Hong Kong & China Launches Swap Connect, Allow Global Investors to Manage Risks & Trade Interest Rate Derivatives with Onshore Investors in Mainland China
7th July 2022 | Hong Kong
Hong Kong and China are launching Swap Connect, allowing global investors to manage interest rate risks & trade interest rate derivatives with onshore investors in Mainland China. Hong Kong Exchange: “In its initial stage, Swap Connect will allow Hong Kong and international investors to participate in Mainland China’s interbank interest rate swap market, without changing their existing trading and settlement practices.” HK SFC Announcement: “To promote the development of financial derivatives markets in both Mainland China and Hong Kong, the People’s Bank of China, the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority have agreed that China Foreign Exchange Trade System (National Interbank Funding Center) and Shanghai Clearing House (collectively “Mainland Infrastructure Institutions”), together with OTC Clearing Hong Kong Limited (“Hong Kong Infrastructure Institution”), will collaborate to develop mutual access between the Hong Kong and Mainland interest rate swap markets (Swap Connect).” Preparatory work for Swap Connect’s launch will take about 6 months (Q1 2023)
” Global Investors to Manage Risks & Trade Interest Rate Derivatives with Onshore Investors in Mainland China “
Hong Kong Exchange Announcement
Hong Kong Exchanges and Clearing Limited (HKEX) welcomes the joint announcement today (Monday) by the People’s Bank of China (PBOC), Hong Kong Securities and Futures Commission (SFC), and Hong Kong Monetary Authority (HKMA), on the collaboration between HKEX, China Foreign Exchange Trade System (CFETS) and Shanghai Clearing House (SHCH) to develop Swap Connect, a new mutual access programme between Hong Kong and Mainland China’s interbank interest rate swap markets.
HKEX, through its clearing subsidiary OTC Clear, is working in partnership with CFETS and SHCH to build Swap Connect, which will provide trading and clearing services for Hong Kong and international investors to access Mainland China’s financial derivatives market, and for investors in Mainland China to access Hong Kong’s financial derivatives market.
Swap Connect is the next significant milestone in progressing the further development and connectivity between Hong Kong and Mainland China’s financial markets, promoting the sustainable growth of both markets, and further enhancing Hong Kong’s status as an international financial centre.
In its initial stage, Swap Connect will allow Hong Kong and international investors to participate in Mainland China’s interbank interest rate swap market, without changing their existing trading and settlement practices.
OTC Clear has today signed a framework agreement with CFETS and SHCH to develop the infrastructure that supports the launch of Swap Connect.
OTC Clear, which provides clearing services for over-the-counter (OTC) financial derivatives transactions, is an SFC recognised clearing house and an internationally-recognised qualifying central counterparty (QCCP). CFETS is an electronic trading platform authorised by PBOC to provide trading services for Mainland China’s interbank market. SHCH is a QCCP recognised by the PBOC that provides central clearing services for OTC derivatives in Mainland China.
Under Swap Connect, CFETS will provide trading services for investors, allowing Hong Kong and international investors to access Mainland China’s interbank derivatives market through overseas third-party trading platforms recognised by the PBOC, without changing their trading practices. CFETS will transmit real-time transactions information to OTC Clear and SHCH to support the efficient clearing of these transactions.
OTC Clear and SHCH will build a clearing link, with OTC Clear providing central clearing services for Hong Kong and international investors, while SHCH will provide central clearing services for investors in Mainland China. The two clearing houses will handle daily margin management and settlement payments with each other, and will establish a central counterparty margin fund to manage default risk.
Swap Connect will offer international investors a similar level of convenience trading in Mainland China’s interbank derivatives market, as they enjoy through participating in Mainland China’s interbank bond markets via Bond Connect. In its initial phase, the innovative clearing link between OTC Clear and SHCH will facilitate international investors trading in the onshore interest rate swap market using existing international practices, including legal documentation, as well as clearing, settlement and risk management procedures.
OTC Clear, CFETS and SHCH will work closely to prepare for the launch of Swap Connect, including rules announcement, system development and market communications, with the support of the Hong Kong and Mainland China regulators.
HKEX and its partners expect preparatory work for Swap Connect’s launch to take about six months. Subject to regulatory approval, a further announcement on the official launch date will be made in due course.