank mon-ey.Market participants can hold an account directly at the(I)CSD or access the(I)CSD indirectly through an agent custodian bank.Most domestic CSDs in Europe form part of a single settlement platform called TA

144、RGET2-Securities which is operated jointly by the ECB and four national central banks.In terms of collateral composition,the most commonly used type of col-lateral in the European repo market are bonds issued domestically by central governments which account for over 90%of EU-originated repo collate

145、ral(see Fig.16 below).Government bonds of the six largest European sovereign issuers alone(Germany,UK,France,Italy and Spain)account for over 60%of the total.Repo using collateral other than high-quality government bonds is often called credit repo.On the cusp between government and credit col-later

146、al are high-grade bonds issued by supranational institutions,as well as sovereign issues(foreign currency bonds issued by governments)and agency issues(issued by public sector bodies such as the government-guar-anteed mortgage agencies in the US).Private sector assets,which are much less liquid alth

147、ough higher yielding,form the smallest sector of the repo market,including assets such as cor-porate bonds,equity,covered bonds,MBS,ABS and others.Fig.16:The Composition of Collateral in the European repo market(2001-2022)Government BondsOthers202.3 Latest DevelopmentsFollowing the 2007-2008 financi

148、al crisis,the G20,through the Financial Stability Board(FSB),has committed to building a safer and more resilient economy by developing and coordi-nating a comprehensive framework for global financial regulation.As part of the overall framework,the FSB identified a number of finan-cial stability ris

149、ks specifically related to securities financing transactions(SFTs),which includes repo,and grouped the risks into those that im-pact the banking system and those that arise in what was previously re-ferred to as the“shadow banking”sector10，which is now more com-monly termed“Non-Bank Financial Interm

150、ediation”(NBFI).One of the most critical post-crisis regulatory reforms which have also reshaped the dynamics of the repo market is the Basel III reform.It aims to address a number of problems in the pre-crisis regulatory frame-work.Some of the key components of Basel III include requirements on reg

151、ulatory capital,as well as the introduction of the Leverage Ratio(LR)and different liquidity buffers in-cluding the Liquidity Coverage Ratio(LCR11)and the Net Stable Funding Ratio(NSFR12).Looking more specifically on repo,the Leverage Ratio introduced by Basel III is probably the single most impactf

152、ul measure to mention.The LR measures institutions exposure to the risk of excessive leverage and is currently set at 3%for all balance sheet assets13,based on a non-risk-based measure of exposure.This creates significant constraints for low-risk businesses such as repo,especially for balance sheet

153、inten-sive and low-margin repo activity in highly-rated securities such as gov-ernment bonds.As a result,market participants seek to offset repo assets and liabilities through netting.The LCR and NSFR also impact the behavior of participants in the repo market.LCR requires regulated banks to hold su

154、fficient high-quality liquid assets(HQLA)to cover projected 30-day net cash outflows during a stress period,making short-term funding under 30-days less attractive,and at(1)Global Regulatory Challenges for the Repo Market10 Shadow banking is defined as the system of credit intermediation that involv

155、es entities and activities outside the regular banking system.11 https:/www.bis.org/fsi/fsisummaries/lcr.htm12 https:/www.bis.org/fsi/fsisummaries/nsfr.htm13 In the US,top-tier banks must also hold an additional buffer of 2%(for a total of 5%),known as the Supplementary leverage Ratio(SLR).21In the

156、early 1990s,in order to help international investors re-duce the cost of cross-border repo financing,the European market began to introduce the tri-party repo mechanism.How-ever,due to the low concentration of tri-party repo services,it was difficult to take advantage of any potential“economies of s

157、cale”of tri-party repo.In addition,the fragmentation of financial mar-ket infrastructure and a lack of harmonization across European markets,meant that the rules,technologies and standards re-lated to tri-party repo lacked sufficient standardization.In 2017,the European Central Bank through its Advi

158、sory Group on Market Infrastructures for Se-curities and Collateral(AMI-SeCo)launched an initiative to promote standardization in the area of securities clearing and settle-ment within the euro system with a particular focus on collateral management.The core objectives have been to develop a set of

159、pan-European,unified collateral management rules,to promote the use of the latest internation-al standards(e.g.,ISO 20022),and to improve the efficiency of collateral use through straight-through processing,thereby enhancing the connectivity of financial systems and financial market infrastructure w

160、ithin the euro area,and optimizing the operational efficiency of the Eu-ropean bond repo market.This led to the adoption of the Single Collateral Management Rulebook for Europe(SCoRE)which sets out common rules for managing collateral in Europe and is seen as an important step towards a more integra

161、ted European post-trade space.14(2)European Market:Promoting Tri-party Repo and Market Integration14 Further details on the ongoing work on collateral management harmonization are available on the ECB website.https:/www.ecb.europa.eu/paym/integration/collateral/html/index.en.htmlthe same time,makes

162、holding liquid assets more appealing.On the other hand,NSFR requires sufficient“sta-ble”funding to sustain the financ-ing of their assets and off-balance sheet positions during a year-long market crisis,further reducing reli-ance on short-term funding.To sum-marize,LR,LCR and NSFR all impact the rep

163、o market in different ways,considerably adding to the cost of capital required to run a repo book.22After the financial crisis in 2008,the Federal Reserves operating frame-work for monetary policy was adjust-ed.Due to the large-scale quantita-tive easing policy,the price signals of interbank offered

164、 rates such as the federal funds rate began to weaken.In response,the Fed created a new monetary policy tool,the overnight reverse repo instrument(ON RRP),and gradually formed an interest rate corridor with the Overnight Re-verse Repo Rate as the floor and the Interest on Excess Reserves(IOER)as the

165、 ceiling.In particular,since March 2022,the Fed has scaled up its ef-forts to regulate liquidity through the repo market,which has further increased the importance of repo market rates.Currently,the most important bench-mark interest rate in the US bond repo market is the US Secured Overnight Financ

166、ing Rate(SOFR).The SOFR is derived by calculating the median repo transaction rate on the basis of the Tri-Party General Collateral Rate(TGCR)and the Broad General Col-lateral Rate(BGCR),excluding the portion that is clearly a special repo transaction,which measures the overall interest rate situati

167、on in the US bond repo market.Besides,SOFR moves in lockstep with the Feds mon-etary policy cycle.In early 2020,when the Fed initiated a large-scale uncon-ventional monetary policy in response to the global pandemic,SOFR fell rapidly,reducing the financing cost for financial institutions.Meanwhile,a

168、fter the Fed started the tapering process in response to inflation,SOFR showed a stepwise upward trend,keeping in line with the Feds rate hike cycle(see Fig.17),and it can be said that the Feds efforts to channel monetary policy through the bond repo market are beginning to bear fruit.(3)US Market:I

169、ncreased Correlation between Repo Benchmark Rates and Monetary PolicyFig.17:Federal Reserve Bank of New York overnight reference rates and corresponding volumes(2018-2023)Source:OFR23Table 2:New benchmark rates to replace LIBOR in major money marketsMoney marketsNew benchmark interest rateInterest r

170、ate typeCollateralizationUS dollarSecured overnight financing rate(SOFR)Overnight repo rateCollateralizedBritish poundSterling Overnight Index Average(SONIA)Overnight interbank loanNon-CollateralizedEuroEuro Short-Term Rate(STR)Interbank overnight lendingNon-CollateralizedJapanese yenTokyo Overnight

171、 Average Rate(TONA)Interbank overnight lendingNon-CollateralizedSwiss francSwiss Average Rate Overnight(SARON)Overnight repo rateCollateralizedAt the beginning of 2022,the Lon-don Interbank Offered Rate(LI-BOR),which has served as the core benchmark interest rate for global financial markets for the

172、 past three decades,started to be gradually phased out.In this context,mone-tary authorities of various countries successively announced a new benchmark rate to replace LIBOR(see Table 2).It could be found that these new benchmark rates were generally developed based on the overnight money market tr

173、ans-actions,which avoid the moral hazard of the original LIBOR mech-anism and can more realistically reflect the supply and demand and funding levels in the money mar-ket.In addition,another important reason why the repo rate repre-sented by SOFR is used as the new benchmark rate was that these repo

174、 contracts use Treasury bonds as collateral and can therefore be approximated as risk-free.The cumulative total of SOFR-linked financial products has exceeded USD150 trillion since the SOFR was published in 2018.As of October 2021,the nominal outstanding amount of SOFR amounted to ap-proximately USD

175、7.95 trillion.Among them,swaps in SOFR derivatives account for about USD5.85 trillion while related futures reached about USD1.95 trillion15.In the future,as the repo market interest rate rep-resented by SOFR becomes more widely used in the pricing of various financial products,accordingly,the syste

176、matic importance of the bond repo market in the global financial system will be further enhanced.15 Data about SOFR is from:BOC Research:Risk Analysis Framework and Insights Based on SOFR Benchmark Interest Rate SystemLatest Trends in the Global Repo Market225(1)Emerging Technology1.1 Revolutionary

177、FintechTechnology is reshaping the way financial markets operate.Driven by the increasing need for efficiency,liquidity as well as regulatory requirements,the global repo market is actively embracing technology across its trading lifecycle.A noticeable trend in the current glob-al repo market is the

178、 increasing auto-mation and importance of electronic trading,with many electronic trading venues rapidly emerging and ex-panding.According to recent analysis,electronic trading in repo accounts for over 50%at end of 202116 in the EU today.Order management systems(OMS)and execution management systems

179、(EMS)provide market par-ticipants with better connectivity and interoperability with financial infra-structures when trading repos.Fur-thermore,relevant service providers have developed more than 200 com-plementary post-trade and ancillary technology solutions17,covering all parts of the trade lifec

180、ycle from clear-ing to collateral management,liquidi-ty monitoring,and corporate actions.In addition,there is a prospect to digitalize repo transactions through distributed ledger technology(DLT)18.The first step in the application of DLT is the representation of securities and cash in digital recor

181、ds.Many central banks have started to look into the viability and usability of Central Bank Digital Currency(CBDC).Market insti-tutions are using or have announced plans to use DLT for repo transactions and settlements19.For example,the European Investment Bank(EIB)is-sued its first DLT bond on a pu

182、blic blockchain in April 2021,which was subsequently used in a securities fi-nancing transaction,collateralized by a triparty agent on the back of a tradi-tional contractual setup20.All of these developments lay the groundwork for a wider adoption of DLT in the future including repo trading.In fact,

183、there are already a handful of examples of repo transactions that have been traded on blockchain21.Regulators and policymakers are also respond-ing by adapting laws22.(1)Digital Technology Reconstructs the Repo Market16 European Repo Market Survey:Electronic trading in the European repo market,using

184、 UK and EU SFTR data on trading venues as a proxy for automatic trading systems(ATS).ATS is defined as either a fully-automatic or semi-automatic electronic trading platform.https:/www.icmagroup.org/assets/Repo-Survey-Electronic-Trading-April-2022.pdf?vid=417 See ICMA Operations Fintech directory.ht

185、tps:/www.icmagroup.org/market-practice-and-regulatory-policy/fintech-and-digitalisation/operations-fintech-directory/18 Distributed Ledger Technology refers to the protocols and supporting infrastructure that allow computers in different locations to propose and validate transactions and update reco

186、rds in a synchronised way across a network,see https:/www.bis.org/publ/qtrpdf/r_qt1709y.htm.19 For example,Broadridge launched its distributed ledger repo trading platform in June 2021,where market participants can agree,execute and settle transactions on a decentralised platform that utilises block

187、chain.20 https:/ See New Fintech Applications in Bond Markets under Repo and Collateral markets22 See ICMA Distributed Ledger Technology(DLT)regulatory Directory.26(2)Standardized Data ModelsAt present,financial institutions use different systems and processes to manage repo transactions,and the for

188、m of transaction details is not uniform,which makes the ex-change of information inefficient and inconsistent.In response,ICMA is working together with the Inter-national Swaps and Derivatives Association(ISDA)and the Interna-tional Securities Lending Associa-tion(ISLA)on a joint trade associ-ation

189、initiative called the Common Domain Model(CDM).The CDM is a standardized data model that pro-vides a generic definition for how financial products are traded and managed in the form of executable code.It enables firms IT systems to speak the same language through the standardization of product repre

190、sentations,events and pro-cesses.As the CDM facilitates the translation of existing messaging protocols and data standards and consolidates the transaction data into a single view,market partici-pants will not be required to inter-pret and program lifecycle events and processes into their IT systems

191、 individually.This will reduce costs,support STP and provide a founda-tion for innovation.Beyond trading and settlement,legal documentation is another area that could benefit from further standardization in order to stream-line the negotiation and execution of repo trading agreements.In Oc-tober 202

192、1,ICMA launched a project to develop a GMRA Clause Taxono-my and Library,which aims to build an industry-wide,foundational library of standardized contract clauses,which will help firm short-en negotiations time and reduce operational risk,while also helping to simplify the extraction of agree-ment

193、data.Together with the CDM mentioned above,a completed GMRA clause taxonomy and data model can provide a significant ac-celerator for the digital transforma-tion of repo and collateral markets.In order to achieve various net-ze-ro targets worldwide,sustainable finance has become a focal point in the

194、 financial market.As an im-portant component of the financial system,the repo market is playing its part in the development of sus-tainable finance.1.2 Repo&Sustainability Becomes an Industry Focus27In 2021,ICMA published a first con-sultation paper on the role of repo in sustainable finance23,which

195、 contemplated how the repo market could potentially be embedded into sustainable finance,considering three aspects of a repo:the under-lying collateral,cash proceeds and counterparties sustainability pro-file.In 2022,ICMA further introduced a high-level classification of sus-tainability-related repo

196、 transactions in a follow-up report24.Based on current market practices,the paper describes four types of intersections between repo and sustainability,which fall into two broad categories(see Table 3):1.the wider sustain-ability considerations in the existing repo business through the differen-tiat

197、ed treatment of collateral and counterparties and,2.specific repo products providing sustainable financing,such as sustainable use of proceeds repo and sustainabil-ity-linked repo.23 https:/www.icmagroup.org/assets/documents/Regulatory/Repo/ICMA-ERCC-Green-and-sustainable-finance-role-of-the-repo-ma

198、rket-CP-220421.pdf24 https:/www.icmagroup.org/assets/ICMA-Sustainability-in-the-repo-market-20221025.pdfTable5 Combination of repo transactions and sustainability typesRepo supporting sustainable financingRepo providing sustainable financingCollateral ConsiderationsA repo transaction in which buyer

199、and seller use sustainable asset(s)as collateral for the trade.Sustainable Use of Proceeds(UoP)RepoA repo transaction where the cash is used exclusively to finance or re-finance,in full or in part,new and/or existing eligible sustainable projects or the borrowers sustainable asset portfolio.Counterp

200、arty ConsiderationsA repo transaction that considers the sus-tainability credentials of the counterparties to the repo transaction,i.e.,counterparties that meet certain sustainability criteria.Sustainability-Linked(SL)RepoA repo transaction in which the financial and/or structural characteristics of

201、 the repo is linked to the sellers performance with respect to a set of predefined Sustainability Key Performance Indicators(KPIs)or Sustainability Performance Targets(SPTs).28The large capital flow seeking to support sustainable activities has brought more innovative products into the repo market.I

202、n November 2020,a Green Bond GC basket was launched by Eurex,providing the first standardized basket which in-tegrates repo and sustainability in Europe.The basket is CCP eligible and consists of Euro-denominated high-quality liquid assets(HQLAs)that are issued in adherence with various Green Bond g

203、uidelines,in particular ICMAs Green Bond Prin-ciples.The trading volume on the basket,however,remains low.Ac-cording to Eurexs update in 2022,the overall traded volume in Green Bonds is below 1%.The bonds in the basket also vary in terms of the type of issuers and credit qual-ity,which is untraditio

204、nal for GC baskets.This is due to insufficient short-term green issuance.On the Column#3:Development of Sustainability-related Repo Products and Transactions in Global MarketFrom a regulatory perspective,current ESG-related policies deal largely with incorporating ESG fac-tors into securities,invest

205、ments and operations as well as with their clas-sification,disclosure and reporting,and indirectly influence the repo market through the management of collateral and counterparties.In Eu-rope,regulators and central banks are already promoting collateral with sustainability credentials.From the begin

206、ning of 2021,the ECB be-gan accepting sustainability-linked bonds as collateral for Eurosystem credit operations and also incorpo-rated climate change considerations into its monetary policy strategy,including differentiated treatment for collateral and assets purchases that meets certain eligibilit

207、y criteria.Furthermore,the Eurosystem also announced that they will begin to consider climate-related factors when evaluating corporate bonds used as collateral25.Similarly,the Bank of England is also considering implementing stricter green criteria in its corporate bond purchase pro-gram26,promptin

208、g companies to manage their non-green collateral more actively and effectively.25 ECB takes further steps to incorporate climate change into its monetary policy operations.https:/www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr2207044f48a72462.en.html26 Bank of England publishes its approach to gree

209、ning the Corporate Bond Purchase Scheme.https:/www.bankofengland.co.uk/news/2021/november/boe-publishes-its-approach-to-greening-the-corporate-bond-purchase-scheme29other hand,a number of triparty agents and electronic platforms are also introducing ESG eligibility criteria into their collateral man

210、-agement services,providing ca-pabilities for clients to express ESG preferences by factoring ESG rat-ings(for individual securities)into eligibility criteria,collateral margin as well as concentration limits.However,as mentioned in the previous section,it is question-able whether using sustainable

211、assets as collateral in itself gen-erates any additional financing for the green ecosystem.Instead,inspired by the existing market standards from the bond and loan side,the repo market also shifts its attention from the collateral to the cash proceeds.For example,in December 2020,the Agricultural Ba

212、nk of Chinas Singapore branch(ABC SG)entered a$50 million repo deal with BNP Paribas where-by the cash proceeds of the repo will be allocated to green projects based on the branchs internal Sustainable Financing Framework.ABC SG has engaged Sustainalyt-ics to review the assets funded by this repo tr

213、ansaction and provide an assessment as to whether the projects met the Use-of-Proceeds criteria and the Reporting commit-ments outlined in the framework.This type of transaction creates funding directly for designated green projects and tends to follow well-established market practices such as ICMAs

214、 Green and Social Bond Principles or the Green Loan Principles.As the market evolves,more firms across the globe are developing use-of-proceeds repo transactions and an integrated approach which combines the use-of-proceeds with sustainable assets also started to appear in the market.Apart from the

215、collateral and cash legs of the repo,some market practitioners choose to focus on the sustainability profile of their counterparty and their overall sustainability goals.Sustainabil-ity-linked repo is a repo trans-action in which the repo rate is linked to the sellers performance with respect to a s

216、et of predefined Sustainability Key Performance Indicators(KPIs)or Sustainabili-ty Performance Targets(SPTs).It is another sustainability-related repo product that has emerged.In August 2021,Deutsche Bank and Akbank executed a US$300 million repo transaction which marked the first sustainability-lin

217、ked repo in Central and Eastern Europe,Mid-30dle East and Africa(CEEMEA).The structure of the transaction links the repo interest rate to the bor-rowers performance on their three sustainability key performance indicators(KPI).Throughout the life of the transaction,Deutsche Bank monitored Akbanks su

218、stainability performance based on these KPIs and adjusted the pricing rate of the repo accordingly.Similar to use-of-proceeds repos,the number of sustainability-linked repos is also growing.However,as of now,sus-tainability-linked repos are main-ly used as part of a firms overall sustainable finance

219、 framework,and it is unclear whether they can be transacted independently outside the framework due to the mismatch between a repos short-term nature and firms long-term sustainability objectives.Despite the popular trends in the sustainability repo space,the market is still at an early stage.There

220、are still a lot of questions that remain unanswered,includ-ing considerations from a legal,reporting and disclosure per-spective.Nonetheless,there is no doubt that repo plays an import-ant role in sustainable finance and the current market standards could be applied to sustain-able-related repo tran

221、sactions with the appropriate adaptation.A key challenge for this emerging field is finding the right balance between promoting sustainability while at the same time ensuring the efficiency of the repo market and safeguarding the crucial role it plays for the wider financial market.It is also import

222、ant to avoid any unwanted claims about sustainability that could be per-ceived as greenwashing.3The Basis and Elements of RMB Bonds Collateral Participating in Global Bond Repurchase(1)Deeper Opening-up of Chinas Bond Market1.1 Chinas Macroeconomic Outlook is Stable and Promising,and RMB Internation

223、alization has Achieved Significant ProgressFigure 18 GDP growth rates of major economiesData sources:WindUS:GDP:constant:YOYEurozone:GDP:constant:YOYJapan:GDP:constant:YOYGDP:actual YOY:GlobalUK:GDP:constant:YOYChina:GDP:constant:YOY-12-1200-6-666-9-933-3-399%2022201820142010202020162012200820212017

224、2013200920192015201132Due to the steady growth of Chinas economy and the accelerated process of RMB internationalization,Chinas bond market has grown substantially in size,with continuous improvement in operating mechanisms while grad-ually opening up.Chinas bond mar-ket is today the second largest

225、in the world and increasingly international institutions have begun to explore the potential of using RMB bonds as col-lateral in the global financial market.The internationalization of RMB also coincides with the opening of the bond market.The expansion of use of RMB creates favorable conditions fo

226、r the opening-up of the bond market.Establishing a bond market with suffi-cient depth,breadth,and internation-al integration can also accelerate the process of RMB internationalization,promoting the transition of RMB from The internationalization of Chinas bond market is closely related to Chinas in

227、te-gration into the global economy.In 2022,Chinas GDP reached RMB 121.02 trillion,accounting for approximately 18.1%of the worlds GDP.The GDP growth rate is 3.0%,which is faster than most major economies in the world(see Fig.18).33a settlement currency to internation-al currency,encompassing functio

228、n as both an investment currency and reserve currency.According to data released by the International Monetary Fund(IMF),RMBs proportion in the global foreign exchange reserves was only 1.08%when RMB joined the SDR(Special Drawing Rights)in October 2016.By the end of Q3 2022,RMBs share had risen to

229、2.76%,ranking fifth globally.In terms of global FX transac-tion volume,according to the Bank for International Settlements(BIS),RMB ranked eighth.In addition,according to data released by the Society for Worldwide Interbank Financial Telecommunications(SWIFT),at the end of 2022,RMB was the fifth mos

230、t active currency in terms of global payments,accounting for 2.15%.RMB ranked third in global cross-border trade,accounting for 3.91%of the total,which was nearly double the proportion during the same period in 2021(see Fig.19).As of Septem-ber 2022,more than 70 central banks worldwide had used RMB

231、as a re-serve currency,with RMB accounting for nearly 2.76%of the global central banks foreign exchange reserves,making it the fifth largest reserve cur-rency in the world.At present,the Peo-ples Bank of China has signed bilat-eral local currency swap agreements with central banks of 40 countries an

232、d regions,with a swap fund scale of RMB 4.02 trillion,and the willingness of various economies to hold RMB assets has increased.Figure 19 Global market share and ranking of RMB international payments(2010-2022)Data sources:WindRMB international payments:globalmarket share(Right axis)RMB internationa

233、l payments:global ranking40.4202121.2282.880.8242.4161.632363.2%10-Q411-Q415-Q419-Q413-Q417-Q421-Q434In May 2022,the IMF increased the weight of RMB in the SDR from 10.92%to 12.28%(see Table 4),with the US dollar weight also increasing,while the weight of the euro,yen,and pound decreased.This measur

234、e not only confirmed the increasing global influence of Chinas macroeconomic and financial openness,but also the role of RMB in supporting,stabiliz-ing,and enhancing global trade and financial development.Overall,the cross-border use of RMB continues to grow rapidly,with significant growth in cross-

235、border RMB settlement for trade and direct investment,and new breakthroughs in commodity pricing.The payment function of RMB contin-ues to be strengthened,the financial transaction function continues to be deepened,there are breakthroughs in developing its pricing function,while its reserve function

236、 is gradually emerging.Reviewing the history of Chinas bond market,its opening-up is closely relat-ed to RMB internationalization.In the context of RMB internationalization,the opening-up of Chinas bond market ex-hibits the following characteristics.Firstly,it involves the launching of pilot initia-

237、tives,followed by supporting policies.Secondly,there is a sequential progres-sion of bringing in foreign participation before going global.Thirdly,the initial implementation of layered pilot projects has expanded over time.To summarize,the opening-up of Chinas bond market Table 4 SDR weighting adjus

238、tment details in May 2022CurrencyBefore adjustmentAfter adjustmentAdjustment rangeUS Dollar41.73%43.38%+1.65%Euro30.93%29.31%-1.62%RMB10.92%12.28%+1.36%Yen8.33%7.59%-0.74%Pound8.09%7.44%-0.65%1.2 Gradual Opening of Chinas Bond Market35is characterized by stability and devel-opment.It has a stable op

239、ening-up process and has gradually opened up at different levels,including four stages of brewing strength,opening doors,paving roads,and deep integration.In this stage,regulatory authorities officially clarified the standards for qualified foreign investors and launched pilot businesses.In 2002,the

240、 Peoples Bank of China and the China Securities Regulatory Commission(hereinafter referred to as the CSRC)issued Provision-al Measures on Administration of Domestic Securities Investment of Qualified Foreign Institutional Inves-tors,officially launched the Qual-ified Foreign Institutional Investor(Q

241、FII)system,defined the criteria for qualified foreign investors,and stipulated that qualified foreign in-vestors can enter Chinas securities market.In 2005,Pan-Asian Bond Index Fund,sub-fund of the Asian Bond Fund,was allowed to enter the inter-bank bond market,be-coming the first foreign institutio

242、n to enter Chinas bond market.In 2009,with the promulgation of the Mea-sures for the Administration of Pilot RMB Settlement in Cross-border Trade,the pilot cross-border RMB settlement was officially launched,promoting the RMB international-ization,and accumulating initial momentum for the follow-up

243、devel-opment of Chinas bond market.In this stage,concerning the scope of opening-up the bond market,China has steadily promoted the diversification of participating in-stitution types.From 2010 to 2011,in order to cooperate with the cross-border trade RMB settlement pilot program,China expanded the

244、channels for RMB capital return by permitting foreign institutions to invest in the domestic bond market.Regulatory authorities introduced relevant regulations27.First,allow-ing foreign central banks,RMB clear-(1)Brewing Strength(2002-2010):Testing the Participation of Over-seas Institutions in the

245、Domestic Market(2)Opening Doors(2010-2015):Foreign Participating Institutions Increased Rapidly27 In 2010,the Peoples Bank of China issued Notice of the Peoples Bank of China on Issues Concerning the Pilot Program on Investment in the Interbank Bond Market with RMB Funds by Three Types of Institutio

246、n Including Overseas RMB Clearing Banks PBC Document No.217 2010.In 2011,the China Securities Regulatory Commission,the Peoples Bank of China and the State Administration of Foreign Exchange issuedMeasures for the Pilot Program of Investment by Fund Management Companies and Securities Companies Appr

247、oved as RMB Qualified Foreign Institutional Investors in Domestic Market.36ing banks in Hong Kong and Macao,and foreign participating banks to use RMB to invest in the interbank bond market after approval.Later,eligible domestic fund management companies and Hong Kong subsid-iaries of securities com

248、panies were allowed to use RMB funds raised in Hong Kong to invest in the domestic securities market(i.e.,establish the RQFII system).In 2013,the scope of RQFII was further expanded,stipu-lating that Hong Kong subsidiaries of domestic commercial banks and insurance companies or financial in-stitutio

249、ns whose domiciles and main business locations were in Hong Kong can participate in the RQFII,and can invest in the interbank bond market after approval.In this stage,China continued to relax restrictions and promoted innovation of the bond market,further improved the liquidity of RMB bonds,and enri

250、ched the domestic RMB financing means of foreign institutions.In 2015,the Peoples Bank of China suc-cessively issued relevant notic-es28,gradually allowing foreign RMB clearing banks and partic-ipating banks to use their RMB bonds to participate in bond repurchase business in the do-mestic interbank

251、 market.Sub-sequently,the access of foreign central banks,international financial institutions,and sov-ereign wealth funds to invest in the interbank market using RMB was changed from an approval system to a filing system,while the range of products that these three types of investors can par-ticipa

252、te in was expanded,and relevant foreign institutional investors could independently decide the investment scale.In 2016,the Peoples Bank of Chi-na issued Announcement No.3 of the Peoples Bank of China,which stipulated that foreign commercial banks,insurance companies,securities compa-nies,fund manag

253、ement com-panies,and other asset man-(3)Paving Roads(2015-2018):Continuously Improving the Conve-nience of Foreign Institutions Participation in RMB Bond Market28 In 2015,the Peoples Bank of China issued Notice on Overseas RMB Business Clearing Banks and Overseas Participating Banks Conducting Bond

254、Repurchase Transactions in the Interbank Market.In the same year,the Peoples Bank of China issued Notice of the Peoples Bank of China on Issues Concerning Investment of Foreign Central Banks,International Financial Institutions and Sovereign Wealth Funds with RMB Funds in the Inter-bank Market.37At

255、this stage,China continuously expands the business scope of foreign financial institutions and improves the degree of two-way opening-up of the capital mar-ket.In 2018,President Xi Jinping announced at the Boao Forum for Asia that China would significant-ly relax market access,including in the finan

256、cial sector.In the fol-lowing two years,more than 50 measures for opening-up were established,including the com-plete abolition of restrictions on the proportion of foreign shares in banking,securities,funds,futures and personal insurance.From 2019 to 2021,Chinas trea-sury bonds have been included i

257、n the three major international bond indexes,which not only means that more foreign funds will participate in Chinas bond market,but also reflects that Chi-nas efforts in bond market open-ing-up have been recognized by global investors.In May 2022,the Peoples Bank of China,the CSRC,and the State Adm

258、inistration of Foreign Exchange(hereinafter referred to as the SAFE)jointly issued a notice,in accordance with the principle of one set of institutional rules,one bond mar-ket,to synchronously promote the opening-up of the interbank and exchange bond markets,making the interbank and ex-change bond m

259、arkets connected at the opening-up level.(4)Deep Integration(2018-present):Accelerated Promotion of Bilat-eral Opening upagement institutions can issue investment products in accor-dance with the law and regu-lations,while pension funds,charitable funds,donation funds and so on can participate in bo

260、nd transactions in the inter-bank market through settlement agency.In in order to facilitate foreign investors in Hong Kong and other countries and regions,the Peoples Bank of China and the Hong Kong Monetary Au-thority jointly announced the launch of interconnection and cooperation between the bond

261、 markets of the Chinese mainland and Hong Kong.This formed the basis for further interconnec-tion and cooperation between Hong Kong and mainland infra-structure institutions in trading,custody,settlement,and other aspects.381.3 Trends and Prospects of Chinas Bond MarketIn recent years,the ways in wh

262、ich overseas institutions participate in Chinas domestic bond market have become increasingly diverse.The in-ternational influence of Chinas bond market has continued to rise.Chi-nas bond market has attained key achievements in opening-up.From 2017 to 2021,Chinas cross-border bond investment inflows

263、 were sur-passed only by the United States,the United Kingdom,and Japan,rank-ing fourth globally.As of the end of January 2023,the balance of Chinas bond market was RMB 14.49 trillion.According to investment data re-leased by the Shanghai Head Office of the Peoples Bank of China,a total of 1,075 ove

264、rseas institutions entered the market during this period.Over-seas institutions hold RMB 3.28 tril-lion worth of bonds in the interbank market,accounting for approximate-ly 2.6%of the total amount of bonds held in custody in the interbank bond market.Looking ahead,Chinas bond market will continue to

265、 open up to the world.The use to Chinese bonds held by overseas institutions will gradually expand:Initially,the influence of the RMB and Chinas bond market will contin-ue to increase.The RMB has main-tained its position as the worlds fifth-largest reserve currency and the eighth-largest foreign exc

266、hange trading currency.As an important allocation target for overseas institu-tions RMB assets,Chinas bond mar-ket will further increase its influence on the global bond market in the future.At the same time,the open-ing-up of the bond market plays a pivotal role in the international-ization of the

267、RMB,improving the global liquidity and efficiency of RMB bonds.It is conducive to the deeper development of the international use of the RMB,spanning from trade to finance.Simultaneously,the investment value of RMB bonds will be further emphasized.From a historical per-spective,the stability of Chin

268、ese bond returns is relatively high.From 2018 to 2021,the monthly return of the Chinese domestic bond index converted into US dollars had an annualized volatility of 4.7%,which is lower than the volatility of US bonds during the same period(6.5%).From the perspective of portfolio manage-ment,due to

269、the strong autonomy of Chinas macro policies,the domestic economic and policy cycles are not synchronized with those of major de-veloped economies such as the Unit-39ed States.The correlation between the Chinese domestic bond index and the US Treasury bond index is only 0.2,which is a relatively low

270、 level,providing an important choice for global investors to diversify their investments.In terms of investment proportion,foreign investment ac-counts roughly for only 3%of Chinas bond market,which is relatively low compared with developed econo-mies and some emerging market countries.That suggests

271、 room space for a large increase in allocation.Finally,the appeal for the interna-tionalization of RMB bond collateral will grow rapidly.Previously,with the opening-up of Chinas bond market,some international inves-tors have begun to pay attention to the use of RMB bonds as collateral in the interna

272、tional financial market and have pushed relevant institu-tions to take corresponding mea-sures.During the 10th China-UK Economic and Financial Dialogue held in 2019,it became a consen-sus to promote RMB bonds as qual-ified collateral that would be widely accepted in the UK market.In 2021,Hong Kong a

273、nnounced that local government bonds issued on off-shore markets in RMB and other currencies would be included in the list of eligible collateral for RMB li-quidity arrangements.In the future,there will be a continuing increase in demand to include RMB bonds as international collateral and to promot

274、e the use of existing assets,enhancing the internationalization of RMB bond collateral.RMB bonds have gradually gained recognition in the international mar-ket.However,RMB bonds still fall short of the cross-border application and have yet to become widely accepted as collateral in the global financ

275、ial market compared to the G7 sovereign bonds.This section discusses the in-stitutional environment,cooperation status,and related exploratory prac-tices of the cross-border application of RMB bond collateral.A sound legal and regulatory system is an essential prerequisite for the op-eration of coll

276、ateral businesses.For a long time,there have been differenc-es between Chinas security interest and those of other jurisdictions,re-sulting in some unique trading habits and operational mechanisms in the(2)Internationalization of RMB Bonds Collateral2.1 Gradual Convergence with International Legal S

277、ystems and Rules40Chinese market.However,due to the convergence of domestic and foreign markets,the institutional environment for the cross-border application of RMB bonds is gradually improving.In terms of legal basis,the official promulgation of the Civil Code further clarified the institutional f

278、oundation of security interest.This development has been instrumental in guiding practical business operations in this field.Furthermore,the promulgation of the Futures and Derivatives Law incorporates non-standard security arrangements,such as assignment guarantee,in compliance with the Civil Code

279、and its judicial interpreta-tions.It provides space for innovative applications of domestic bonds as collateral.In 2018,the establishment of the Shanghai Financial Court pro-vided an essential platform for resolv-ing complex and international finan-cial disputes,which further improve Chinas financia

280、l legal environment.In terms of business rules,Chinas bond market collateral business prac-tices continue to break through and are ahead of the legislative process.Financial infrastructure represented by CCDC has established a collateral business rule system,which is highly combined with internation

281、alization and localization,through standard-ized documents such as business guidelines.The industry association represented by NAFMII has fully ab-sorbed international advanced ex-perience and closely integrated with Chinas market demand.They have established a complete set of master agreement docum

282、ents applicable to over-the-counter derivatives trading,bond repurchase transactions,and bond lending transactions.It helps to promote the legal construction and standardized development of Chinas financial market.In terms of supporting mecha-nisms,the procedures for foreign investors to enter the C

283、hinese market have been continuously simplified.Tax policies have become more cer-tain.The types of investable assets have been continuously enriched,and the transparency of data dis-closure has been steadily improved.The business environment has seen ongoing improvements.Meanwhile,a series of facil

284、itation measures have been successively launched,such as extending the trading time of the interbank foreign exchange market and providing special settlement cycle trading services.It provides foreign investors with more efficient and higher-quality market services.China has established an initial s

285、up-port system that aligns with its level of openness to the outside world.41As institutional rules converge,the connectivity between the domestic and foreign markets has become tighter.Consequently,foreign inves-tors willingness to strengthen their connectivity with the Chinese bond market has grad

286、ually increased.The internationalization of Chinas bond market inevitably leads to the inter-nationalization of its bond collateral.With the growth of foreign investors holdings of RMB bonds,cooperation in the field of cross-border collateral has also been put on the agenda and has become an importa

287、nt aspect of the connectivity and cooperation be-tween domestic and foreign markets.At the level of cross-border mutual recognition,on the one hand,pro-moting RMB bonds as eligible collat-eral widely accepted in the UK mar-ket has been included in the policy achievements of the 10th China-UK Economi

288、c and Financial Dialogue,reflecting the national level of atten-tion.Subsequently,with the support of cooperation platforms such as the China-UK Capital Markets Working Group,all parties are actively pro-moting the international acceptance of RMB bond assets.On the other hand,financial infrastructur

289、e institu-tions such as CCDC have established cooperation relationships with more than ten international peers,such as Clearstream,Euroclear,and JP Mor-gan,actively exploring cross-border collateral cooperation and establish-ing channels for mutual recognition of cross-border collateral between Chin

290、a and foreign markets.At the level of business practice,with the continuous opening-up of Chinas bond market,the demand for cross-border applications of RMB bond collateral is constantly increas-ing.Financial infrastructure repre-sented by CCDC strongly supports the innovative implementation of bond

291、 collateral business and there have been numerous applications in the cross-border field(see Column 4).It provides full-process service support for financial institutions cross-border financing and issuance and lays a solid foundation for the international-ization of RMB bond collateral.To es-tablis

292、h a solid foundation for expand-ing the cross-border application of RMB bonds,several measures should be considered.These include explor-ing various use cases for RMB bond collateral,enhancing the depth and quality of Chinas bond market as it opens up,and aligning it more closely with international

293、bond markets.2.2 Cross-border Connectivity between Domestic and Foreign Mar-kets is Increasing42Column#4:Cases of RMB Bonds Cross-border ApplicationPledgingIssuingBondBondDelegationBank with Foreign Captial(Pledge agent)Overseas Branch of Commercial Bank AInvestorsCollateral Manager Executive agent

294、of Default DisposalAbroadDomesticCommercialBank ACase One:Issuing Overseas Bonds Secured by Domestic BondsIn October 2016,Chinese do-mestic commercial bank A is-sued green bonds secured by assets denominated in US dol-lars on a foreign exchange.The bonds were backed by a pool of domestic bonds held

295、by bank A,which were pledged to the overseas trustee bank of its for-eign branch,providing security for the issuance of the overseas bonds.In this transaction,bank As domestic guarantee bonds were held in custody by CCD-C,with pledge registration and collateral management services provided by CCDC.T

296、his approach of using domes-tic bonds as collateral to is-sue overseas bonds effectively reduces the issuance cost of overseas bonds for Chinese financial institutions.While gaining recognition from in-ternational investors,it offers 43CollateralManagementProcessAbroadDomestica better financing opti

297、on for Chinese financial institutions overseas.Case Two:Using Domestic Bonds as Collateral for USD LoansIn 2017,the Hong Kong branch of a foreign bank and domestic commercial bank C conducted overseas USD loan business,with the domestic branch of the foreign bank accepting the bonds,held by C,under

298、CCDCs custody as collateral.In this transaction,bank C used RMB bonds held in custody domesti-cally to obtain foreign currency liquidity in overseas markets,which not only broadened the cross-border application of RMB bonds but also enhanced their efficiency,further promot-ing connectivity between d

299、o-mestic and overseas markets.Continuous innovation break-throughs in the cross-border application of collateral provide valuable practical experience for promoting the participa-tion of RMB bond collateral in cross-border repos.Based on this,another key issue is to con-struct a cross-border transfe

300、r framework for RMB bond col-lateral that is more tailored to the needs and trading habits of domestic and overseas institu-tions.Initial OrdersInitial OrdersPledgeePledge、RoportReportPledgerDollar LoanCommercialBank cCommercialBank cHong KongBranch ofOverseas BankDomesticBranch ofOverseas Bank44(3)

301、Core Elements Affecting the Use of RMB Bonds as Collateral in Global Repo TransactionsWith the continuous deepening of RMB internationalization,RMB bonds have made significant prog-ress in terms of regional distribution and investor base.As collateral for international repo,RMB bonds have a signific

302、ant potential.However,the differences in the construction of domestic and foreign systems,market operations,and the lack of a cross-border custody system for fi-nancial infrastructure have hindered the participation of RMB bonds in global repurchase transactions.The repo agreement is the pre-requisi

303、te legal document for both parties to engage in transactions.Unlike the domestic bond repo market,which mandates the sign-ing of the NAFMII Master Repur-chase Agreement,the primary master agreement used in the international repo market is the Global Master Repo Agreement(GMRA).Overseas institutions

304、who want to participate in the domestic interbank repo market through the direct investment mode are re-quired to complete market access filings and sign the NAFMII Master Repurchase Agreement.The com-plex process to access the market and the differences in legal agree-ment texts fundamentally restr

305、ict the participation of overseas insti-tutions in the domestic interbank repo market.With the continuous opening-up of the interbank mar-ket,the access mechanism for the repo market urgently needs im-provement.The procedure for over-seas investors filing for admission needs further simplification.F

306、ur-thermore,the equivalence between domestic and foreign market repo agreements should be recognized,which would facilitate transactions for overseas institutions and pro-mote the integration of domestic and foreign rules.Close-out netting is a funda-mental provision in international financial deriv

307、ative contracts,including the termination of 3.1 Agreement Element:Compatibility and Integration between Domestic and Foreign Master Repo Agreements3.2 Systematic Element:Implementation of Close-out Netting45transactions,valuation,and de-termination of net settlement amounts.This concept also has ap

308、plications in the repo market.In the cross-border use of RMB bond collateral,the effectiveness of netting provisions under the Chinese legal system has been a controversial subject and a mar-ket focus.In the close-out netting mechanism,relevant netting ac-tions are not suspended,invali-dated,or revo

309、ked due to the entry into bankruptcy proceedings by one party to the transaction or a settlement participant.However,current Chinese laws,particularly,the Enterprise Bankruptcy Law of the Peoples Republic of China do not explicitly address this issue.Therefore,foreign counterparties have generally r

310、egarded domestic financial institutions as non-net-ting transaction counterparties.Interpreting and confirming the effectiveness of close-out netting under the current Chinese legal system is a key factor that affects the cross-border application of RMB bond collateral.It is worth mentioning that Ch

311、i-na has gone through a series of developments and breakthroughs in the construction of the netting and settlement system.Firstly,the netting and settlement system has been gradually recognized at the level of financial market trading systems and regulatory practices.For example,an au-thoritative of

312、ficial from the China Banking and Insurance Regulatory Commission(CBIRC),which is now the National Financial Regulatory Administration(NFRA),explicitly confirmed the legal certainty of close-out netting in derivative transactions under Chinese law(including repo transactions)when answering questions

313、 from reporters.Additionally,at the legislative level,the concept of netting is explicitly mentioned in the Draft Amendment to the Law of the Peoples Republic of China on Commercial Banks announced in October 2020,and the Futures and Derivatives Law,passed in April 2022,further clarifies and explici

314、tly recognizes netting in respect of derivatives contracts.The promulgation of the Futures and Derivatives Law marks a significant breakthrough in es-tablishing legal recognition and enforceability of close-out netting in China.Continuing legislative focus and development around the application and

315、enforceability of close-out netting provides a 46In addition to advancing the prac-tical implementation of procedures related to the disposal of collateral in the event of default,the policy regarding the outbound fund flow after the disposal of RMB bonds also needs to be clarified.From a legal and

316、institutional perspective,3.3 Risk Management Element:Clarifying the Outbound Fund Flow Path after Enforcementstronger legal basis for domestic and foreign investors to engage in over-the-counter derivatives and repo transactions,creating more favorable conditions for the cross-border application of

317、 RMB bond collateral.In the repo mar-ket,the uncertainty around close-out netting directly impacts the ability of financial institutions to enjoy the benefits and advantag-es that close-out netting can pro-vide in relation to risk mitigation and capital savings under repo transactions.In a previous

318、notice issued by CBIRC regarding the measure-ment rules for counterparty default risk assets in derivative instrument transactions,it is clar-ified that,apart from the NAFMII Master Repurchase Agreement,the China Securities and Futures Market Master Agreement,and the 2002 ISDA Master Agreement in th

319、e international market,oth-er legally valid netting master agreements recognized by CBIRC can also serve as a basis for com-mercial banks to calculate coun-terparty default risk exposure on a net basis.It is also mentioned that the default risk and capital measurement of commercial bank bond repo tr

320、ansactions can be executed in accordance with the relevant provisions of derivative instrument transaction netting.These two aspects of the expla-nation leave some policy room for the confirmation of the close-out netting system in the repurchase agreement market.However,currently,the relevant regul

321、ations regarding the close-out netting in the repo market are still at the level of regulatory interpretation,and there are no formal docu-ments issued at the legislative level.This is the primary concern of many domestic and foreign investors participating in the repo market and something that all

322、parties will need to address as the next step in developing the market.47The soundness and stable oper-ation of financial infrastructures are necessary prerequisites and foundations for the use of RMB bonds in the global repo market.A cross-border custody system between domestic and foreign repo mar

323、kets,providing conve-nient access,is crucial.In recent years,major global financial infrastructures have conducted a series of collabora-tions in establishing more effi-cient channels for the cross-bor-der allocation of collateral and facilitating effective operations in overseas markets.Current-ly,

324、mainstream bond collateral is centrally registered and held by a few large custodians and depository institutions,so that investors can access global mar-kets through these custodians or institutions,enabling the alloca-3.4 Interoperability Element:Building a Cross-Border Custody Systemthere are cur

325、rently no specific laws,policy guidelines,or operational instructions that explicitly address the cross-border remittance of funds resulting from the realization of defaulted collateral when RMB bonds are used as cross-border collateral.Taking the CIBM direct access pattern as an example,foreign inv

326、estors who directly enter the market usually open non-resident accounts(NRA)with custodian banks or settlement agents in Chi-na as they can remit the principal and investment returns to overseas through this account.This pattern has been explicitly approved by the State Administration of For-eign Ex

327、change(SAFE).However,for foreign investors participating in the interbank bond market,there are no corresponding institutional policy provisions that include the proceeds from the disposal of de-faulted RMB bond collateral in the scope of income and expenses of the overseas institutions RMB set-tlem

328、ent account.The relevant legal and policy provisions in this area are relatively ambiguous.Therefore,the issue of cross-bor-der fund flow after the disposal of RMB bonds remains a significant factor hindering foreign investors from participating in the domestic bond repo market.It still requires fur

329、ther clarification and regulation in terms of relevant laws and rules,which should also be an important direction for future market devel-opment and improvement.48tion and application of collateral assets on a global scale.In contrast,only investors with RMB bond accounts opened at domestic custodia

330、n institutions can directly pledge or hold RMB bonds as collateral.For foreign investors who have not opened accounts with domestic custodian institutions,the existing custody system fails to meet the require-ments for accepting onshore RMB bonds as collateral.Currently,there is no established cross

331、-bor-der connectivity between China and foreign custodian institutions,making it difficult to support the cross-border allocation of RMB bond assets.This directly affects the range of investors eligible to use RMB bonds as qualified col-lateral as well as the cross-border application and development

332、 of RMB bond collateral.Establishing cross-border connectivity with global custodians or depositories will facilitate the cross-border use of RMB bonds as collater-al.This will serve as an import-ant infrastructure guarantee for RMB bonds to be used in the cross-border repo market.Prospects and Sugg

333、estions450Along with the progress in RMB internationalization,the promo-tion of RMB bonds as collateral in global repo transactions is enter-ing a crucial phase.The interna-tional use of RMB bond collateral can promote the integration be-tween China and international fi-nancial markets and bring a wide range of development opportu-nities for Chinese and foreign in-vestors.In order to promote this