China & Hong Kong to Enhance Swap Connect Launched on 15th May 2023, 20 China Dealers & 59 Overseas Investors Transacted $245 Billion in 3,600 Interest Rate Swaps with Average $1 Billion Daily Notional Volume, Swap Connect Allows Investors Access to Interest Rate Swap Markets in Mainland China & Hong Kong
15th May 2024 | Hong Kong
China & Hong Kong have announced to enhance Swap Connect launched on 15th May 2023, with the Swap Connect having 20 China dealers & 59 overseas investors transacting $245 billion (CNY 1.77 trillion) in 3,600 interest rate swaps with average $1 billion (CNY 7.6 billion) daily notional volume. Hong Kong SFC: “To implement the national strategy to steadily advance the opening-up of China’s financial markets, the mutual access between the Mainland and Hong Kong interest rate swap markets (“Swap Connect”) was launched on 15 May 2023. Since the launch, the trading and clearing arrangements of Swap Connect have been operating smoothly and its trading volume has been on the rise with active participation of Mainland and overseas investors. As of the end of April 2024, 20 Mainland dealers and 58 overseas investors had conducted more than 3,600 interest rate swap transactions with an aggregate notional amount of approximately RMB1.77 trillion, representing an average daily turnover of RMB7.6 billion or thereabouts in notional amount. The average daily turnover calculated on a monthly basis had increased by around three times from approximately RMB3 billion in the first month after the launch to over RMB12 billion in April 2024, providing Mainland and overseas investors with a convenient and efficient risk management tool to manage their RMB asset allocation. To further promote the coordinated development of financial derivatives markets in the Mainland and Hong Kong and establish a framework to facilitate high-quality opening-up in the realm of finance, the People’s Bank of China, the Securities and Futures Commission and the Hong Kong Monetary Authority have resolved to support the following further enhancements of Swap Connect, after thoroughly reviewing the operational experiences of Swap Connect and carefully considering comments and suggestions from Mainland and overseas investors. 1) First, to enrich the product types, interest rate swap contracts with payment cycles based on the International Monetary Market dates will be accepted for clearing to align with mainstream products traded globally and meet the diverse risk management needs of Mainland and overseas investors. 2) Second, to improve the ancillary services, compression service and the clearing of backdated swap contracts as the associated supporting arrangement will be introduced to facilitate participating institutions to manage the notional amount outstanding, lower capital costs, and foster active trading. 3) In addition, the China Foreign Exchange Trade System (National Interbank Funding Center), the Shanghai Clearing House, and OTC Clearing Hong Kong Limited will roll out other system enhancements and incentive programmes simultaneously to reduce the participation costs of Mainland and overseas investors. For the next step, the Mainland and Hong Kong regulators will guide the financial market infrastructure institutions in both markets to extend the business collaboration under Swap Connect in a steady and orderly manner and further enhance the operational arrangements of the scheme, with a view to facilitating the steady opening-up of China’s financial markets and strengthening Hong Kong’s status as an international financial centre.“
“ China & Hong Kong to Enhance Swap Connect Launched on 15th May 2023, 20 China Dealers & 59 Overseas Investors Transacted $245 Billion in 3,600 Interest Rate Swaps with Average $1 Billion Daily Notional Volume, Swap Connect Allows Investors Access to Interest Rate Swap Markets in Mainland China & Hong Kong “
China & Hong Kong Central Banks to Launch Swap Connect on 15th May 2023, Allows Investors Access to Interest Rate Swap Markets in Mainland China & Hong Kong
10th May 2023 – China & Hong Kong central banks (People’s Bank of China & Hong Kong Monetary Authority) have jointly announced the launch of Swap Connect beginning 15th May 2023 (Monday), allowing investors access to interest rate swap markets in Mainland China & Hong Kong. Official Statement: “The programme will begin with Northbound Trading, allowing overseas investors from Hong Kong and other countries and regions to participate in the Mainland interbank financial derivatives market through a connection between financial infrastructure institutions in the two markets. The preparatory work of Swap Connect has progressed smoothly since the joint announcement. Northbound Trading of Swap Connect will launch on 15 May 2023.” More info below.
HKEX Chief Executive Officer, Nicolas Aguzin: “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. We look forward to working with our Mainland partners and all our regional and international market participants to ensuring the successful rollout of Swap Connect, as we connect China and the world.”
HKEX: Starting initially with a Northbound channel, the programme will give Hong Kong and international investors access to Mainland China’s interbank financial derivatives market through a connection between financial infrastructure institutions in the Hong Kong and Mainland China markets.
China & Hong Kong Central Banks to Launch Swap Connect on 15th May 2023
The People’s Bank of China, Securities and Futures Commission and Hong Kong Monetary Authority to commence mutual access between the Mainland and Hong Kong interest rate swap markets
5th May 2023 – To promote the collaborative development of financial derivatives markets in both the Mainland and Hong Kong and establish a framework for high-quality financial opening-up, the People’s Bank of China (PBoC), the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) made a joint announcement on 4 July 2022 on their agreement for China Foreign Exchange Trade System (National Interbank Funding Center) (CFETS), Shanghai Clearing House (SHCH) and OTC Clearing Hong Kong Limited (OTC Clear) to collaborate in developing Swap Connect – mutual access between the Mainland and Hong Kong interest rate swap markets.
The programme will begin with Northbound Trading, allowing overseas investors from Hong Kong and other countries and regions to participate in the Mainland interbank financial derivatives market through a connection between financial infrastructure institutions in the two markets. The preparatory work of Swap Connect has progressed smoothly since the joint announcement. Northbound Trading of Swap Connect will launch on 15 May 2023.
To facilitate a smooth launch of Northbound Trading, we set out relevant details as below:
1. Trading and clearing arrangements under Northbound Trading of Swap Connect
(a) Investment products:
At the initial stage, eligible products will include interest rate swap contracts. The quotation, transaction and settlement currency will be in renminbi (RMB).
(b) Investors:
(i) In order to participate in Northbound Trading, Mainland investors (i.e. Swap Connect Dealers) shall sign an agreement with CFETS for providing price quotation and also be a Clearing Member of SHCH or a client of such a Clearing Member;
(ii) In order to participate in Northbound Trading, overseas investors shall be overseas institutional investors who meet the PBoC’s requirements and have completed filings for participating in the Mainland interbank bond market, and have been granted trading permission for Northbound Trading by CFETS. Overseas investors who intend to apply for Northbound Trading permission shall apply to OTC Clear to become its Clearing Member or a client of such a Clearing Member.
(c) Trading and clearing:
(i) Trading arrangement: CFETS and overseas electronic trading platforms recognised by the PBoC will jointly provide trading service;
(ii) Clearing arrangement: SHCH and OTC Clear will jointly provide clearing and settlement services to Mainland and overseas investors through a central counterparties link.
(d) Quota management:
(i) Trading quota: At the initial stage, the daily net notional principal amounts of the interest rate swap contracts traded by all overseas investors under Northbound Trading shall not exceed RMB20 billion. Subsequently, the quota amount may be adjusted as and when appropriate based on market conditions.
(ii) Clearing quota: SHCH and OTC Clear will establish a Swap Connect financial resources pool in respect of the risk exposure between the two clearing houses. At the initial stage, the Swap Connect financial resources pool corresponding to the risk exposure of the net positions between SHCH and OTC Clear shall not exceed RMB4 billion. Subsequently, the quota amount may be adjusted as and when appropriate based on market conditions.
2. The PBoC, the SFC and the HKMA have agreed on the principles and arrangements for cross-boundary regulatory cooperation relating to Swap Connect and have signed the Memorandum of Understanding on Matters relating to Bonds and Derivatives Markets in the Mainland and Hong Kong. The memorandum has enhanced the regulatory collaboration arrangements and liaison mechanisms among the Mainland and Hong Kong regulators for the bond and derivatives markets, in order to jointly maintain the normal operation of Swap Connect, financial market stability and fair and orderly trading.
3. CFETS, SHCH and OTC Clear shall perform their respective duties under Swap Connect in accordance with applicable laws and regulations and engage with market participants to facilitate the orderly operation of Northbound Trading businesses. Clearing Members shall comply with relevant regulatory requirements and operational rules, strengthen internal controls, prevent and manage risks, enhance investor education and services, and effectively safeguard the legitimate rights and interests of investors. Investors should familiarise themselves with the differences in laws, regulations, operational rules and practices between the Mainland and Hong Kong markets, assess and control risks, and invest rationally.
Market participants shall prepare themselves to ensure the successful launch of Northbound Trading of Swap Connect. Interested investors may contact CFETS, SHCH and OTC Clear in due course to prepare for their participation.
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