Authorities on the Chinese mainland and Hong Kong announced Monday that they will jointly launch a “Swap Connect” program in six months, to allow offshore investors a wider access to the mainland interest rate swap (IRS) market.
The plan comes as China bolsters efforts to further open up its financial market to overseas investors. As offshore investors become more active in trading Chinese bonds, their demand for derivatives to manage risks of fluctuating interest rates has grown.
An IRS is a type of a derivative contract where two parties agree to exchange interest payments on the same principal amount over a set period of time. Such a swap could allow investors to benefit from lower risk exposure.
The Swap Connect program will initially commence northbound trade to allow offshore investors to participate in the mainland’s IRS market, according to a joint announcement by the People’s Bank of China (PBOC), the Hong Kong Monetary Authority, and the Hong Kong Securities and Futures Commission. Southbound trade, which will allow mainland investors to access the Hong Kong financial derivatives market, will be explored in due course.
In its initial stage, the program will facilitate global investors trading in the onshore IRS market using existing international practices, including legal documentation, as well as clearing, settlement and risk management procedures, Hong Kong Exchanges and Clearing Ltd. (HKEX) said in a statement on Monday.
The program will improve efficiency of cross-border IRS trading and clearing, and cement Hong Kong’s position as an international financial hub, the PBOC said in a Q&A on the same day.
The program’s official launch date will be confirmed after regulatory approval, said HKEX. The company, alongside the China Foreign Exchange Trade System and the Shanghai Clearing House, are collaborating on the program.
Over the past years, China has sought to further open up its financial market to overseas investors via Hong Kong. In 2017, China launched the northbound channel of a bond connect program that allows overseas investors to trade bonds on the mainland through Hong Kong. In September last year, the launch of the southbound leg completed the two-way program.
As of the end of 2021, overseas investors held 4 trillion yuan ($627 billion) worth of yuan-denominated bonds, accounting for 3.5% of the total outstanding value, the PBOC said.
Read more Six Things to Know About China’s ‘Southbound Bond Connect’ Program
Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Bertrand Teo (bertrandteo@caixin.com)
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