I. Classification of benchmark bonds

Benchmark bonds refer to a basket of benchmark bonds subject to comprehensive analysis on the basis of list of market-making bond types reported by market-making institutions in the interbank cash bond market, as ultimately determined by elements such as bond type, distribution of terms, and market liquidity. Benchmark bonds are divided into medium and long term bonds and short-term bonds: the sample of medium and long term bonds is confirmed monthly and includes treasury bonds, policy bank bond(CDB), policy financial bonds(EIBC), policy financial bonds(ADBC) and medium-term notes (AAA); the sample of short-term bonds is confirmed weekly and includes commercial paper (AAA). Corresponding real-time yield curve series are generated according to benchmark bond sample selection results.

II. Bond selection criteria

For market-making bonds in the interbank cash bond market, the benchmark bond for each key rate duration for each bond type is selected on the basis of six indices including bond type, credit rating, key rate duration, average number of competitive market-making institutions, quotation coverage, and market-making activity in such bonds, and bonds other than benchmark bonds are sample bonds.

(1) Bond type: fixed rate bonds, discount bonds, zero coupon bonds and option-free bonds.

(2) Credit rating and key rate duration.

The credit ratings are all taken from the RMB trading system of the interbank market and the corresponding relationships between credit ratings and key rate duration are shown in the table below.

(3) Average number of competitive market-making institutions refers to the average number of market-making institutions that make a market in and quote for the  bond within the benchmark bond sample selection period.

(4) Quotation coverage refers to the ratio of days on which competitive market-making quotations are given to the actual number of days on which trading can occur during the latest selection period of the bond on the basis of the “average number of competitive market-making institutions” sample selection.

(5) The activity indices for market-making bonds are divided into medium and long term bond index and short-term bond index.

Medium and long term market-making bond activity index:

Short-term market-making bond activity index:

For every bond type, the priority bond selection criteria are the average number competitive market-making institutions, quotation coverage and the market-making bond activity index in that order, and the benchmark bonds and sample bonds for every key rate duration for every bond type are obtained in the reverse order.

Take the benchmark treasury bond as an example:

III Valid period and sample selection period for benchmark bonds

The valid period refers to the range of trading days for the benchmark bond being valid, and the sample selection period refers to the range of trading days for selecting the benchmark bond sample; the valid period and the sample selection period shall in principle be determined weekly and monthly, and specific valid and sample selection periods shall be adjusted to take account of holidays and festivals. In general, the sample selection period refers to the previous valid period, and the benchmark bond for the next valid period will be determined and published on the last trading day of the sample selection period.

The sample selection period is divided into the initial sample selection stage and the sample confirmation stage. The initial sample selection stage for medium and long term bonds shall be terminate on the penultimate trading day of the previous valid period, and the sample confirmation stage for benchmark bonds shall terminate on the last trading day of the previous valid period after business personnel have requested opinions from market participants; the initial sample selection stage for short-term bonds shall terminate at noon on the last trading day of the previous valid period, and the sample confirmation stage for benchmark bonds shall terminate at closing time on the last trading day of the previous valid period after business personnel have requested opinions from market participants.

For example, the valid period for the benchmark bond corresponding to the 201001 valid period for treasury bonds is from January 1, 2010 to January 31, 2010, and the sample selection period for the same bond is from December 1, 2009 to December 30, 2009; the valid period for the benchmark bond corresponding to the 201002 valid period for commercial paper (AAA) is from January 11, 2010 to January 15, 2010 and the sample selection period for the same paper is from January 4, 2010 to January 8, 2010.  

IV Automatic bond substitution mechanism for benchmark bonds 

Benchmark bonds is obtained by calculating statistics based on historical market-making quotation data, quotes may not be updated on subsequent trading days. In such circumstances, the benchmark bond scheme will initiate an automatic bond substitution mechanism and market participants will be promptly informed. The automatic bond substitution mechanism is as follows:

Priority criteria for selecting newly issued bonds:

If there is no price for a key rate duration for a benchmark bond for N consecutive days (5 days in general) and a new bond is issued during the valid period, new bonds with bilateral quotes in the last N days (5 days in general) shall be first be taken into account; if there are two or more new bonds satisfying these conditions, bond substitution shall be carried out in the following order: average number of market-making institutions, issue date, issue volume, bond code.

Secondly, for selecting sample bonds:

If a new bond cannot be selected to conduct an automatic bond substitution, the bond with bilateral quotes for N consecutive days (5 days in general) and the highest score among the sample bonds for the standard period shall be regarded as the benchmark bond for the valid period. If the selected bond has not been priced for N consecutive days (5 days in general) during the valid period, the principles applicable to changes in benchmark bonds shall be the same as above.

Ongoing selection of bonds:

If no bond has been selected via the two steps described above, the benchmark bond shall not change on that day and the interest rate used for the period shall be the historically quoted interest rate for the bond; the benchmark bond shall be selected according to the two steps described above on the following day.