On January 20, 2022, theInterim Measures for the Connectivity Business between the Interbank Bond Market and the Exchange-traded Bond Market(hereinafter referred to as theInterim Measures) was released. Since then, the China Foreign Exchange Trade System (CFETS) and Shanghai Clearing House (SHCH) have received many inquiries regarding the interconnection of the interbank bond market (“CIBM”) and the exchange-traded bond market. We have therefore prepared this FAQ to helpmarket participants better understand the Interim Measures and prepare for theinterconnection scheme.

1. What is the framework for Interbank-Exchange Bond Connect?

According to the Interim Measures, the Interbank-Exchange Bond Connect is a mechanism arrangement that permits investors in the interbank bond market and investors in the exchange-traded bond marketto buy and sell the bonds traded in each other’s markets through the market infrastructures they are currently using. The purpose of this arrangement is to allow investors of either market to trade and settle cash bond transactions in the other market with their existing accounts. For example, participants of the interbank market can now directly buy and sell the bonds traded on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) through their trading accounts opened with CFETS and the custody accounts and fundsaccounts opened with SHCH, tapping into both the interbank and exchange markets efficiently and conveniently through one-click access. Likewise, qualified participants in the exchange-traded bond marketcan now buy and sell bonds traded in the interbank market through their existing accounts.

With the realization of interconnectivity between the interbank bond market and the exchange-traded bond market, investors who meet the requirements of Announcement No. 7 [2020] of the People’s Bank of China (PBC) and the China Securities Regulatory Commission (CSRC) may participate in the agreement-based trading of cash bonds in the exchange-traded bond market via the Interbank-Exchange Bond Connect or by directly opening accounts in themarket.

2. What is the nominee holding arrangement for investors in the interbank bond market to hold exchange-tradedbonds underInterbank-Exchange Bond Connect?

The nominee holding arrangementiswidelyappliedin financialmarket connectivityprograms in China, such as the Bond Connect, Shanghai-Hong Kong Stock Connect,and Shenzhen-Hong Kong Stock Connect. The Interbank-Exchange Bond Connect implemented a similar system. Specifically, CIBM investors should hold exchange-traded bonds through SHCH and enjoy the rights and interests of the bonds they have purchased through the Interbank-Exchange Bond Connect. SHCH opensnominee account(s) with China Securities Depository and Clearing Corporation (CSDC) to record the outstanding balance of bonds it holds onbehalf of CIBM investorsand to facilitate bonds delivery.A bond holding record issued by SHCH serves as a lawful certificate of the CIBM investor’s entitlement to the rights and interests of the exchange-traded bonds

3. What preparations should investors make to participate in Interbank-Exchange Bond Connect and do they need to open a new account or set up a mapping one?

According to the Interim Measures, investors in either market can submit trading declaration formsfor Interbank-Exchange Bond Market Connectthrough the trading systems,and complete trade clearing and settlement through the bond registration, custody and settlement institutionof the corresponding market, using relevant accounts. Under the Interbank-Exchange Bond Connect, account information and instructions will be transmitted between the infrastructures of the two marketswithout further action by investors. This means an investor in one market can directly buy and sell the bonds in the other market with its existing trading account and settlementaccounts. CIBM investors, for example, can invest in exchange-tradedbonds with their CFETS trading accounts and SHCH custody accounts and fundaccounts (assignedclearingaccounts opened in the Large-Value Payment System or special fund settlementaccounts opened in SHCH) without any additional application or input.

4. What is the arrangement and design of CFETS’trading servicesfor Interbank-Exchange Bond Connect?

CFETS organizes and supports interbank market members to trade in the exchange-traded bond market (“Exchange-bound Connect”), and provide the reciprocal “Interbank-bound Connect” services as the trading platform for the interbank market, in accordance with the arrangements for Interbank-Exchange Bond Connect under the Interim Measures.

(1) System service: X-Tradersupports thetrading of cash bonds, under either Exchange-bound Connector Interbank-bound Connect, through Interbank-Exchange Bond Connect. Interbank market members can buy and sell SSE- or SZSE-listed bonds with their existing X-Trader accounts.

(2) Trading mechanism: For an Interbank-bound Connect transaction, once an interbank market member and exchange market member agree on a trade, the former should submit a trading declaration form in X-Trader. Upon receiving thetrading declaration forms from both parties the CFETS will match them and issue a deal ticket. For an Exchange-bound Connect transaction, an interbank market membershouldagree on a trade and submit a trade form via X-Trader. X-Trader will then route the trading declaration formto the relevant exchange and issue a deal ticket to the member upon trade matching.

(3) Interface service: CFETS’ CSTP interface for cash bond trading also works with both Exchange-bound Connect and Interbank-bound Connect trades, and no additional application is required. The “Originating Institution” field can now take on two additional values, namely “SSE” and “SZSE.” CIBMinvestorsmay apply to the CFETS for interface testing if needed. Trading through trading API via Exchange-bound Connect and Interbank-bound Connectis notyet available until further notice.

5. What’s SHCH’s clearing and settlement services for CIBM investors under Interbank-Exchange Bond Connect?

For CIBM investors, trade clearing and settlement procedures are basically the same for both Interbank-Exchange Bond Connecttransactions and interbank bond market transactions(Investorsusing SHCH Open API to conduct settlement will receive specific information associated with Interbank-Exchange Bond Connect transactions upon the completion of interface upgrade for the new generation of SHCH’s Business System). CIBM investors can complete settlement confirmationincluding the underlying bonds, the counterparty, and other information through SHCH’s Business System according to existing procedures. Interbank-Exchange Bond Connecttrades are settled through real-time gross settlement (RTGS) and delivery versus payment (DvP).

For an Exchange-boundConnect transaction, SHCH will submit a settlement confirmation instruction to CSDC after receiving the instruction from a CIBM investor and confirming the sufficiency of relevant bonds or funds. Then, SHCH will conduct bond deliveryor funds transfer for CIBM investors based on the settlementresultsindicated by CSDC.

For anInterbank-boundConnect transaction, SHCH will conduct settlement after receiving theconfirmation instructions from theCIBM investor and CSDC and confirming the sufficiency of the bonds andfunds. Then, CSDC will handle the delivery process for the corresponding exchange market investor based on the settlement resultsindicated by SHCH.

6. How does SHCH providecoupon payment and redemption servicefor CIBM investors holding exchange-tradedbondsunder Interbank-Exchange Bond Connect?

Principal andcoupon payment under Interbank-Exchange Bond Connectis handled in accordance with the procedures of the “home bond market”.CIBM investorswill receive the principal and coupon of exchange-traded bonds with the current designated fundsaccount at SHCH. Upon receiving thepayment from CSDC made in accordance with the current procedures of the exchange-traded bond market, SHCH, as the nominee, will promptly transfer the funds to CIBM investors. Similarly, for exchange-traded bond market investors that hold CIBM bonds through Interbank-Exchange Bond Connect, SHCH will, in accordance with its current procedures, transfer the principal and coupon payment to CSDC, who will then promptly credit the payment into the investors’ accounts.

7. When will Interbank-Exchange Bond Connect be launched and what is the next step?

Currently,financial market infrastructures are upgrading relevantsystems as scheduled. As the next step, CFETS and SHCH will make the necessary preparations, coordinate with other market infrastructures, and organize members of the interbank market to take part in the joint testing of the Interbank-Exchange Bond Connectscheme to ensure a smooth launch.