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January 2013
A New Repurchase Agreement for
the PRC Inter-bank Market
On 18 December 2012, the People’s Bank of China (“PBOC”) announced its
approval of the publication of the China Inter-bank Market Bond Repurchase
Master Agreement (the “New Agreement”) by the National Association of
Financial Market Institutional Investors (“NAFMII”), which NAFMII later
published on 21 January 2013.
Subject to a one-year transition period, the New Agreement is to replace the
two existing repurchase agreements published by PBOC in 2000 and 2004
(based on pledge and title transfer approaches respectively).
How does it affect you?
How does it affect
Key Features of the
New Agreement
Execution of the New
The New Agreement introduces a number of significant structural and
substantive changes to its predecessors.
Banks that do not enter into the New Agreement within the transition period
will be locked out of the People’s Republic of China (“PRC”) inter-bank
It is therefore critical for market participants to familiarize themselves with the
changes brought about by the New Agreement and plan for a smooth
Key Features of the New Agreement
The New Agreement adopts new document architecture and contains more
sophisticated provisions on termination and default payment and calculation.
Its key features are:
New document architecture: The New Agreement contains one set of
general terms (the “General Terms”) and two sets of special terms.
The general terms apply to all the repurchase transactions documented
The New Agreement will be used to document bond repurchase transactions in the PRC interbank market. Bond repurchase transactions refer to repurchase transactions in respect of
fixed income valuable securities that are entered into by market participants on a bilateral
basis. The New Agreement does not apply to shares repurchase transactions which are
carried out on the stock exchanges in Shanghai and Shenzhen.
A New Repurchase Agreement for the PRC Inter-bank Market
under the New Agreement, irrespective of whether they are pledge
repurchase transactions or title transfer repurchase transactions.
The New Agreement has a set of pledge repurchase special terms (the
“Pledge Special Terms”) and a separate set of title transfer
repurchase special terms (the “Title Transfer Special Terms”) which
govern pledge repurchase transactions and title transfer repurchase
transactions, respectively.
Contracting parties may also enter into a supplemental agreement to
make elections, provide information or make any amendment to the
General Terms, Pledge Special Terms or the Title Transfer Special
Terms. There are two sets of supplemental agreements: one for
pledge repurchase transactions (the “Pledge Supplement”) and the
other for title transfer repurchase transactions (the “Title Transfer
Title transfer repurchase documentation forms a single
agreement: Importantly, title transfer repurchase transactions
documented under the New Agreement constitute one “single and
complete” agreement. This allows a non-defaulting party to early
terminate all the outstanding title transfer repurchase transactions if
there is a payment or delivery failure under any title transfer
repurchase trade. All title transfer repurchase transactions will be
closed-out and netted upon early termination following an event of
default or a termination event. This differs from its predecessor under
which different title transfer repurchase transactions did not altogether
form one agreement.
Pledge repurchase documentation does not form a single
agreement: Interestingly, pledge repurchase transactions documented
under the New Agreement do not form a single agreement with each
other. If all the pledge repurchase transactions did form one single
agreement, every time a new transaction is concluded or an existing
one terminates, the pledge registration would have to be renewed. As
this would create uncertainty as to the perfection of pledge interests
especially in the context of bankruptcy proceeding for the pledgor,
payment or delivery failure in relation to one pledge repurchase trade
should only result in default under that particular transaction.
Additional events of default: In addition to payment or delivery
failure, the New Agreement greatly expands the list of events of default
to include some events similar to those under the internationally used
Global Master Repurchase Agreement such as admission of intention
not to perform obligations, untrue representations, act of insolvency,
and breach of non-payment obligations, as well as other events similar
to those under the derivatives master agreement published by NAFMII,
such as merger without assumption, cross-default, and default under
specified transactions.
The Global Master Repurchase Agreement is published by the International Capital Market
Association and Securities Industry and Financial Markets Association.
A New Repurchase Agreement for the PRC Inter-bank Market
New termination events: The New Agreement introduces two
termination events, i.e., illegality and force majeure event.
More sophisticated termination calculation mechanics: The New
Agreement prescribes various calculation formula and interest rates to
determine the repayment amount and compensation amount
depending on the relevant termination scenario.
include whether the payment or delivery is due from the defaulting
party, and whether the early termination occurs prior to the initial
settlement date or the final settlement date or upon the final settlement
date. These new provisions are far more comprehensive compared to
their predecessors.
New self-help remedy for pledgees: For a pledge repurchase
transaction, if a non-defaulting party is the reverse-repurchase party
(i.e., it lends money to the counterparty and becomes a pledgee of the
bonds), the New Agreement expressly allows the non-defaulting party
to dispose of the bonds by auction or sale. This overcomes a current
enforcement problem encountered by a pledgee who cannot direct the
depository to change the bond register following disposal of the bond
without the co-operation of the pledgor. The express recognition of a
pledgee’s right in the New Agreement greatly assists the pledgee who
will be able to enforce the pledge independently of the pledgor.
Net settlement permitted for title transfer repurchase transactions:
Following default on a title transfer repurchase transaction, the
defaulting party may experience difficulties in returning the bonds to the
non-defaulting party. The New Agreement allows the non-defaulting
party to apply a net-calculation method as provided for in the Title
Transfer Special Terms instead of the return-delivery provisions under
the General Terms. This would improve the position of a non-defaulting
party who owes any amount to the defaulting party under other title
transfer repurchase transactions but a question remains as to the
enforceability of this netting arrangement in a post-insolvency scenario.
Mandatory PRC governing law and dispute resolution: The New
Agreement adopts PRC law as the governing law, and requires dispute
resolution (which can be litigation or arbitration) to be carried out
through proceedings in the PRC. Like the NAFMII derivatives master
agreement, these governing law and dispute resolution provisions are
mandatory and cannot be contracted out of by the parties.
Other provisions similar to NAFMII derivatives master agreement :
The provisions on set-off, transfer, notice, telephone recording and
confidentiality are generally similar to those in the derivatives master
agreement published by NAFMII.
A New Repurchase Agreement for the PRC Inter-bank Market
Execution of the New Agreement
Like its predecessors, the New Agreement is open for execution on a
multilateral basis, although the contracting parties must enter into each
repurchase transaction bilaterally.
One executed copy of the New Agreement must be filed with NAFMII. For
effective execution, the legally designated representative or authorized
representative must sign, and affix the company chop on, the New
Agreement. It should be noted that the New Agreement becomes effective as
between the executing party and all other market participants who have
executed the New Agreement upon effective execution, and not upon filing
with NAFMII.
The Pledge Supplement and the Title Transfer Supplement can be executed
on a bilateral basis and one executed copy must be filed with NAFMII. Any
subsequent amendment to a supplement must also be filed with NAFMII.
NAFMII is required to carry out “service works” in respect of the filing of
executed New Agreements. NAFMII will maintain an updated list of market
participants who have deposited their executed New Agreements with
NAFMII. Market participants must report any dispute or event of default under
the New Agreement to NAFMII.
Transitional Arrangements
There will be a 12-month transition period for the PRC inter-bank market to
adopt the New Agreement for all the repurchase transactions. The transition
period commenced on 21 January 2013, the date of publication of the New
Agreement. During the transition period, those who have not entered into the
New Agreement can enter into new repurchase transactions under the
predecessor agreements. Where both counterparties have executed the New
Agreement, they must document new repurchase transactions under the New
Market participants are well advised to enter into the New Agreement. It is
important to note that following the expiry of the transition period, those who
have not done so cannot enter into new repurchase transactions in the PRC
inter-bank market.
Historical trades may continue to be governed by the predecessor
agreements, or the parties may agree to migrate them to the New Agreement.
Inter-bank repurchase transactions have served as a major tool for funding
and money market investment by domestic and foreign-invested banks in the
PRC. In 2012, over RMB140 trillion of pledge repurchase transactions and
approximately RMB5 trillion of title transfer repurchase transactions were
traded in the PRC.
The New Agreement introduces a number of important changes from its
predecessors in terms of structural features and substance. For banking
A New Repurchase Agreement for the PRC Inter-bank Market
institutions to continue their repurchase activities on the inter-bank market, it
is important to become familiar with the changes brought about by the New
Agreement and plan for adequate legal and operational risk management and
review measures. To better manage counterparty risks, banks may, in
addition to the General Terms, consider entering into Supplements with their
A New Repurchase Agreement for the PRC Inter-bank Market
For further information please
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A New Repurchase Agreement for the PRC Inter-bank Market
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