Multi-dimensional regulation of bond issuance: Central bank seeks public comments on the Administrative Rules for Bond Issuance in the Interbank Bond Market

On October 16, the People's Bank of China sought public comments on the Administrative Rules for Bond Issuance in the Interbank Bond Market. The Rules consist of 28 articles, strengthening the regulation of bond issuance conduct from three dimensions: issuers, underwriters, and investors. In terms of regulating issuers' issuance pricing behavior, it includes prohibiting issuers from subscribing to, or subscribing in a disguised manner, to bonds issued by themselves, and providing that no person may directly or indirectly assist an issuer in subscribing to, or subscribing in a disguised manner, to bonds issued by itself; prohibiting issuers from interfering with investors' subscription decisions or disrupting pricing through rebates or other means; clarifying the pricing requirements for different bond issuance methods; and promoting issuers to optimize the mechanism and standards for selecting underwriting institutions and improve the quality of bond underwriting services. Regulating the underwriting behavior of underwriters. This includes prohibiting low-price underwriting and providing that underwriting fees shall not be significantly lower than the fair industry level; prohibiting prior commitments on bond bid prices or issuance prices (interest rates); regulating behavior such as firm-commitment underwriting and entrusted bidding and payment; strengthening internal control requirements for underwriters such as conflicts of interest and information barriers, and enhancing market-based constraint mechanisms such as information disclosure. Regulating investors' subscription behavior. This includes prohibiting investors from submitting false bids; prohibiting intentional large-volume submissions and cancellations that disrupt bond issuance prices (interest rates) and allocation; and prohibiting bids at prices significantly lower than fair market prices for the purpose of interfering with pricing. The Rules also set out clear prohibitions on insider trading, tunneling of benefits, and other acts. Regulating issuance processes such as book building. Book-building venues are required to be able to record the entire process of all price inquiries, adjustments, and pricing decisions, and to form tamper-proof records for subsequent verification. Strengthening supervision and management of the issuance pricing process. It is clarified that the People's Bank of China supervises and administers bond issuance in the interbank bond market; establishes a closed-loop management mechanism of frontline monitoring, self-regulatory management, administrative supervision, and unified enforcement; clarifies that the People's Bank of China and its branches may take regulatory measures such as ordering rectification and regulatory talks, and impose administrative penalties on illegal and non-compliant acts in accordance with law; and strengthens the linkage between administrative and criminal enforcement, transferring suspected criminal acts to judicial authorities to pursue criminal liability in accordance with law. The full text is as follows: Administrative Rules for Bond Issuance in the Interbank Bond Market (Draft for Comment) Article 1 These Rules are formulated in accordance with the Law of the People's Republic of China on the People's Bank of China and other laws and regulations for the purpose of regulating bond issuance conduct in the interbank bond market, maintaining market order, and promoting the healthy development of the market. Article 2 These Rules apply to securities with an agreed schedule of repayment of principal and payment of interest (hereinafter referred to as bonds) issued in the interbank bond market by domestic and overseas issuers. Entities and individuals participating in bond issuance in the interbank bond market shall comply with these Rules. Article 3 Bond issuance shall follow the principles of market orientation, the rule of law, fairness and impartiality, and good faith. The issuance price, interest rate, and commissions and fees involved in the issuance process shall be determined in a market-based manner. No entity or individual may influence the fair pricing of bonds, and no entity or individual may engage in acts that violate fair competition, tunnel benefits, seek improper interests, harm investor rights and interests, or disrupt market order. Article 4 The People's Bank of China shall supervise and administer bond issuance in the interbank bond market in accordance with law. The National Association of Financial Market Institutional Investors (hereinafter referred to as the Dealers Association) shall perform self-regulatory management duties for bond issuance in the interbank bond market. The People's Bank of China may send observers to supervise bond issuance on site to maintain fairness, impartiality, and order in issuance work. Article 5 Issuers shall strictly comply with the laws and regulations of the interbank bond market, maintain market order, and protect investor rights and interests. Issuers may, based on market conditions, flexibly adjust the issuance size. Issuers shall not subscribe to, or subscribe in a disguised manner, to bonds issued by themselves. Where shareholders holding more than 5% of an issuer and other related parties directly or indirectly subscribe to the issuer's bonds, information shall be disclosed in a timely manner. Article 6 On the basis of legal and regulatory compliance, issuers may choose underwriting-based issuance or direct issuance to investors. Where underwriting-based issuance is chosen, the issuer may independently choose whether to form an underwriting syndicate. Where an issuer chooses direct issuance to investors, it shall ensure the fairness and impartiality of bond issuance and shall bear information disclosure obligations and investor protection responsibilities itself. Article 7 Issuers shall establish a multi-dimensional mechanism for selecting underwriting institutions, comprehensively considering underwriting institutions' market pricing capability, issuance scheme design capability, sales capability, and other factors, and select underwriting institutions in accordance with the principles of fairness and impartiality. Issuers shall reasonably set the principles for allocating underwriting fees, and are encouraged to allocate underwriting fees based on the division of responsibilities among underwriting institutions and the quality of orders introduced, among other factors. Article 8 Underwriting institutions, securities service institutions, and others shall determine various service fees involved in bond issuance reasonably in accordance with market-based principles, shall not quote at prices significantly lower than the fair industry level, and shall not obtain clients through unfair competition methods such as low-price firm-commitment underwriting or disguised firm-commitment underwriting. No entity or individual may interfere with underwriting institutions or securities service institutions in independently conducting business in accordance with law. Article 9 Issuers shall take effective measures to ensure that their non-public information is not improperly leaked or used. Bond underwriting institutions shall formulate and strictly implement risk management and internal control systems for underwriting business, effectively isolate and prevent conflicts of interest, and ensure that the bond underwriting process is fair and impartial. Teams responsible for bond origination and execution shall maintain necessary information barriers with teams responsible for bond sales. Bond underwriting business shall remain relatively independent from bond investment and trading, deposit and loan business, and interbank business. Underwriting institutions are encouraged to provide market-making services for newly issued bonds to promote active secondary market trading of bonds. Article 10 During the bond issuance process, issuers, underwriting institutions, and securities service institutions shall ensure the fairness and impartiality of bond issuance, ensure the timeliness, authenticity, and consistency of information obtained by investors, and shall not improperly transmit pricing, subscription, or bidding information to mislead or induce investors. During the bond issuance process, underwriting institutions shall identify investor suitability and understand investor circumstances. Where an underwriting syndicate is formed, syndicate members shall provide the lead underwriter with their working papers on identifying investor suitability. Article 11 Bond issuance may adopt methods such as tender, book building, quotation, and negotiation to determine prices. Issuers that adopt quotation or negotiation methods to determine prices shall themselves have professional pricing capability and be familiar with the issuance pricing mechanism of the interbank bond market. Article 12 The bond issuance price (interest rate) range shall be set reasonably. The bond tender or book-building price (interest rate) range shall include the fair price (interest rate/yield) of comparable bonds. Where issuance is conducted by quotation or negotiation, the bond price (interest rate) shall refer to the fair price (interest rate/yield) of comparable bonds. Article 13 Where pricing is conducted by tender, the issuer, bidding participants, and other relevant parties shall comply with the relevant provisions on tender issuance in the interbank bond market, and insider trading, fraud, collusion, and other acts harming fair competition are prohibited. Article 14 Where pricing is conducted by book building, the issuer may independently choose to conduct it at an underwriting institution's own book-building venue or a centralized book-building venue provided by a third party. Book-building venues shall maintain the security and efficiency of systems related to bond issuance and ensure the smooth operation of bond issuance. Book-building venues shall meet the following conditions: (1) having a department specifically responsible for book-building business and equipped with qualified full-time personnel; (2) having an independent physical venue and equipped with a safe and stable book-building system capable of truly, accurately, completely, and timely recording subscription information, price range adjustment and changes, pricing, allocation, and other decision-making processes in book building, and forming tamper-proof electronic records; (3) having sound on-site management systems for book building, with clear provisions on the use of book-building venues, personnel responsibilities, operating procedures, emergency handling, and other matters. Those responsible for providing book-building services shall file afterward with the provincial branch of the People's Bank of China in the locality of the book-building venue. Article 15 Bond underwriting business shall adopt the methods of best-efforts underwriting or firm-commitment underwriting. Where an underwriting institution conducts standby firm-commitment underwriting, it shall do so after the bond underwriting period ends, and shall not crowd out the effective subscription scale of the market. Before the underwriting period ends, it shall not purchase in advance and retain the bonds it has firm-committed to underwrite. Where book building is adopted, the subscription interest rate for standby firm-commitment underwriting of bonds shall in principle be determined at the upper limit of the bond interest rate range. Article 16 The bond issuance documents shall clearly stipulate the principles for bond allocation (including marginal allocation), and the allocation principles shall be clear and transparent. The bond allocation and distribution process shall be strictly carried out in accordance with the stipulations. Article 17 Investors conducting bond subscriptions shall make independent and prudent quotation and subscription decisions based on their own true funding conditions and investment strategies. Where pricing is conducted by book building and an underwriting institution accepts entrusted investment, the investment order shall clearly indicate the information of the entrusting party. Article 18 Issuers or underwriting institutions shall undertake that the bond issuance process is lawful and compliant, and shall disclose the issuance results in a timely manner. Where an underwriting institution conducts firm-commitment underwriting or a related party of an underwriting institution subscribes, the relevant circumstances shall be disclosed in a timely manner. Article 19 Issuers, book-running managers, underwriting institutions, investors, and venues organizing bond issuance and other participants shall properly manage the storage of information in bond issuance work archives and properly manage security. The retained content shall be standardized, complete, and traceable, and shall comprehensively reflect the entire issuance pricing process of bond price inquiries, setting and adjustment of bond price (interest rate) ranges, determination, and allocation, including but not limited to information on the price inquiry process, subscription order records, pricing process explanations, audio and video materials, communication records, and final allocation results. Where instant messaging tools are used for communication, the relevant communication information shall also be promptly recorded and retained. Unless otherwise provided by laws and regulations, after the bond principal and interest are repaid, the retained archives shall continue to be kept for five years. Article 20 Where market participants commit any of the following acts, the People's Bank of China and its branches may take regulatory measures such as regulatory talks, issuing reminder letters or warning letters, ordering public explanations, and ordering rectification. (1) forcing down underwriting fees, or directly or indirectly linking the selection of underwriting institutions to the bond issuance price (interest rate) or subscription scale; (2) underwriting institutions failing to establish effective internal control mechanisms such as risk prevention and control and conflicts of interest as required by these Rules; (3) underwriting institutions soliciting business through unfair means such as quoting at prices significantly lower than the fair industry level; (4) underwriting institutions accepting entrusted investment without indicating the entrusting party's information as required by these Rules; (5) market participants failing to manage, transmit, disclose, or retain information as required by these Rules; (6) venues organizing bond issuance failing to meet the requirements of Article 14 of these Rules. Article 21 Where market participants commit any of the following acts, the People's Bank of China may impose penalties in accordance with the provisions of the Law of the People's Republic of China on the People's Bank of China. Where a crime is suspected, the case shall be transferred to judicial authorities to pursue criminal liability in accordance with law: (1) interfering with bond issuance pricing by returning underwriting fees, directly or indirectly providing financial assistance to investors, or compensating for investment losses; (2) improperly interfering with investors' subscription decisions, forcing underwriting institutions or investors to subscribe to firm-commitment underwriting, and other acts; (3) issuers subscribing to, or subscribing in a disguised manner, to bonds issued by themselves; (4) directly or indirectly assisting issuers in subscribing to, or subscribing in a disguised manner, to bonds issued by themselves; (5) shareholders holding more than 5% of an issuer and other related parties conducting price manipulation or tunneling benefits through direct or indirect subscription to the issuer's bonds; (6) purchasing in advance the bonds underwritten before the underwriting period ends, and conducting firm-commitment underwriting or disguised firm-commitment underwriting for the purpose of manipulating price or issuance volume; (6) committing in advance to bond bid prices or issuance prices (interest rates); (7) providing false information or uncertain material information to mislead or induce investors; (8) manipulating issuance prices or quantities alone or through collusion or conspiracy; (9) fabricating bid scale or subscription intention to submit false bids; (10) intentionally submitting a large number of bids and canceling bid prices or quantities, disrupting bond issuance prices (interest rates) and allocation; (11) bidding at prices significantly lower than fair market prices for the purpose of intentionally interfering with pricing; (12) manipulating bond market prices and issuance scale by improper means; (13) using non-public information for insider trading; (14) seeking improper interests or tunneling benefits to other entities through methods such as holding on behalf of others or entrusted bidding; (15) other acts violating these Rules and acts violating fair competition or disrupting market order. Where illegal acts involve matters subject to unified enforcement in the bond market, they shall be handled in accordance with the unified enforcement mechanism. Article 22 The branches of the People's Bank of China in all provinces, autonomous regions, municipalities directly under the Central Government, and cities under separate state planning shall strengthen monitoring of bond issuance pricing within their jurisdictions. Where they discover that bond pricing significantly deviates from fair value, they may promptly learn about the situation from relevant institutions through measures such as written inquiries and interviews, and require relevant entities to provide explanations and pricing bases. Where clues of illegal and non-compliant conduct are discovered, they shall promptly report to the People's Bank of China and notify the Dealers Association, and actively cooperate with the head office in carrying out enforcement inspections. Relevant entities and individuals shall cooperate and truthfully provide relevant documents and materials, and shall not refuse, obstruct, or conceal. Article 23 The National Interbank Funding Center and the interbank bond market registration, custody, and settlement institutions shall actively play a frontline monitoring role, strengthen monitoring of the issuance pricing process involved in their business, and promptly report major illegal and non-compliant acts of financial institutions to the People's Bank of China and relevant financial regulatory authorities upon discovery. Where market participants discover illegal and non-compliant acts in bond issuance, they may complain or report in accordance with laws and regulations. Article 24 The Dealers Association shall formulate self-regulatory management rules in accordance with these Rules. After discovering or receiving clues of acts violating self-regulatory rules, the Dealers Association shall promptly initiate self-regulatory investigation procedures, form handling opinions, and report to the People's Bank of China. The Dealers Association shall establish and improve a market-based evaluation mechanism linking underwriting institutions' pricing capability with the evaluation results of underwriting institutions, and strengthen market-based constraints on underwriting institutions' behavior. Article 25 Where enterprises, underwriting institutions, securities service institutions, and relevant personnel fail to perform information disclosure obligations in accordance with relevant provisions of the interbank bond market, or the information disclosed or documents prepared and issued contain false records, misleading statements, or material omissions, the People's Bank of China will handle information disclosure violations in accordance with relevant provisions; where matters subject to unified enforcement in the bond market are involved, they shall be handled in accordance with the unified enforcement mechanism. Article 26 Asset-backed securities in the interbank bond market shall be governed by these Rules by reference. Article 27 These Rules shall be interpreted by the People's Bank of China. Article 28 These Rules shall take effect on [date]. This article is edited from the official website of the "Central Bank". GMTEight editor: Jiang Yuanhua.