With the purpose of promoting the international use of RMB and accelerating the process of internationalization of RMB assets, combined with the development status of my country’s bond market, drawing lessons from the practical experience of Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and Bond Connect, and at the same time referring to international frontier explorations, this article attempts to build a consistent A new infrastructure mechanism that relies on distributed ledger technology that is internationally customary and can be integrated into the large domestic market.
China’s bond market has become the world’s second largest bond market. According to the People’s Bank of China, the stock of my country’s bond market at the end of December 2020 was RMB 116.72 trillion.
After the renminbi joined the SDR in 2015, the internationalization of the renminbi and the internationalization of the financial market have initially formed a positive interaction. However, the proportion of international bonds in my country is much lower than that of the United States. Demands are rising simultaneously.
In November 2020, RCEP was formally signed. Sixteen countries, initiated by the ten ASEAN countries, invited China, Japan, South Korea, Australia, New Zealand and India to jointly establish a unified market and sign the free trade agreement by reducing tariffs and non-tariff barriers. This move is expected to expand the spillover effect of the investment and financing functions of China’s green bond market. At present, many ASEAN countries have launched a series of policies to encourage clean energy, including Vietnam, Malaysia, Thailand, Indonesia, etc., and the 15 member states of RCEP have adopted a negative list method for manufacturing, agriculture, forestry, fishery, and mining. The non-service sector has made a high level of open investment liberalization commitments, and green projects in the RCEP area may become a global investment hotspot.
RMB international bond market needs further development
Currently, RCEP member countries such as Australia, Japan, Singapore, and Malaysia have begun to gradually promote the research and application of the decentralized blockchain bond issuance model, in order to subsequently promote the regional interconnection of RCEP member countries in the Asian bond market and Asian bond funds. Lay the foundation for intercommunication construction. On this basis, financial institutions represented by Deutsche Bank, Bank of New York Mellon, and UBS have also begun to explore and test the ICSD (International Central Securities Depository) model based on distributed ledger technology.
With the gradual expansion of the RMB international bond market and increasingly active transactions, more and more frequent business transactions have placed higher requirements on the infrastructure of market transactions. Based on the current obstacles such as information asymmetry and low efficiency in the cross-border use of RMB, combined with the development status of my country’s bond market, drawing lessons from the practical experience of Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and Bond Connect, and at the same time referring to international cutting-edge explorations, this article attempts to build A new infrastructure mechanism based on distributed ledger technology that conforms to international practices and is able to integrate into the domestic large market.
The new mechanism aims to solve the pain points of the RMB international bond business, better regulate the development of the RMB international bond market, further integrate with the international market, introduce more market participants, and promote the realization of the following goals: ① Realize the diversification of offshore RMB bonds . Through blockchain technology, promote the innovation of bond products and provide attractive products for the RMB international bond market. ② Improve market infrastructure construction. In the offshore market, basic price indicators such as the offshore RMB bond index and deliverable foreign exchange far drop can be improved on the original basis, and trading channels can be increased; in the onshore market, the transaction level can be improved and the issuance scale can be increased. ③ Guide the reasonable return of offshore RMB funds. The offshore market participates in multiple parties to strengthen the linkage, so as to work together to make RMB-denominated investment products an important variety of diversified asset allocation for global investors. ④ Improve the coordinated supervision of domestic and foreign bond markets. There is an inconsistency between the offshore market and the onshore market regulatory policies. The full disclosure of information will improve the effectiveness of supervision. ⑤ To meet the needs of cross-border issuers and investors in RCEP alliance countries and even the world. Solve the issues of issuance, transaction and custody through blockchain technology and provide security.
New infrastructure mechanism based on distributed ledger technology
The new generation of digital bond market infrastructure (DLT-CSD) based on distributed ledger technology can realize the combination of “one standard” and “multi-party joint construction and common ownership”, and solve the “ownership” and “ownership” of the regional financial business network. The “right to use” issue, with good market-oriented operational value, is a brand-new way of thinking and implementation path to solve the RCEP financial market infrastructure.
The subscription process based on the new mechanism (see Figure 1) has reduced the number of steps from 11 to 9, and achieved obvious efficiency and cost optimization in 5 steps. Investors can directly subscribe and hold through the distributed ledger. With bond assets, it is very likely to improve the current business model and operating efficiency of the bond retail business.
In the traditional bond transaction process, even if you do not consider the possibility of the bond transfer between multiple CSDs, which is common in international business, the transaction process still includes at least 8 steps. In the transaction process of the new mechanism (see Figure 2), since multiple parties in the transaction use the same DLT (Distributed Ledger Technologies) ledger for accounting, the transaction process is simplified into 4 main steps, which is greatly simplified, and 3 of them are mainly The efficiency and cost of the steps have been significantly optimized.
In the process of interest payment and return of traditional bonds, even if the possibility that bonds need to be transferred between multiple CSDs in international business is not considered, only one CSD is registered in a unified business, and the interest payment process must be divided into at least 13 steps, long interest payment period, low payment efficiency, and serious capital occupation. In the interest payment process of the new mechanism (see Figure 3), the core advantage of the distributed ledger that “everyone is on the same ledger” optimizes the interest payment process to six, and two of the main processes have been greatly optimized .
Internationally, many leading financial institutions have begun to actively promote the innovation and development of blockchain technology, and have launched a series of “blockchain+” experimental projects in the securities field. For example, Singapore’s DBS Bank officially launched the digital trading platform DBS Digital Exchange at the end of 2020, aiming to create a comprehensive digital asset tokenization, trading and custody ecosystem for financial institution customers and qualified investors; the following year, DBS Bank A 6-month DBS Digital Bond was issued to digitize the bond and improve the efficiency of the bond issuance process. In 2021, Deutsche Bank launched the blockchain digital bond project to explore the integration of current bond business processes and innovative digital assets. The project realizes the issuance, subscription, trading, and settlement functions of digital bond assets through the blockchain network, and direct connection with the securities custodian bank/CSD, underwriting bank, transaction bank and IPA, realizing the blockchain-based domestic and foreign banks New bond trading methods of DvP (Vendor Payment) and PvP (Bank versus Silver) are conducted online. Compared with the traditional bond business process, the digital bond business based on blockchain technology integrates intermediary service agencies (reducing custodians), improves business efficiency, and realizes the real-time sharing of credible information. In addition, the Philippine Depository PDS plans to officially launch a digital bond project based on blockchain technology at the end of 2021 to optimize the traditional bond business process.
Risk management recommendations related to the new infrastructure mechanism
The traditional bond business transaction system consists of the transaction structure and the parties involved. On the one hand, complex asset information and transaction chains have affected the integration of enterprises, separating the parties and links of transactions, resulting in the fragmentation of the ecosystem and the emergence of bottlenecks. Therefore, due to risk considerations, most investors’ evaluations of the expected return security of bond products rely excessively on the tracking and supervision of the underlying assets after investment by credit rating agencies, and cannot directly access the underlying assets into the pool, and it is difficult to effectively monitor the asset pool. . On the other hand, CSD facilities in the international financial market are relatively complex, and there are generally two or even multi-level registration and custody. The penetrating supervision of investors is more difficult in the case of multi-level registration and cross-regional and cross-sovereign regulatory agency registration. This is reflected in the lag, lack and error of investor registration information.
As an international financial product, RMB bonds must be placed in the global financial product sequence for risk comparison and ranking by investment institutions. At this time, credit rating is the main tool for investors to assess the credit risk of RMB international bonds.
The new DLT-CSD RMB bond mechanism is expected to solve this problem through technological and business innovation. First of all, DLT-CSD solves the problem of the separation of transaction structure and transaction parties. It records asset information and transaction information through a unified DLT ledger, and registers the status and owner information of the “spot bonds” on the blockchain. Build an ecosystem for the full life cycle of bonds, integrating the fragmented registration and transaction links of the current model; secondly, from the perspective of penetrating supervision, since all bonds are registered and hosted on a unified DLT ledger, they exist immediately In the case of multi-level custody, you can trace all custody levels at a glance and see the connections between them, thereby penetrating the final investor’s information and position changes. Furthermore, if investors evade supervision by setting up a complex investment structure, through the DTL-CSD technical framework, bonds can also be legally frozen, revoked or redeemed to avoid systemic financial risks.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/distributed-ledger-technology-innovation-in-the-rmb-international-bond-market/
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