The RMB-denominated bonds yield curve is officially defined for the market risk management in RMB trading business

In order to promote the effective implementation of the Guidelines on the Market Risk Management of Commercial Banks, CBRC recently issued a Notice on Establishing Reference Benchmark for Measuring Market Risk of Banking Institutions (hereinafter referred to as the Notice), which puts forward guidance and requirements in many respects on the choice of RMB-denominated bonds yield curve for banking institutions. The Notice requires all banking institutions to compare their own measurement data derived from the self-compiled yield curves with the benchmark，and submit reports to the CBRC about comparison (discrepancy) results starting from the first working day in October 2007. It marks the official establishment of reference benchmark for measuring market risk in RMB trading business in China’s banking sector.

RMB-denominated bonds yield curve is derived from the RMB-denominated bonds of various maturities. RMB-denominated bonds backed by sovereign credit are riskless, including Treasury bonds, central bank notes and policy financial bonds. Due to insufficient development of the RMB bond market and related yield curves, banking institutions are short of a unified reference benchmark for measuring market risks and are relying more heavily on their subjective judgments when monitoring and managing market risks on RMB trading accounts. Such a doing is not helpful for the supervisors to make a unified judgment and comparison on the market risk conditions among different banks, so it is necessary to establish the yield curve for market risk management for the banking institutions. CBRC constitutes and promulgates the Notice based on a thorough investigation.

The first two clauses of the Notice stress that the banking institutions should pay attention to the application of yield curves and at the same time should have the right to choose preferred yield curves at their own discretion.

Clause 3, 4, 5 and 6 set forth specific requirements on the rationality, stability, comparability and application scope of the yield curves adopted by banking institutions.

Clause 7, 8 and 9 specify all banking institutions should adopt the inter-bank treasury bond yield curve, central bank note yield curve and policy financial bond yield curve, which are compiled and published by China Government Securities Depository Trust & Clearing Co. Ltd. as the reference benchmark for measuring market risks, and require banks to compare their own measurement data with the benchmark and report the comparison (discrepancy) results to CBRC. Clause 10 and 11 state the application scope of the Notice.

CBRC senior officials stated that the issuance of the Notice marks the official establishment of reference benchmark for measuring market risk in RMB trading business in Chinese banking industry, and will be helpful to enhance the capability of market risk management of banking institutions, and thus laying a solid foundation for the follow-up implementation of internationally-practiced management measures and models for various market risks.