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Treasury & Capital Markets
China opens derivatives market to HK, international investors
Swap Connect kicks off with northbound trading and daily quota of 20 billion yuan
The Asset 15 May 2023

Swap Connect, the new mutual access programme between Hong Kong and mainland China’s interbank interest rate swap markets, launched today (May 15). Starting initially with a northbound channel and a daily quota of 20 billion yuan (US$2.87 billion), the programme gives Hong Kong and international investors access to mainland China’s interbank financial derivatives market.

Hong Kong Exchanges and Clearing (HKEX), through its clearing subsidiary OTC Clearing Hong Kong (OTC Clear), has been working with China Foreign Exchange Trade System (CFETS) and Shanghai Clearing House (SHCH) to develop the underlying infrastructure for Swap Connect and will facilitate the delivery and operation of the programme.

HKEX chief executive officer Nicolas Aguzin says: “Swap Connect is the latest chapter in our Connect story. As the world’s first derivatives mutual market access programme, it will help forge stronger connectivity between Hong Kong and mainland’s capital markets, further supporting their mutual development and strengthening Hong Kong’s role as an international financial centre.”

Eddie Yue, chief executive of the Hong Kong Monetary Authority, says the launch of the northbound trading of Swap Connect “will create favourable conditions for global investors to increase their participation in the onshore bond market, and carries special significance for enhancing the recognition of and confidence in RMB bonds in the international market”.

Under Swap Connect, CFETS and overseas electronic trading platforms recognized by the People’s Bank of China (PBOC) will jointly provide trading services for Hong Kong and international investors. The programme will give access to interest rate swaps at the initial stage, which will be priced, settled and cleared in renminbi.

OTC Clear and SHCH will jointly provide clearing and settlement services through a central counterparties link, with OTC Clear providing central clearing services for Hong Kong and international investors, while SHCH will provide central clearing services for investors in the mainland.

Very positive response

In separate press statements, Citibank (China) Co Ltd (Citi China), HSBC, and Standard Chartered say they have completed the first interest rate swap transactions at today’s launch of Swap Connect.

“Our international institutional investors have shown a very positive response to the launch of the Swap Connect,” says John Thang, head of financial markets, Hong Kong and Greater Bay Area, at Standard Chartered. “They are interested in participating in the programme’s northbound trading to better manage the interest rate risks of holding mainland Chinese bonds.”

HSBC concluded trades for several global clients including Dymon Asia and CSI Capital Management Limited, with HSBC China acting as the designated market maker and HSBC Hong Kong acting as the mandated clearing broker.

Standard Chartered helped Eastfort Asset Management Private Limited and CICC International Limited to execute their first batch of Swap Connect transactions, both as a designated market maker and mandated clearing broker.

Explaining the process, Citi China says offshore investors can directly quote prices from onshore market makers through overseas e-trading platforms and execute transactions. On transaction day, a bilateral transaction will be novated to SHCH and OTC Clear after a compliance check, which then enters central clearing for both the onshore market maker and offshore investor.

As of the end of March 2023, the outstanding balance of bonds held by offshore institutions in the China Interbank Bond Market reached 3.3 trillion yuan, according to the PBOC. And with the increase in bond holdings by offshore investors and the growth of trade activities, the demand for derivatives to manage interest rate risks has been rising, Standard Chartered says.

“We believe that as international investors continue to increase their understanding of the bond and swap markets in mainland China, the quota and eligible investment products of the Swap Connect will be gradually expanded, further supporting the role of Hong Kong as a super-connector and facilitating the rapid development of mainland China’s financial markets,” Thang adds.

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