Homeostasis of the endoplasmic reticulum (ER) is essential for normal cellular functions. Disturbance of this homeostasis causes ER stress and activates the Unfolded Protein Response (UPR). The Ufm1 conjugation system is a novel Ubiquitin-like (Ubl) system whose physiological target(s) and biological functions remain largely undefined. Genetic study has demonstrated that the Ufm1-activating enzyme Uba5 is indispensible for erythroid differentiation in mice, highlighting the importance of this novel system in animal development. In this report we present the evidence for involvement of RCAD/ Ufl1, a putative Ufm1-specific E3 ligase, and its binding partner C53/LZAP protein in ufmylation of endogenous Ufm1 targets. Moreover, we found that the Ufm1 system was transcriptionally up-regulated by disturbance of the ER homeostasis and inhibition of vesicle trafficking. Using luciferase reporter and ChIP assays, we dissected the Ufm1 promoter and found that Ufm1 was a potential target of Xbp-1, one of crucial transcription factors in UPR. We further examined the effect of Xbp- 1 deficiency on the expression of the Ufm1 components. Interestingly, the expression of Ufm1, Uba5, RCAD/Ufl1 and C53/ LZAP in wild-type mouse embryonic fibroblasts (MEFs) was significantly induced by inhibition of vesicle trafficking, but the induction was negated by Xbp-1 deficiency. Finally, we found that knockdown of the Ufm1 system in U2OS cells triggered UPR and amplification of the ER network. Taken together, our study provided critical insight into the regulatory mechanism of the Ufm1 system and established a direct link between this novel Ubl system and the ER network.