China, Hong Kong enhance Swap Connect scheme in time for its 1st birthday, easing access to mainland interbank derivatives
Financial regulators in mainland China and Hong Kong rolled out enhancements to the Swap Connect scheme on Monday to further open up China's financial markets and strengthen Hong Kong's status as an international financial centre.
The scheme, launched in Hong Kong a year ago, has been instrumental in allowing global investors to access mainland China's interbank financial derivatives market to hedge interest-rate risks.
The People's Bank of China, Hong Kong's Securities and Futures Commission and the Hong Kong Monetary Authority announced three enhancements. First, Swap Connect will accept interest rate swap contracts with payment cycles based on the International Monetary Market (IMM) dates to "align with mainstream products traded globally and meet the diverse risk management needs of mainland and overseas investors", according to a joint press release.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
Second, ancillary services like compression and clearing of backdated swap contracts will be introduced to help participating institutions manage the notional amount outstanding, reduce capital costs and foster active trading.
Finally, the Swap Connect's clearing houses in China and Hong Kong - namely the China Foreign Exchange Trade System, Shanghai Clearing House, and Hong Kong Exchanges and Clearing (HKEX) subsidiary OTC Clearing Hong Kong - will launch other system enhancements and incentive programmes to reduce investors' participation costs.
"As the world's first derivatives mutual market access programme, Swap Connect has proved very popular with Hong Kong and international investors, providing them access to mainland China's interbank swaps market," said Bonnie Chan Yiting, CEO of HKEX, the city's bourse operator.
As of last month, 20 mainland dealers and 58 overseas investors had conducted more than 3,600 interest-rate swap transactions under the Swap Connect.
That marked an aggregate notional amount of around 1.77 trillion yuan (US$245 billion) and an average daily turnover of 7.6 billion yuan. The average daily turnover calculated on a monthly basis increased to 12 billion yuan last month compared with 3 billion the month after the mechanism launched on May 15, 2023.
"We look forward to further enhancing and expanding our broader connect programmes with our mainland partners, supporting the long-term sustainable development of markets in both Hong Kong and mainland China," Chan added.
Swap Connect complements a range of connect programmes launched in stocks, bonds, exchange-traded funds and wealth-management products over the past decade. The various trans-border investment channels continue to facilitate more capital flow between mainland China and Hong Kong.
A view of Exchange Square, the home of the Hong Kong stock exchange, in Central on January 19, 2024. Photo: Xiaomei Chen alt=A view of Exchange Square, the home of the Hong Kong stock exchange, in Central on January 19, 2024. Photo: Xiaomei Chen>
Interest-rate swaps under Swap Connect are over-the-counter, bilateral contracts that allow bondholders to manage their risks by swapping one stream of future interest payments for another based on a specified principal amount.
Such derivative products have become popular as more overseas investors are participating in the onshore cash bond market, and their demands for risk-management tools for yuan interest rates are also increasing.
Zhaoting Xu, head of China investment banking at Deutsche Bank, said international investors welcome the enhancements.
The launch of interest rate swap contracts with payment cycles based on IMM dates "will help investors avoid the risk of fluctuation in fixed interest rates", he said. "At the same time, international investors are also happy to see the launch of the compression service and clearing of backdated swap contracts as supporting arrangements, which will help them to reduce curve risks and costs in an efficient manner."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.