Bond Collateral Supports Local Treasury Cash Management in Controlling Financial Market Risk

On February 9, 2017, the Ministry of Finance(MOF) in conjunction with the People's Bank of China(PBC) issued "Notice on the Full Implementation of the Provincial Local Treasury Cash Management". It noted that, with sustained efforts since the launch of pilot local treasury cash management in 2014, the fundamental systems and regulations of local treasury cash management have been established, the operation processes have been standardized, and risk is well under control. Therefore, MOF and PBC decided to start the full national wide implementation of provincial treasury cash management. To this end, the use of pledge in the treasury cash management, where CCDC acts as a major service provider, is an important step for the building and improving of risk control system and risk prevention framework of the treasury cash management.

CCDC is an important contributor to China's capital market infrastructure, and it also serves as a platform where national macroeconomic policies are implemented. Since the launch of the pilot local treasury cash management operation, CCDC's collateral management system has effectively supported the relevant local Departments(Bureaus) of Finance and other participating institutions in conducting time deposit pledge. By the end of 2016, CCDC has completed 113 such operations with 21 local departments (bureaus) of finance participating the pilot program. As the full implementation of local treasury cash management operation is under way, CCDC would continue to improve its collateral management services.

With its highly efficient parameter management and intelligent automation mechanism, CCDC’s collateral management system is able to conduct automatic selection, calculation, pledging and discharging of the commercial bank time deposit pledge in the operation of local treasury cash management, and provide manual adjustment, manual replacement, automatic replacement at maturity and other functions during the whole life of the a cash management operation. In addition, CCDC's collateral management system has the function of daily marking the market, which makes possible the dynamic market value monitoring of local treasury cash management. The real-time monitoring of the change of the market value of the pledge and the dynamic assessment of the actual collateral value of the pledge, is of great significance to the accurate risk control of the treasury cash management, and can help commercial banks to obtain more efficient liquidity.

It is generally believed that the full national wide implementation of provincial treasury cash management marks an important milestone of the construction of MOF’s target minimum treasury balance system, and will further improve the efficiency of deposit rate formation mechanism, revitalize the surplus funds and enhance the liquidity of the banking system.

Some institutions believe that, with the full implementation of the local treasury cash management operation taking place and the size of the collateral assets further expanding, the collateral management of CCDC is poised to play a greater role in macroeconomic policy territory, including by using collateral management to control financial risks and to facilitate smooth fiscal policy operations. On the other hand, in the secondary market, this initiative will improve the efficiency of local government bond pricing, reduce transaction costs, increase market liquidity and revitalize the outstanding bonds, which is of vital importance to the implementation of national macroeconomic policies and the smooth operation and development of financial market.

The collateral management business, as an important element of the CCDC’s financial market risk management platform, has successfully positioned itself and made extraordinary achievements recently. In 2016, the size of CCDC’s collateral activities ranks first in the world, with the total value of collateral under its management over 12 trillion yuan. CCDC collateral management further expands the scope of business, cooperates with monetary policy operation, and supports PBC’s operations related to Medium-term Lending Facility and Standby Lending Facility; supports the full implementation of local treasury management system; provides comprehensive services to the social security system and all layers of financial markets, covering more than 4500 institutions. In addition, in line with the development of financial markets, CCDC collateral management keeps upgrading its functions and further integrating with the international market. To this end, CCDC collateral management expects to gradually develop into a liquidity hub and a risk control valve of global RMB system.

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