China Central Bank Allows Northbound Swap Connect Investors to Use China Onshore Bonds as Margin Collateral for Northbound Swap Connect Transactions, Providing Investors with Option to Use Non-Cash Collateral to Reduce Liquidity Cost & Improve Capital Efficiency
9th July 2024 | Hong Kong
China central bank People’s Bank of China (PBoC) has announced to allow Northbound Swap Connect investors to use China onshore bonds as margin collateral for Northbound Swap Connect transactions, providing investors with option to use non-cash collateral to reduce liquidity cost & improve capital efficiency. Hong Kong SFC & HKMA (9/7/24): “The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) welcome the announcement of the People’s Bank of China (PBoC) today (9 July) to support offshore investors to use onshore bonds issued by the Ministry of Finance and policy banks on the Mainland and held under Northbound Bond Connect as margin collateral for Northbound Swap Connect transactions. This measure will provide Northbound Swap Connect investors with the additional choice of non-cash collateral, reducing their liquidity cost and improving capital efficiency. It will also help vitalise offshore investors’ onshore bond holdings and further enhance the attractiveness of onshore bonds. The measure will also promote synergies between Bond Connect and Swap Connect, thereby further invigorating market participation in the Connect Schemes. This is a new arrangement for the use of onshore bonds as eligible collateral in the offshore market, following the inclusion of onshore bonds issued by the Ministry of Finance and policy banks on the Mainland in the list of eligible collateral for the HKMA’s RMB Liquidity Facility on 26 February this year. It is built on the collaborative efforts with the PBoC to deepen financial cooperation between Hong Kong and the Mainland and further promote RMB internationalisation in a steady, orderly and sound manner. The SFC and the HKMA will continue to provide guidance to the financial infrastructure institutions (including the HKMA Central Moneymarkets Unit and OTC Clearing Hong Kong Limited) to take forward the preparatory work, including promulgating rules for the provision of collateral by way of security interest or title transfer, and for the transfer of the relevant bonds, with a view to implementing this new measure as soon as practicable. Relevant details will be announced in due course.” HKEX (9/7/24): “Hong Kong Exchanges and Clearing Limited (HKEX) today (Tuesday) welcomed the announcement from the People’s Bank of China to allow China Government Bonds and Policy Financial Bonds, held by international investors through Bond Connect, as collateral for Northbound Swap Connect. HKEX’s clearing subsidiary, OTC Clear, plans to start accepting these instruments as collateral for Swap Connect, with a targeted launch by the end of 2024. OTC Clear and will work closely with the Securities and Futures Commission and the Central Moneymarkets Unit of the Hong Kong Monetary Authority in preparation for this enhancement. More details will be announced in due course. This latest enhancement to Northbound Swap Connect will help improve capital efficiency of investors in the programme by offering them more non-cash collateral options. It will also further boost the attractiveness of holding onshore RMB bonds for international investors participating in Bond Connect. Swap Connect, which links the Hong Kong and Mainland China interbank interest rate swap markets, has seen smooth operations and steady growth in trading volume since its launch in May 2023, adding vibrancy to the region’s financial markets. As of the end of May 2024, a total of 61 overseas institutions have participated in Northbound Swap Connect. The average daily turnover of Swap Connect totalled RMB20 billion in May 2024, up sharply from about RMB3 billion in May 2023.”
“ China Central Bank Allows Northbound Swap Connect Investors to Use China Onshore Bonds as Margin Collateral for Northbound Swap Connect Transactions, Providing Investors with Option to Use Non-Cash Collateral to Reduce Liquidity Cost & Improve Capital Efficiency “
Swap Connect, which links the Hong Kong and Mainland China interbank interest rate swap markets, has seen smooth operations and steady growth in trading volume since its launch in May 2023, adding vibrancy to the region’s financial markets. As of the end of May 2024, a total of 61 overseas institutions have participated in Northbound Swap Connect. The average daily turnover of Swap Connect totalled RMB20 billion in May 2024, up sharply from about RMB3 billion in May 2023.”
HKEX Co-Head of Markets, Glenda So: “We warmly welcome this latest enhancement to Swap Connect, the world’s first derivatives mutual market access programme. This development will add even more synergies between the Bond Connect and Swap Connect programmes, and help to further support international investors’ participation in China’s bond market. We look forward to working closely with our Mainland partners, regulators and market participants to continue enhancing Swap Connect and explore the application of China bonds as collateral for more HKEX products, facilitating the continued opening of China’s financial markets and supporting the internationalisation of the RMB.”
China Central Bank Allows Northbound Swap Connect Investors to Use China Onshore Bonds as Margin Collateral for Northbound Swap Connect Transactions, Providing Investors with Option to Use Non-Cash Collateral to Reduce Liquidity Cost & Improve Capital Efficiency
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