· Document Number：No. 126 [2016] of the People's Bank of China

· Area of Law： Negotiable Instruments

· Level of Authority： Departmental Regulatory Documents

· Date issued：04-30-2016

· Effective Date：04-30-2016

· Issuing Authority： People's Bank of China China Banking Regulatory Commission

· Status： Effective

Notice of the People's Bank of China and the China Banking Regulatory Commission on Strengthening the Administration of Negotiable Instrument Business and Promoting the Sound Development of Negotiable Instrument Market
(No. 126 [2016] of the People's Bank of China, April 30, 2016)
Shanghai Head Office of the People's Bank of China ("PBC"); all branches and business management departments of the PBC, all central sub-branches of the PBC in the capital cities of provinces (autonomous regions), central sub-branch of the PBC in Shenzhen; the offices of the China Banking Regulatory Commission ("CBRC") in all provinces (autonomous regions and municipalities directly under the Central Government); China Development Bank, all policy banks, state-owned commercial banks, joint-stock commercial banks, and Postal Savings Bank of China:
Over recent years, all types of negotiable instrument market businesses based on commercial drafts have developed rapidly and have played a positive role in expanding the financing channels of enterprises and optimizing the management of the assets and liabilities of banking financial institutions (hereinafter referred to as banks). However, there exist such problems as nonstandard development of some negotiable instrument businesses, failure of some banks in observing regulations in force and ineffective internal control, which have led to a series of negotiable instrument cases and caused significant loss of funds. The business risks shall not be ignored. For purposes of implementing the requirement for the finance supporting the development of the real economy, effectively prevent and control the risks in negotiable instrument businesses and promoting the sound and orderly development of the negotiable instrument market, you are hereby notified of the issues concerning strengthening the administration of negotiable instrument businesses and regulating business conducting as follows:
I. For the purpose of this Notice, the negotiable instrument business means the business of acceptance and discount of commercial drafts handled for clients by the banks established in accordance with the law within the territory of the People's Republic of China, or outright inter-bank discount business handled between banks, or reverse repurchase (repurchase) with financial assets in the negotiable instrument category as the basic assets under the Notice of the People's Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and Other Departments on Regulating the Interbank Business of Financial Institutions (No. 127 [2014] of the People's Bank of China).
II. Strengthening the administration of internal control of negotiable instrument business
(1) Establishing a prudential appraisal mechanism according to the business substance. Banks shall establish scientific appraisal and incentive mechanism, give significantly higher weight to indicators in the category of compliance in operation and indicators in the category of risk management than to the indicators in other categories according to the requirement of the Supervisory Guidelines for Performance Appraisal of Banking Financial Institutions (Issued in No. 34 [2012] of the China Banking Regulatory Commission), and include the fee rates of acceptance, advance payment rates and other indicators of business distribution effectiveness and indicators in the category of risk management into appraisal, to ensure the reasonable growth of the negotiable instrument business.
(2) Strengthening the preservation of physical negotiable instruments. Banks shall establish a negotiable instrument preservation system with effective checks and supervision, strictly implement the system of sorting, counting, handing over, registering and bringing into and out of storage physical negotiable instruments, strengthen regular accounts check and storage check, ensure that the account books are consistent with the actual negotiable instruments, and prevent risks in the transfer and preservation of negotiable instruments.
(3) Strictly regulating the management of inter-bank accounts. Banks shall strictly implement the requirement of the Notice of the People's Bank of China on Strengthening the Administration of RMB Interbank Settlement Accounts of Banking Financial Institutions (No. 178 [2014] of the People's Bank of China). Opening banks shall verify with the first-level legal person of the deposit bank through the High Value Payment System. The opening, use and management of inter-bank accounts in different locations shall be strictly regulated, the management of specimen signatures and seals shall be strengthened, no account shall be leased or lent, and it shall be prohibited to entrust the inter-bank accounts to any other person for management. Opening banks shall reconcile accounts with the deposit banks on a monthly basis. Where any false opened inter-bank account or any abnormal funds flow is discovered, the reasons shall be screened for immediately, and in respect of existing suspicious circumstances, reports shall be submitted to the regulatory departments within two working days.
(4) Strengthening risk prevention and control. Banks shall conscientiously sort out all internal systems, regulate the design of business process and adhere to separation and checks of key offices and functional departments in strict accordance with the negotiable instrument business management system of the regulatory departments and the requirement of this Notice. The management, control and screening of the employee behaviors shall be strengthened and internal business training and moral education shall be conducted to improve employees' professional equality and raise their awareness of regulatory compliance. A negotiable instrument business system shall be established and continuously optimized to realize systematic process control, strengthen internal examination and business audit, ensure that internal control system and supervision requirement are implemented, and prevent moral risks and operating risks.
III. Adhering to the requirement for the truthfulness of trade background and prohibiting funds from idling
(1) Strictly examining the truthfulness of trade background. Banks shall strengthen the examination of the truthfulness of relevant transaction contracts, value-added tax invoices and plain invoices and may verify additionally shipping documents and documents about entry and exit of warehouses, among others, to ensure the consistency of the trade content reflected by relevant negotiable instruments with the scope of business, true distribution status and relevant content of documents. False transaction or repeated use of relevant documents shall be prevented by affixing notes on the front of invoices, receipts and other original documents attached to the accepted or discounted commercial drafts. It shall be prohibited to handle acceptance and discount business for any enterprise whose business volume of negotiable instruments is clearly inconsistent with its actual distribution.
(2) Strengthening the credit investigation of clients and unifying credit management. Banks shall scientifically verify and approve the credit limit for a client's negotiable instrument business and include it into the general credit management frame. The information on clients shall be collected based on the specific types of credit of the negotiable instrument businesses, including but not limited to basic information, finance information and non-finance information, among others, to end credit beyond the line. Banks shall effectively analyze and appraise different types of credit of the negotiable instrument businesses according to the requirement of the Guidelines on Due Diligence in the Credit Extension Work of Commercial Banks (Issued in No. 51 [2004] of China Banking Regulatory Commission). Where significant matters impacting the credit of clients, among others, occur before the expiration of existing credit rating and business appraisal of the clients, banks shall make timely adjustment about relevant risk analysis and appraisal.
(3) Strengthening the management of acceptance deposit. Banks shall ensure that the acceptance deposit is cash fund with appropriate ratio and is put in place in full amount in a timely manner, and the mortgage, pledge or third-party guarantee as required by the part uncovered by the deposit shall be strictly implemented in accordance with the law. The fund source of the acceptance deposit shall be identified and no business of applying for banker's acceptance in a rolling-ahead manner after loans and discount funds are transferred and deposited as deposit shall be handled. The deposit account shall be opened independently and the deposit shall not be deposited together with other funds of the banks. The management of the deposit shall be controlled through system and no misuse or withdraw in advance at will shall be allowed.
(4) No covering credit risks. No bank shall make use of discount funds to take loans to repay old ones, adjust credit quality targets; no loan shall be lent to repay the advance payment for banker's acceptance and disguise non-performing assets.
IV. Regulating transaction of negotiable instruments
(1) Strictly implementing the uniform management requirement for inter-bank business. Banks shall include the reverse repurchase (repurchase) of banker's acceptance into comprehensive risk management, strictly implement concentrated and unified authorization, credit and approval, improve the internal control mechanism featuring separated front, middle and back offices and strengthen business management in strict accordance with the requirement of the Notice of the People's Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission and the State Administration of Foreign Exchange on Regulating the Interbank Business of Financial Institutions and the Notice of the General Office of the China Banking Regulatory Commission on Regulating the Interbank Business Governance of Commercial Banks (No. 140 [2014] of the General Office of the China Banking Regulatory Commission). Correct accounting handling methods shall be adopted according to the requirement of accounting code, and in respect of accounting items separately set out for reverse repurchase (repurchase), accounting shall be conducted in strict accordance with the stipulations of the business contract (agreement).
(2) Strengthening the management of qualifications of the counterparties. Banks shall bring the counterparties of reverse repurchase (repurchase) to be subject to concentrated and uniform name list management by headquarters with a legal person status, regularly assess the credit risks of counterparties and dynamically adjust the list of counterparties, and shall not conduct reverse repurchase (repurchase) of negotiable instruments and other equivalent businesses with any institution not on the list of counterparties.
(3) Regulating requirement for the endorsement of paper negotiable instruments When handling inter-bank discount business, the proposed transferee shall confirm the endorsement by the counterparties and shall forbid the purchase and sale of negotiable instruments without endorsement; the transferee shall write its name at the column of endorsee of this endorsement on the date of the inter-bank discount business, and protect its right on negotiable instruments. When dealing with reverse repurchase, the proposed reverse repurchase bank shall confirm that the counterparty is the endorsee of the last endorsement of the negotiable instruments.
(4) Prohibiting handling paper negotiable instrument business off the counter or outside of the banks. The two parties of the transaction of inter-bank discount and reverse repurchase (repurchase) shall examine, verify and hand over the negotiable instruments one by one within the business premise of one party of the transaction. Where the negotiable instrument assets corresponding to the transaction of reverse repurchase (repurchase) are required to be packed up, the two parties of the transaction shall examine, verify and hand over the negotiable instruments negotiable instruments within the business premise of the buyer. The physical negotiable instruments shall be preserved by the buyer.
(5) Strictly implementing the requirement for fund transfer. When handling the transfer and reverse repurchase (repurchase) of inter-bank discount, the transferee shall transfer funds into the reserve accounts opened by negotiable instrument transferor in the People's Bank of China or the accounts opened in the negotiable instrument transferors, so as to prevent the funds from flowing beyond the State administration. Financial institutions handling electronic commercial draft businesses through principal mode may receive and transfer funds through the inter-bank accounts opened at the agent bank and associated with the electronic commercial draft businesses.
(6) Prohibiting all types of transactions in violation of regulations. Banks shall be prohibited from conducting business with illegal "agency of negotiable instruments" and "funds brokers" and no transaction of negotiable instruments shall be conducted with "agency of negotiable instruments" or "funds brokers" as buyer or seller. Cross-bank transaction of negotiable instrument clearance and repeated sale of one negotiable instrument shall be prohibited.
V. Self-inspecting risks and enhancing supervision and inspection
(1) Comprehensively self-inspecting risks in negotiable instrument business.
Banks shall inspect their risks in negotiable instrument business in the whole system prior to June 30, 2016, and take immediate and effective measures to plug up the loopholes in respect of existing hidden risks. Leasing and lending official seals, seals and signatures, and inter-bank accounts, transaction with institutions not on the list of counterparties, and "conducting channel business" and "reducing draft size" for other banks as well as accounting not in accordance with provisions shall be the key points inspected. Any inter-bank account opened and used in violation of regulations shall be revoked; any suspicious "agency of negotiable instruments," "funds brokers" or any other client or any counterparty shall be subject to prudent disposition in a timely manner; where loss of funds has been caused or any crime is suspected, report shall be submitted to the regulatory departments to transfer it to the public security department for disposition. Banks shall submit at the same time the reports on the self-inspection for the risks to the PBC and banking regulatory and administration departments prior to July 15, 2016, the national banks shall submit the reports to the Head Office of the PBC and the CBRC, and other banks shall submit the reports to the Shanghai Head Office of the People's Bank of China ("PBC"), all branches and business management departments of the PBC, all central sub-branches of the PBC in the capital cities of provinces (autonomous regions), central sub-branch of the PBC in Shenzhen (hereinafter collectively referred to as "the local PBC branch offices above the level of central sub-branches of a sub-provincial cities") and the offices of the CBRC in all provinces (autonomous regions and municipalities directly under the Central Government) where their legal persons are located.
(2) Strengthening supervision and inspection and improving the actual effect of administration.
The Head Office of the PBC, the local PBC branch offices above the level of central sub-branches of a sub-provincial cities and the offices of the CBRC in all provinces (autonomous regions and municipalities directly under the Central Government) shall strengthen on-site inspection and off-site inspection of negotiable instrument businesses according to statutory powers and duties, enhance the actual effect of administration, reinforce the implementation of systems and readjust market order; and shall strictly enforce disciplines about negotiable instrument businesses, disclose consulting and reporting telephone and maintain report channels unimpeded. Where any bank is discovered to have operations in violation of regulations during the acceptance of reports, law enforcement and examination, it shall be seriously investigated, dealt with and urged to make timely rectification. Where circumstances of violations of regulations are serious, temporary suspension of market access, temporary suspension of negotiable instrument businesses and other supervision measures shall be adopted as the case may be, and the accountability of directly responsible persons and relevant senior executives shall be held in accordance with the law.
The local PBC branch offices above the level of central sub-branches of sub-provincial cities and the CBRC offices in all provinces (autonomous regions and municipalities directly under the Central Government) shall jointly forward this Notice to the urban commercial banks, rural commercial banks, rural cooperative banks, foreign-funded banks, rural credit cooperatives and village banks within their respective jurisdictions.
Please report the problems encountered in the implementation to the PBC and the CBRC in a timely manner.