Enhanced Currency Conversion Arrangement Involving Onshore RMB (CNY) under Northbound Bond Connect

55th Floor, Two International Finance Centre, 香港中環金融街 8 號國際金融中心 2 期 55 樓 8 Finance Street, Central, Hong Kong 網址: www.hkma.gov.hk Website: www.hkma.gov.hk 5 March 2021 The Chief Executive All Hong Kong FX Settlement Banks Dear Sir / Madam, Enhanced Currency Conversion Arrangement Involving Onshore RMB (CNY) under Northbound Bond Connect As you may be aware, the China Foreign Exchange Trade System (CFETS) issued a notice on 24 September 2020 on the enhancements to currency conversion and foreign exchange hedging under Bond Connect.1 In the light of several rounds of market consultation, I write to provide guidance for banks in providing the relevant service. Background
2. With reference to the Joint Announcement between the Hong Kong Monetary
Authority (HKMA) and the People’s Bank of China (PBoC) on 16 May 2017, Bond Connect is an arrangement that enables Mainland and overseas investors to trade bonds tradable in the Mainland and Hong Kong bond markets through connection between the Mainland and Hong Kong financial infrastructure institution. To ensure sound supervisory cooperation and effective implementation of Bond Connect, the HKMA and the PBoC have entered into a Memorandum of Understanding on supervisory cooperation under Bond Connect (referred to as “the MoU” hereafter).2 Under the MoU, the HKMA and the PBoC should provide each other with supervisory assistance, with a view to ensuring effective operation of Bond Connect, and meet each other’s request for information for supervisory purposes as far as possible.
3. Pursuant to PBoC Order [2017] No. 1, Bond Connect investors are allowed to
conduct currency conversion (CNY/FX) or foreign exchange hedging with the designated settlement banks in Hong Kong. The said banks may square their positions arising from the aforementioned transactions in the onshore interbank foreign exchange market in accordance with the relevant rules and regulations. The notice issued by the CFETS on 24 September 2020 stipulated a new arrangement where Bond Connect investors may choose to engage up to three designated settlement banks in Hong Kong 1 The text of the Notice can be found at http://www.chinamoney.com.cn/english/rarfmrrudrgl/20200924/1785566.html 2 The text of the MoU can be found at http://www.hkma.gov.hk/media/eng/doc/key-information/press￾release/2017/20170626e5a1.pdf

to conduct currency conversion and foreign exchange hedging for their RMB exposure in respect of their Bond Connect investments (referred to as “Enhanced CNY Conversion Service” hereafter). In order to maintain access to the onshore interbank foreign exchange market to conduct the permitted position squaring transactions, Hong Kong banks should have proper internal controls in place to ensure compliance with the requirements in this circular and other relevant requirements. Scope
4. Banks that can offer the Enhanced CNY Conversion Service include the RMB
Clearing Bank and overseas RMB participating banks in Hong Kong which have been approved by the Mainland authorities to take part in the onshore interbank foreign exchange market (collectively referred to as “Hong Kong FX Settlement Banks” hereafter). Hong Kong FX Settlement Banks shall only provide the Enhanced CNY Conversion Service to investors who are eligible to participate in the Northbound Bond Connect (collectively referred to as “Eligible Investors” hereafter).
5. Each Eligible Investor should appoint one Hong Kong FX Settlement Bank as
its Primary FX Settlement Bank and up to two as General FX Settlement Bank(s). Upon the appointment, the Eligible Investor should inform the HKMA of its appointment through its Primary FX Settlement Bank. The Primary FX Settlement Bank must concurrently be the bank that executes the related money settlement of the Northbound Bond Connect transactions with the Central Moneymarkets Unit (CMU). Only the Primary FX Settlement Bank should deposit CNY funds to and receive CNY funds from the CMU for an Eligible Investor’s Northbound Bond Connect transaction settlement. The General FX Settlement Bank(s) should only undertake CNY funds transfer to and from the Eligible Investor’s designated Bond Connect settlement account at its Primary FX Settlement Bank.
6. If an Eligible Investor does not file any appointment of Primary and General FX
Settlement Banks, it will be assumed that the said investor will continue to engage its incumbent settlement bank alone to obtain CNY under the regulatory requirements that have been in place since the launch of Bond Connect. Principle
7. In providing the Enhanced CNY Conversion Service, the Hong Kong FX
Settlement Banks should ensure that the currency conversion and foreign exchange hedging transactions (collectively referred to as “CNY Transactions” hereafter) arise from genuine and reasonable needs from Bond Connect investments. In order to ensure continued access to the onshore interbank foreign exchange market, the Hong Kong FX Settlement Banks should ensure continued compliance with the relevant Mainland regulations, and have proper internal control in place to monitor the following:
3 The requirements are set out in the letter and FAQs issued to Hong Kong FX Settlement Banks at the launch of Bond Connect or when a Hong Kong Settlement Bank acquires the relevant license from the Mainland authorities.

i. the genuineness of the Eligible Investors using the Enhanced CNY
Conversion Service;
ii. the genuineness and reasonableness of the Bond Connect investments
underpinning the CNY Transactions as confirmed by the Eligible Investors; and
iii. the CNY converted for the Eligible Investors is properly ring-fenced and
is only used for settling Bond Connect.
8. The Hong Kong FX Settlement Banks are not expected to share the transaction
data relating to the Enhanced CNY Conversion Service with each another; they are required to report the investor-level data relating to the Enhanced CNY Conversion Service to the HKMA. The HKMA will make use of the data collected as well as the data available from the CMU to conduct ex post spot checking over the Enhanced CNY Conversion Service obtained by each Eligible Investors across different Hong Kong FX Settlement Banks. If any irregularities are found, the HKMA may ask investors to provide supporting documents, through their Primary FX Settlement Banks, to clarify that their CNY Transactions are conducted based on genuine and reasonable Bond Connect investment needs. Monitoring Responsibilities
9. To facilitate the control and monitoring work by the Hong Kong FX Settlement
Banks, the expectations of each party in monitoring the “genuineness and reasonableness” of CNY Transactions are set out as follows.
i. General FX Settlement Bank: While the Eligible Investors shall bear the
responsibility of ensuring that their CNY Transactions are commensurate with their underlying Bond Connect investments, the Hong Kong FX Settlement Banks who provide the Enhanced CNY Conversion Service in the capacity of General FX Settlement Banks should obtain confirmation from the Eligible Investors that the CNY Transactions are underpinned by genuine and reasonable Bond Connect transactions. For currency conversion, the banks should implement a closed-loop fund flow arrangement for the CNY funds obtained under the Enhanced CNY Conversion Service. Specifically, the banks should properly ring-fence an account under each Eligible Investor so that the funds in that account can be properly monitored and are only used for settlement of Bond Connect transactions via the Primary FX Settlement Bank. Besides the reporting obligation to the HKMA (see section below), the banks should monitor and notify the HKMA if the difference between (1) the net 4 For the avoidance of doubt, CNY funds in an Eligible Investor’s designated account at General FX Settlement Banks should only be transferred to the designated Bond Connect settlement account at the said investor’s Primary FX Settlement Bank.

amount of CNY conversion conducted by an Eligible Investor and (2) the net remittance 5 to the said investor’s designated Bond Connect settlement account at the Primary FX Settlement Bank exceeds 15% for a period longer than 10 working days.
ii. Primary FX Settlement Bank: While the Eligible Investors shall bear the
responsibility of ensuring that their CNY Transactions are commensurate with their underlying Bond Connect investments, the Hong Kong FX Settlement Banks who provide the Enhanced CNY Conversion Service in the capacity of Primary FX Settlement Banks should obtain confirmation from the Eligible Investors that the CNY Transactions are underpinned by genuine and reasonable Bond Connect transactions. For currency conversion, the banks should implement a closed-loop fund flow arrangement for the CNY funds obtained under the Enhanced CNY Conversion Service. Specifically, the banks should properly ring-fence an account under each Eligible Investor so that the funds in that account can be properly monitored and are only used for settlement of Bond Connect transactions with the CMU. Remittance by General FX Settlement Banks for the purpose of settling Bond Connect transactions should also be deposited in this designated account before onward remittance to the CMU. Besides the reporting obligation to the HKMA (see section below), a Primary FX Settlement Bank should bear the following monitoring responsibilities:
(a) Notify the HKMA if the difference between (1) the sum of net amount of CNY conversion it provides to an Eligible Investor and the net remittance6 it receives from the said investor’s designated account(s) at the General FX Settlement Bank(s), and (2) the net money settlement of Bond Connect transactions with the CMU6 exceeds 15% for a period longer than 10 working days. (b) Notify the HKMA if the difference between (1) the outstanding CNY hedging instruments it provides to an Eligible Investor and (2) the net money settlement of Bond Connect transactions with the CMU 7 (which serves as a proxy for the amount of the said 5 The regulatory focus of this requirement is CNY. If a General FX Settlement Bank has put in place adequate systems and control to distinguish CNY funds from CNH funds it transfers to and receives from Primary FX Settlement Banks, it should monitor the net CNY remittance. However, if a General FX Settlement has difficulty in singling out CNY remittance from the total RMB remittance, it may monitor the net remittance in its entirety. 6 The regulatory focus of this requirement is CNY. If a Primary FX Settlement Bank has put in place adequate systems and control to distinguish CNY funds from CNH funds it transfers to and receives from the General FX Settlement Banks and the CMU, it should monitor the net CNY remittance. However, if a Primary FX Settlement has difficulty in singling out CNY remittance from the total RMB remittance, it may monitor the net RMB remittance in its entirety. 7 A Primary FX Settlement Bank may also monitor the outstanding CNY hedging instruments it provides to an Eligible Investor against the nominal value of the bond holding of the said investor, if the latter

investor’s bond holdings) exceeds 15% for a period longer than 10 working days. For more detailed guidance, please refer to the FAQ in Annex 1. Reporting Requirements
10. The Hong Kong FX Settlement Banks are required to submit to the HKMA
investor-level transactions under the Enhanced CNY Conversion Service they provide, including both currency conversion and foreign exchange hedging. Banks should match each transaction with an Eligible Investor using the latter’s CMU sub-account number as the identifier.
11. Authorized Institutions are currently required to report over-the-counter foreign
exchange derivatives transactions (including those arising from Bond Connect investments) to the Trade Repository of the HKMA (HKTR). To avoid duplicate reporting, we will require the Hong Kong FX Settlement Banks to report the Enhanced CNY Conversion Service transactions to the HKTR. To allow sufficient time for system adjustments, there will also be a twelve-month transitional period starting from 8 March 2021, during which banks may report transactions under the Enhanced CNY Conversion Service using other specified channels. For detailed reporting requirements, please refer to Annex 2. Pre-existing Positions
12. An Eligible Investor may obtain the Enhanced CNY Conversion Service8 for its
Bond Connect transactions settled prior to the date when it appoints its Primary and General FX Settlement Banks (referred to as “Effective Date” hereafter), provided that its Primary FX Settlement Bank is able to report to the HKMA the said investor’s (1) total net amount of CNY conversion prior to the Effective Date and (2) the outstanding CNY hedging instruments prior to the Effective Date (collectively referred to as “Pre￾existing CNY Positions” hereafter). The Primary FX Settlement Bank should then take into account the Pre-existing CNY Positions when they are carrying out the monitoring responsibilities set out above.9

13. If a Hong Kong FX Settlement Bank has difficulty in reporting the Pre-existing
    CNY Positions of its Eligible Investors, it can continue to provide CNY Conversion Service10 to the Eligible Investors for their Bond Connect transactions settled prior to the Effective Date. The said Hong Kong FX Settlement Bank should however continue to carry out the monitoring responsibilities of the Pre-existing CNY positions in accordance with the requirements that have been in place since the launch of Bond Connect.

information is available to the bank.
8 Where an Eligible Investor does not choose to use the Enhanced CNY Conversion Service, the issue of pre-existing positons does not arise. 9 The Primary Hong Kong FX Settlement Bank may use the investor’s net RMB remittance to CMU as a proxy of its Bond Connect transactions settled prior to the Effective Date. 10 As opposed to the Enhanced CNY Conversion Service

Way Forward
14. The Hong Kong FX Settlement Banks may start to provide the Enhanced CNY
Conversion Service after the issuance of this circular and after they have the necessary control and system in place to discharge the abovementioned requirements.
15. Please nominate a staff member as the contact person in your bank for further
communication with the HKMA on matters relating to Bond Connect currency conversion. Please submit relevant details by email to bcreporting@hkma.gov.hk.
16. Should you have any question, please contact Mr Edmund Lee at +852 2878
1239 or Ms Andrea Chen at +852 2597 0605.
Yours faithfully,
Donald Chen
Senior Advisor (External)
Encl.

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Annex 1
Frequently Asked Questions in Relation to
The Enhanced Currency Conversion Arrangement under Bond Connect
I. Appointment of the Hong Kong FX Settlement Banks
Q1 Can Global Custodian (GC) or other financial intermediaries appoint the Primary and General FX Settlement Banks on behalf of Eligible Investors? A1 The appointment of Primary and General FX Settlement Banks is at the discretion of the Eligible Investors. However, the Eligible Investors may choose to complete appointment procedures (please refer to FAQ3 for details) through its GC or other financial intermediaries. Q2 Should the Primary FX Settlement Bank be the GC of the Eligible Investors? A2 The appointment of Primary and General FX Settlement Banks is at the discretion of the Eligible Investors. However, the Primary FX Settlement Bank must concurrently be the bank that executes the related money settlement of the Northbound Bond Connect transactions with the CMU. Therefore, the Primary FX Settlement Bank of an Eligible Investor has to be the settlement bank of the investor’s CMU member (in many cases, CMU members serve as their own settlement banks). Subject to its account structure and payment arrangement, an Eligible Investor may designate its GC as the Primary FX Settlement Bank. Q3 How should a Hong Kong FX Settlement Bank inform the HKMA that it is appointed by an Eligible Investor? A3 Upon the appointment of Primary and General FX Settlement Bank(s), the Primary FX Settlement Bank should inform the HKMA (via email:
bcreporting@hkma.gov.hk) on behalf of the Eligible Investor and with a copy to the General FX Settlement Bank(s): (1) The name of the Eligible Investor and its CMU sub-account number, and (2) the names of the Primary and General FX Settlement Banks appointed by the Eligible Investor. The Primary FX Settlement Bank may also choose to submit the CFETS filing form (dated 24 September 2020) to bcreporting@hkma.gov.hk. The Hong Kong FX Settlement Banks may start to provide Enhanced CNY Conversion Service if the HKMA has not raised any enquiries or objections after five business days.
II. Account Structure And Fund Flow
Q4 Can Hong Kong FX Settlement Banks maintain an omnibus account for multiple Eligible Investors at the same custodian bank? Or does each Eligible Investor need to set up a physical account?

A4 The HKMA does not intend to prescribe the operational arrangement, so long as the Hong Kong FX Settlement Banks can implement the closed-loop fund flow arrangement and fulfil the reporting obligations at the investor-level (or the CMU sub-account level) as set out in this circular. Q5 Can GC execute currency conversion and foreign exchange hedging with the Hong Kong FX Settlement Banks on behalf of Eligible Investors? A5 The Hong Kong FX Settlement Banks may provide Enhanced CNY Conversion Service to GCs acting on behalf of the Eligible Investors, so long as they can implement the closed-loop fund flow arrangement and fulfil the reporting obligations at the investor-level (or the CMU sub-account level) as set out in this circular. Q6 Is pre-funding allowed? Can the Eligible Investors keep their CNY proceeds (either from bond sale or coupon payment) in their ring-fenced account for future refinements under Bond Connect? Q6 Eligible Investors are allowed to conduct currency conversion and foreign exchange hedging transactions as long as these transactions are underpinned by genuine and reasonable Bond Connect transactions. In practice, we do not require the Hong Kong FX Settlement Banks to take any actions if the difference between the net CNY conversion and the net Bond Connect settlement of an Eligible Investor does not exceed 15% over a period of 10 working days. Further details on the calculation methodology are set out in FAQ 10 below. Even if the difference between the net CNY conversion and the net Bond Connect settlement exceeds 15%, it does not necessarily imply that there is a breach of the requirement. Under such circumstances, the responsibility of the Hong Kong FX Settlement Banks is to notify the HKMA in accordance with the circular. We will review the actual circumstances of the case to assess whether the CNY conversion arisesfrom genuine and reasonable Bond Connect investment needs. Q7 What will be the standard payment flow look like under the enhanced currency conversion arrangement? A7 A standard payment flow is depicted in the figure below:

Q8 Can wire transfer be made from an Eligible Investor’s account at its Primary FX Settlement Bank to CMU directly? Or should it be routed via CMU member’s account at the Primary FX Settlement Bank? A8 It should be routed via CMU member’s account at the Primary FX Settlement Bank.
III. Monitoring Responsibilities
Q9 How often should the Hong Kong FX Settlement Banks obtain confirmation from the Eligible Investors that the CNY Transactions are underpinned by genuine and reasonable Bond Connect transactions? Do banks have to obtain such confirmation on a deal-by-deal basis? A9 It is up to the Hong Kong FX Settlement Banks to decide the format and frequency of such confirmation. Depending on the relationship with the Eligible Investors, the Hong Kong FX Settlement Banks may choose to accept periodic confirmation rather than deal-by-deal confirmation. Q10 Could the HKMA illustrate with some examples how the Hong Kong FX Settlement Banks calculate the 15% difference when carrying out their monitoring responsibilities? Should they use the notional value of bond purchases, or mark-to-market value? A10 Consider the following scenarios:
Scenario 1 (currency conversion)
On Day 1, an Eligible Investor (Investor A’) buys CNY50 from its Primary FX Settlement Bank (Bank A) and CNY55 from its General FX Settlement Bank (Bank B). Investor A’ instructs Bank B to remit CNY55 to Bank A for settling its Bond Connect transactions. On Day 2, upon instructions of Investor A’, Bank A remits CNY100 from its account to CMU for settling its Bond Connect transactions. So, for Bank A:
Net Bond Connect Settlement = CNY100
Net CNY Conversion = CNY50
Net Remittance from Bank B = CNY55
Net CNY Conversion + Net Remittance from Bank B - Net Bond Connect Settlement = CNY 5 Since the difference is only 5% of net Bond Connect settlement, Bank A does not need to notify the HKMA. For Bank B:
Net Bond Connect Settlement via Bank A = CNY55 Net CNY Conversion = CNY55 Net CNY Conversion - Net Settlement via Bank A = CNY 0

Since there is no difference between the conversion and settlement, Bank B does not need to notify the HKMA. On Day 11, upon selling its bond, Investor A’ receives CNY 120 from CMU; it sells CNY 140 to Bank A. So, For Bank A:
Net Bond Connect Settlement = CNY100 – CNY120 = -CNY20 Net CNY Conversion = CNY50 – CNY140 = -CNY90 Net Remittance from Bank B = CNY55 Net CNY Conversion + Net Remittance from Bank B - Net Bond Connect Settlement = -CNY 15 The difference exceeds 15% of the net Bond Connect settlement, Bank A should notify the HKMA if the difference continues to exceed 15% after 10 working days. Scenario 2 (hedging) On Day 1, an Eligible Investor (Investor X’) buys CNY100 from its Primary FX Settlement Bank (Bank X) and CNY50 from its General FX Settlement Bank (Bank Y). Investor X’ instructs Bank Y to remit CNY50 to Bank X for settling its Bond Connect transactions. On Day 2, upon instructions of Investor X’, Bank X remits CNY150 from its account to CMU for settling its Bond Connect transactions. Investor X’ also enters into a short CNY deliverable forward, with a notional value of CNY160 with Bank X. So, for Bank X:
Net Bond Connect Settlement = CNY150
Outstanding Short CNY positions = CNY160
Outstanding Short CNY positions - Net Bond Connect Settlement = CNY 10 Since the difference is only 6.67% of net Bond Connect settlement, Bank X does not need to notify the HKMA. Q11 How should the Hong Kong FX Settlement Banks inform the HKMA if Eligible Investors’ currency conversion or hedging transactions exceeds the 15% prescribed in the circular for a period longer than 10 working days? A11 The Hong Kong FX Settlement Banks should inform the HKMA by emailing to bondconnectcny@hkma.gov.hk. The banks may continue to provide Enhanced CNY Conversion Service to the Eligible Investor, unless otherwise instructed by the HKMA. Q12 It is mentioned in the circular that the HKMA may ask for supporting documents. Can the HKMA provide examples of the acceptable supporting documents? A12 The HKMA will compile the investor-level CNY transactions data provided by the Hong Kong FX Settlement Banks and cross check the investors’ bond settlement and positions. If any irregularities are found, the HKMA may ask

investors to clarify, through their Primary FX Settlement Banks, that the currency conversion and/or foreign exchange hedging are conducted based on genuine and reasonable Bond Connect investment needs. The type of clarifications and supporting documents will vary depending on the circumstances of the case. Generally speaking, records of fund remittance, Bond Connect transactions, and/or coupon payments (or other applicable payments) are supporting documents that we may ask for. Q13 Do Hong Kong FX Settlement Banks need to keep track of CNH fund flows? Q13 No.
IV. Reporting Requirements
Q14 If long and short positions are netted out at the end of trading day among different Eligible Investors engaging the same Hong Kong FX Settlement Bank (i.e. not squared in the onshore FX market), does the bank still need to report the transactions to the HKMA? A14 All CNY Transactions with Eligible Investors for the purpose of Bond Connect investments are subject to reporting, irrespective of whether the positions are ultimately squared in the onshore FX market. If the Hong Kong FX Settlement Bank chooses not to conduct any transaction in the onshore FX market after selling 100 CNY to Investor A and buying 100 CNY from Investor B, the bank should still report the two currency conversion transactions to the HKMA. Q15 When should the Hong Kong FX Settlement Banks report different types of hedging and currency conversion transactions? Could HKMA illustrate with examples? A15 The Hong Kong FX Settlement Banks should observe existing HKTR reporting requirements and complementary requirements set out in Annex 2 of the circular in reporting CNY Transactionsto the HKMA via HKTR. Some examples are provided below for the sake of clarity. For the avoidance of doubt, the following examples also apply to reporting using the CFETS template and interim template during the transitional period. Scenarios Reporting requirements1 Hong Kong FX Settlement Bank A enters into a spot transaction contract with Eligible Investor A’ on Day 0. The contract is settled on Day 1. Hong Kong FX Settlement Bank A should report a currency conversion transaction by Day 2. 1 The reporting timeline set out in this table refers to the requirements in place after the transitional period. For details on the transitional arrangement, please refer to Annex 2.

Hong Kong FX Settlement Bank A enters into a 5-day physically￾settled short CNY forward with Eligible Investor A’ on Day 0. The contract is delivered on Day 5. Hong Kong FX Settlement Bank A should report a hedging transaction (short CNY forward) by Day 2 . Eligible Investor A’ enters into a 5- day cash-settled short CNY forward with Hong Kong FX Settlement Bank A on Day 0. On Day 5, the contract is cash-settled; on the same day, Eligible Investor A’ enters into a spot transaction contract with Hong Kong Settlement Bank A to sell CNY at the market price. Hong Kong FX Settlement Bank A should report a hedging transaction (short cash-settled CNY forward2 ) by Day 2 and a spot transaction (sell CNY) by Day 7. Hong Kong Settlement Bank A enters into a 5-day cash-settled short CNY forward contract with Eligible Investor A’ on Day 0. On Day 5, Eligible Investor A’ rolls over the position by closing the existing position and re-entering a 5-day cash-settled short contract. Hong Kong FX Settlement Bank A should report a hedging transaction (short cash-settled CNY forward2 ) by Day 2 and a hedging transactions (short cash-settled CNY forward2 ) by Day 7. Hong Kong FX Settlement Bank A enters into a swap contract with Eligible Investor A’ on Day 0, which involves CNY purchase on Day 1 and CNY sale on Day 5. The contract is settled on day 5. Hong Kong FX Settlement Bank A should report a hedging transaction (swap) by Day 2. The transaction should be reported in the form of two forwards: a near-leg long CNY forward and a far-leg short CNY forward. Hong Kong FX Settlement Bank A on Day 0 sells a put option to Eligible Investor A’ that expires on Day 5. The option is not executed. On Day 5, Eligible Investor A’ enters into a spot transaction contract with Hong Kong FX Settlement Bank A to sell CNY at the market price. Hong Kong FX Settlement Bank A should report a hedging transaction (short CNY option) by Day 2 and a spot transaction (sell CNY) by Day 7. Hong Kong FX Settlement Bank A on Day 0 sells a put option to Hong Kong FX Settlement Bank A should report a hedging transaction 2 Hong Kong FX Settlement Banks may choose to report a cash settled forward as either a forward or a non-deliverable forward (NDF) to HKTR, following their existing practice. If a bank chooses to report the aforementioned transaction as a forward, it should use the optional data field of “FX Delivery Type” (Item 179) to denote cash settlement. When the data field is left blank, the reporting entry will be treated as a physically settled forward contract and recorded as a spot transaction on the value date.

Eligible Investor A’ that expires on
Day 5. The option is executed on
Day 4.
(short CNY option) by Day 2 and a currency conversion transaction (sell CNY) by Day 6. Q16 For the Hong Kong FX Settlement Banks that employs a centralised settlement model pursuant to PBoC’s Notice 159 (i.e. all offshore banks under the same banking group square their CNY positions in the onshore Interbank FX Market through its Hong Kong affiliates), what would be the reporting requirements? A16 The reporting requirements set out in this circular apply to all Enhanced CNY Conversion Service provided by the Hong Kong FX Settlement Banks. So for the Hong Kong FX Settlement Banks that centrally square the Bond Connect-related CNY Transactions on behalf of their banking groups, Hong Kong FX Settlement Banks should include the CNY Transactions conducted by their offshore affiliates in the reporting. For the avoidance of doubt, the Hong Kong FX Settlement Banks adopting a centralised settlement model do not need to report both the client-facing transaction and the related back-to-back internal transaction. A report of either one in compliance with the reporting requirements set out in this circular and the existing HKTR requirements will do. Q17 Can the Hong Kong FX Settlement Banks provide multiple CMU sub￾account numbers in Remarks 2 for a single reporting entry? A17 No. Each HKTR reporting entry should correspond to one CMU sub-account number. If the Hong Kong FX Settlement Banks conduct block trades with multiple investors (i.e. via GC’s omnibus account) , the banks should put in place proper bookkeeping measures to make sure transactions can be traced to and reported at an investor level. Q18 Can multiple CNY hedging reporting entries share the same Unique Trade Identifier Indicator? A18 The Hong Kong FX Settlement Banks should observe existing HKTR requirements in reporting CNY hedging transactions, and each reporting entry should carry a unique trade identifier.
V. Others
Q19 Could there be some examples to show how Hong Kong FX Settlement Banks calculate the 15% difference when taking into account pre￾existing CNY and bond positions? A19 Consider the following scenario for an Eligible investor who chooses Option (b) in paragraph 12 of the covering circular. Scenario 1 (Conversion):
An Eligible Investor (Investor A’) has bought a net of CNY100 from a FX Settlement Bank (Bank A) and settled a net of CNY 100 Bond Connect transactions via Bank A prior to appointing Bank A as its Primary FX

Settlement Bank. After the appointment, it buys CNY 50 from Bank A. It also buys CNY55 from its General FX Settlement Bank (Bank B). Investor A’ instructs Bank B to remit CNY55 to Bank A for settling its Bond Connect transactions. Upon instructions of Investor A’, Bank A remits CNY100 from its account to CMU for settling its Bond Connect transactions. So, for Bank A:
Net Bond Connect Settlement = CNY100
Net CNY Conversion = CNY50
Net Remittance from Bank B = CNY55
Net CNY Conversion + Net Remittance from Bank B - Net Bond Connect Settlement = CNY 5 Since the difference is only 5% of net Bond Connect settlement, Bank A does not need to notify the HKMA. Meanwhile, Bank A should monitor the pre-existing CNY conversion of CNY 100 following instructions set up in the letter and FAQs issued to Hong Kong FX Settlement Banks at the launch of Bond Connect or when a Hong Kong FX Settlement Bank acquires the relevant license from the Mainland authorities. Scenario 2 (hedging):
An Eligible Investor (Investor X’) has entered into short CNY hedging contracts with a notional value of CNY 100 with a FX Settlement Bank (Bank X) and settled a net of CNY 100 Bond Connect transactions via Bank X prior to appointing Bank X as its Primary FX Settlement Bank. After the appointment, Investor X’ buys CNY100 from Bank X and CNY50 from its General FX Settlement Bank (Bank Y). Investor X’ instructs Bank Y to remit CNY50 to Bank X for settling its Bond Connect transactions. Upon instructions of Investor X’, Bank X remits CNY150 from its account to CMU for settling its Bond Connect transactions. Investor X’ also enters into a short CNY deliverable forward, with a notional value of CNY160 with Bank X. So, for Bank X:
Net Bond Connect Settlement = CNY150
Outstanding Short CNY positions = CNY160
Outstanding Short CNY positions - Net Bond Connect Settlement = CNY 10 Since the difference is only 6.67% of net Bond Connect settlement, Bank X does not need to notify the HKMA. Meanwhile, Bank A should monitor the pre-existing short CNY hedging positions of CNY 100 following instructions set up in the letter and FAQs issued to Hong Kong FX Settlement Banks at the launch of Bond Connect or when a Hong Kong FX Settlement Bank acquires the relevant license from the Mainland authorities. Q20 Can Eligible Investors continue to engage only one Hong Kong FX Settlement Bank?

A20 Yes. In such cases, the incumbent Hong Kong FX Settlement Banks may choose to monitor their investors’ CNY Transactions under the regulatory requirements that have been in place since the launch of Bond Connect, or under the requirements set out in this circular. In the latter case, the Eligible Investor will need to designate the incumbent Hong Kong FX Settlement Bank as its Primary FX Settlement Bank.

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Annex 2
Reporting Requirements for Enhanced Currency Conversion Arrangement under Northbound Bond Connect
I. General
The Hong Kong FX Settlement Banks should report investor-level information of all Enhanced CNY Conversion Service provided to the Eligible Investors, regardless of whether the transactions are ultimately squared in the onshore FX market. Except during the transitional period (see Section V below), the Hong Kong FX Settlement Banks must fulfil reporting obligations within two business days of the trading day or the day of a subsequent event1 (i.e. on a T+2 basis). The Hong Kong FX Settlement Banks should, either directly or through reporting agents, submit reporting to the HKMA via HKTR2 , using HKTR templates3 of the corresponding asset class. Unless otherwise specified in Section IV of the document, the Hong Kong FX Settlement Banks should follow reporting instruments set out in the HKTR template and relevant HKTR manuals. The instructions set out in this document does not in any way affect the existing OTC derivative reporting requirements. The reporting requirements will come into effect on 8 March 2021, with a twelve-month transitional period ending on 7 March 2022 (inclusive).
II. Reporting CNY Hedging Transactions
The Hong Kong FX Settlement Banks should use the “FX Standard” template to report CNY forward, vanilla option, non-deliverable forward and non-deliverable option transactions. Each transaction should only be reported once. In addition to observing relevant OTC derivatives reporting rules set out in the template and relevant HKTR manuals, The Hong Kong FX Settlement Banks are required to fill in two additional data fields, Remarks 1 and Remarks 2, following instructions set out in Section IV.
III. Reporting CNY Conversion Transactions
The Hong Kong FX Settlement Banks should use the “FX Other” template to report CNY conversion transactions. For the avoidance of doubt, the CNY conversion transactions subject to the reporting requirements under Bond Connect include both (1) conclusion of CNY spot transactions and (2) exercise of options (please refer to FAQ15 for details). The Hong Kong FX Settlement Banks are required to fill in the following data fields:
1 A subsequent event refers to any event that affects the key economic terms of the transactions reported to the HKTR. The Hong Kong Settlement Banks may refer to relevant HKTR manuals for more details. An electronic reporting system operated by the HKMA for submitting and receiving reports on OTC derivative transactions. 3 The templates are available for downloading at HKTR’s website https://hktr.hkma.gov.hk/ContentDetail.aspx?pageName=HKTR-RPT-Administration-and-Interface￾Development-Guide

Item No. Data Field
1 Action
2 Trade Event
3 Product Taxonomy
4 Event Request ID
5 Type of Reporting For
6 Identification code of the Reporting For trade party 7 Name of the Reporting For trade party 8 Agent Event Reference (required if report through agent) 9 User Event Reference (required if report directly) 25 Agent Trade Reference (required if report through agent) 26 User Trade Reference 27 Unique Transaction Identifier (UTI) Indicator 35 Confirmation Platform ID 38 Clearing 68 Type of Trade Party 1 69 Identification code of the Trade Party 1 71 Type of Trade Party 2 72 Identification code of the Trade Party 2 84 Industrial Sector 85 Counterparty Industrial Sector 92 Trade Date 93 Asset Class 157 Final Maturity Date 161 Exchanged Currency 1 162 Payment Amount of Exchanged Currency 1 166 Exchanged Currency 2 167 Payment Amount of Exchanged Currency 2 224 OTC Derivatives Product Taxonomy 225 Remarks 1 226 Remarks 2 Please refer to Appendix 1 for a sample spot transaction report.
IV. Supplementary Notes for Bond Connect Reporting
Unless otherwise specified in this Section, the Hong Kong FX Settlement Banks should follow reporting instruments set out in the HKTR template and relevant HKTR manuals.

1. FX Standard template
   Item No. Data Field Supplementary Notes Example 186 Remarks 1 Banks should fill in “BONDCONNECT”* to indicate the transaction is BONDCONNECT

• All capital letters without space
  In addition, if Hong Kong FX Settlement Banks choose to report a cash-settled forward contract as a forward instead of a non-deliverable forward in data field “Product Taxonomy” (Item No. 3), they should use the optional data field of “FX Delivery Type” (Item No. 179) to denote cash settlement (please refer to FAQ 15 for details).

2. FX Other template
   Item No. Data Field Supplementary Notes Example 35 Confirmation Platform ID Banks should select “OTHERS” if not applicable OTHERS 92 Trade Date Banks should fill in the trade date of a new spot transaction or a newly exercised hedging transaction 2021-01-31 93 Asset Class Banks should select “ForeignExchange” ForeignExchange 157 Final Maturity Date Banks should fill in the settlement date of a spot transaction or value date of a hedging transaction 2021-01-31 161 Exchange Currency 1 – Currency Banks should fill in the type of currency paid by the bank CNY 162 Exchange Currency 1 - Amount Banks should fill in the amount paid by the bank 10000 166 Exchange Currency 2 – Currency Banks should fill in the type of currency paid by the Eligible Investor USD rising from Bond Connect investment needs 187 Remarks 2 Banks should fill in CMU Sub-account Number of the Eligible Investor ABCD001

167 Exchange
Currency 2 –
Currency
Banks should fill in the amount paid by the Eligible Investor 10000 224 OTC Derivatives Product Taxonomy Banks should select “ForeignExchange: Spot” ForeignExchange: Spot 225 Remarks 1 Banks should fill in “BONDCONNECT”* to indicate the transaction is rising from Bond Connect investment needs BONDCONNECT 226 Remarks 2 Banks should fill in CMU Sub-account Number of the Eligible investor ABCD001

• All capital letters without space
  V. Transitional Arrangements
  To allow sufficient time for the Hong Kong FX Settlement Banks to put in place the system changes required for reporting through HKTR, there will be a twelve-month transitional period, during which we will accept CNY Transactions reports using the CFETS template and an interim template4 to be distributed to the banks’ designated contact persons. Reports5 should be submitted by email to bcreporting@hkma.gov.hk on a bi-weekly basis. For avoidance of doubt, the Hong Kong FX Settlement Banks should report all CNY Transactions concluded with Eligible Investors or their custodian banks for the purpose of Bond Connect investments during the reporting period, including positions that are netted off and may not be ultimately squared in the onshore interbank FX market. The Hong Kong FX Settlement Banks ready to commence HKTR reporting should notify the HKMA by emailing to bcreporting@hkmagov.hk for the latter to arrange a two-week simulation test. The Hong Kong FX Settlement Banks are advised to allow for sufficient lead time to complete the simulation test before the grace period ends.
  VI. Pre-existing CNY Positions
  If an Eligible Investor wishes to obtain the Enhanced CNY Conversion Service for its Bond Connect transactions settled prior to the Effective Date from both Primary and 4 For the avoidance of doubt, when using the CFETS and the interim templates, Hong Kong FX Settlement Banks should also obverse reporting requirements set out in the covering circular and its annexes and follow the reporting examples set out in Annex 1. 5 File name format should be “BANKNAME_MMDD-MMDD”.

General Settlements set out in the covering circular, it should report all Pre-existing CNY Positions, including net CNY conversion and outstanding CNY hedges, to the HKMA through its Primary Settlement Bank using the CFETS template. The Primary Settlement Bank should submit one consolidated outstanding position report6 by email to bcreporting@hkma.gov.hk 10 business days before the appointed Primary and General FX Settlement Banks may provide Enhanced CNY Conversion Services for the said investor’s Bond Connect transactions settled prior to the Effective Date. Please refer to Appendix 2 for a sample outstanding position report. If a Hong Kong FX Settlement Bank has difficulty in reporting the Pre-existing CNY Positions of its Eligible Investors, it can continue to provide CNY Conversion Service to the Eligible Investors for their Bond Connect transactions settled prior to the Effective Date and the Enhanced CNY Conversion Service for Bond Connect transactions settled after the Effective Date. The said bank should put in place proper bookkeeping arrangements to differentiate new CNY transactions arising from the Bond Connect transactions settled before and after the Effective Date. For the avoidance of doubt, the Hong Kong Settlement Bank should continue to submit quarterly reports for the former and follow the reporting requirements set out in this document to report the latter.
VII. Others
If an Eligible Investor continues to engage only one Hong Kong Settlement Bank (i.e. not to obtain the Enhanced CNY Conversion Services), the designated Hong Kong Settlement Bank may continue to monitor their investors’ CNY Transactions under regulatory requirements that have been in place since the launch of Bond Connect, and continue to submit the quarterly report to the HKMA. Alternatively, the Hong Kong Settlement Bank may choose to monitor their investors’ CNY Transactions under the requirements set out in this circular, and in that case the Eligible Investor will need to designate the incumbent Hong Kong Settlement Bank as its Primary Settlement Bank and report Pre-existing CNY Positions to the HKMA through the said bank. For operational and technical enquiries relating to submissions through HKTR, contact the HKTR at (852) 8100 3115 or email to hktr@hkma.gov.hk. 6 File name format should be “BANKNAME_Outstanding Position Report”