Article 1. The Rules are formulated according to the Law of the People’s Republic of China on the People’s Bank of China for the purpose of standardizing market making practice in the inter-bank bond market, enhancing market liquidity, fostering price discovery, and promoting development of the bond market in China.

Article 2. A market maker referred to in the Rules is a financial institution that makes market in the inter-bank market upon approval of the People’s Bank of China, and hence enjoying due rights and assuming corresponding obligations.

Market making business refers to that a market maker continuously quotes bilateral prices on sale and purchase of cash bonds, and trades with other market participants at these prices in line with relevant requirements.

Article 3. To apply for a market maker status, a financial institution lawfully incorporated within the territory of the People’s Republic of China shall meet the following requirements:

(1) Having a registered or net capital of no less than 1.2 billion yuan;

(2) Having traded actively in the market, with cash bond transaction volume ranking top 80 among all participants in the year before application;

(3) Having trial operation of making market in the inter-bank market before the application, and acquired necessary experience as well as capability;

(4) Having a healthy internal management system, operational procedures, a sound internal risk control mechanism, incentive and performance review scheme;

(5) Having strong ability in bond market research and analysis;

(6) Having at least five qualified bond market practitioners in relevant business departments, with appropriate job descriptions and clearly defined responsibilities;

(7) Having no violations of laws nor serious incompliance of rules and regulations in the two years before application;

(8) Other requirements as stipulated by the People’s Bank of China.

Article 4.  A financial institution intended to become a market maker should submit the following documents to the People’s Bank of China:

(1) an application letter;

(2) business license (a copy of the duplicate)

(3) financial business license (a copy of the duplicate)

(4) a description of the internal management system and operational procedures for market making business;

(5) an introduction on relevant business departments (including staff structure, job and responsibility description, etc.)

(6) a report on activities in the inter-bank market in the two years before application (including summary of pilot market making business)

(7) balance sheet, profit distribution and cash flow statement (all in copies) audited by certified accountants in the two years before the application;

(8) a written statement of no violations of laws nor serious incompliance of rules and regulations in the two years before application;

(9) other materials as required by the People’s Bank of China.

A financial institution should assume responsibility in authenticity, accuracy and completeness of the materials submitted, and without any fabricated description, misleading statement nor serious omission.

Article 5. The People’s Bank of China should review application of a financial institution according to procedures stipulated in the Implementation Measures for Administrative Licensing of the People’s Bank of China (the People’s Bank of China Decree [2004] No.3).

Article 6. A market maker shall enjoy the following rights:

(1) convenience in purchasing bonds at the primary market;

(2) precedence in joining the underwriting syndicate of treasury bonds and governmental development financial institutions bonds, and in becoming a primary dealer in the open market operation;

(3) convenience in bond borrowing and lending;

(4) policy support for product innovation in the inter-bank market;

(5) preferential transactions and settlement charges on cash bond transactions, and bond borrowing and lending transactions reached in market making;

(6) access to information including real-time quotes and data provided by the National Inter-bank Funding Center ( the Inter-bank Center).

Article 7. A market maker shall assume the following obligations:

(1) Each market maker shall designate no less than six bonds in market making, and the final designated ones shall include the following three categories, i.e. a government bond, a governmental development financial institution bond and a non-government credit bond;

(2) The maturity of market making bonds shall cover at least four out of the following five types of years to maturity, i.e. 0-1 year, 1-3 years, 3-5 years, 5-7 years and over 7 years;

(3) A market maker must not alter market making bonds during a business day once it has designated them, and it shall offer continuous bilateral price quotes on designated bonds with an interval no longer than 30 minutes.

(4) Minimum amount for a single price quote shall be 1 million yuan in face value.

A market maker shall submit a written report to the People’s Bank of China in a timely manner to explain any failure in fulfilling the above obligations due to abnormal circumstances.

Article 8. A market maker shall offer real prices in bilateral price quotes, and bid-ask spread shall be within a reasonable range.

Article 9.  A market maker shall submit to the People’s Bank of China a written report on quarterly analysis of bond market, review of bond transactions and performance of market making in the quarter within 10 business days after the end of each quarter.

Article 10.  A market maker shall not manipulate market. A market maker shall assume compensation responsibility according to law for any loss its manipulation has caused investors.

Article 11.  The inter-bank market self regulatory organization shall disclose information of market makers’ performance on platforms such as the website of the People’s Bank of China every half a year, including information of market making bonds, total volume of price quotes in market making, and total transaction volume of market marking.

Article 12.  The inter-bank market self regulatory organization shall assess performance of market makers on a regular basis, and release the assessment information on platforms such as the website of the People’s Bank of China.

The People’s Bank of China shall adjust the list of market makers regularly based on the assessment.

Article 13. Market making business of market makers and trial market making business of non-market makers shall be conducted through the transaction system of the Inter-bank Center. The Inter-bank Center shall improve its transaction system and provide technical support for market making business.

Article 14. The Inter-bank Center shall formulate operational procedures for market making business according to the Rules, and practise them after reporting for file to the People’s Bank of China.

The Inter-bank Center and China Government Securities Depository Trust & Clearing Co., LTD. shall draw up rules on charges for cash bond trade and bond borrowing and lending by market makers in market making business, and carry out them after reporting for file to the People’s Bank of China.

Article 15. The People’s Bank of China has the right to supervise and regulate the market making business of market makers.

Article 16. Any violation of the Rules by market makers shall be penalized by the People’s Bank of China according to Article 46 in the Law of the People’s Republic of China on the People’s Bank of China.

Article 17. The Rules shall be interpreted by the People’s Bank of China.

Article 18. The Rules shall enter into force as of February 1, 2007. At the same time, Notice of the People’s Bank of China on Issues on Regulating and Supporting Bilateral Price Quotes Business in Inter-bank Market (The PBC Document [2001] No.75) and the Notice on Adjusting Maximum Spread in Bilateral Price Quotes and Minimum Volume Price Quote by Market Makers issued by Monetary Policy Department, the People’s Bank of China (The PBC Monetary Policy Department Document [2002] No.43) shall be abolished.

 January 9, 2007