The move will further facilitate the participation of foreign institutional investors in the interbank bond market, who need the extra time to fund their trades.
China’s NIFC (National Interbank Funding Center), CCDC (China Central Depository & Clearing) and SCH (Shanghai Clearing House) have issued a joint circular extending the settlement period for bond transactions involving foreign institutional investors.
According to the circular, foreign institutional investors trading in the interbank bond market may extend settlement for bond transactions to up to T+3.
To date, China has allowed a settlement cycle of T, T+1 or T+2 for these transactions. Most foreign institutional investors have opted for T+2 to ensure the cross-border flow of securities and cash and to provide extra time for funding.
According to a March whitepaper from ASIFMA – which laid out 103 recommendations to further develop China’s capital markets – T+2 settlement “is still tight” for some foreign institutional investors. “To make Bond Connect more attractive, extending the possible settlement cycle to T+3 or longer would be helpful,” it said.
The joint circular covers spot bonds transactions, pledge-style repo, outright repo and bond lending – now allowing an extension of the settlement period to T+3 for any interbank bond market transaction where at least one of the parties is a foreign institutional investor.
According to the CCDC notice, the move is part of China’s implementation of the 11 measures announced last month to further open up the country’s financial markets. It also said the move effectively responds to FTSE Russell in relation to its planned inclusion of Chinese bonds in its index, and further facilitates the participation of foreign institutional investors in the interbank bond market.
The ASIFMA paper also recommended a move to T+1 or T+2 settlement cycle for equities, to better harmonise with global practice, reduce settlement risk and attract more foreign investors to China’s markets.
Currently, China’s settlement cycle for equities is set at T for shares and T+1 for cash, which is typically not enough time for investors in the US and Europe to pre-fund their trades. In many cases, they have opted for single-sided settlement for China A-share trades, which is costly and raises counterparty risk, ASIFMA said.