On 13 May, the People's Bank of China, the Securities and Futures Commission of Hong Kong and the Hong Kong Monetary Authority, on the basis of fully summarizing the operational experience of the Mainland-Hong Kong interest rate swap market interconnection cooperation (hereinafter referred to as "Swap Connect") and carefully listening to the opinions and suggestions of domestic and foreign investors, supported the further optimization of the "Swap Connect" mechanism arrangement, enriched product types and improved supporting functions.
With the approval of the People's Bank of China, the National Interbank Funding Center ("CFETS"), the Interbank Market Clearing House Co., Ltd. ("Shanghai Clearing House") and OTC Clearing Hong Kong Limited ("OTCC") will jointly launch the "Northbound Swap Connect" business optimization function on 20 May 2024. Added the contract compression function of "Northbound Swap Connect", and added historical value contracts and IMM (International Money Market) contracts. At the same time, we will continue to reduce or exempt the full amount of interest rate swap transaction fees for domestic and foreign institutions under the Northbound Swap Connect.
The three departments pointed out that the regulators of the Mainland and Hong Kong will guide the financial market infrastructure institutions of the two places to continue to promote the "Swap Connect" business cooperation in a steady and orderly manner, continue to improve various mechanisms and arrangements, and help steadily expand the opening up of China's financial market and consolidate and enhance Hong Kong's status as an international financial centre.
(Screenshot of the official website of China Foreign Exchange Trade System)
The total notional principal amount of the transactions reached is about 1.77 trillion yuan
On May 15, 2023, the "Swap Connect" was officially launched. Since the launch of the business, the transaction clearing and other mechanisms have been running smoothly, domestic and foreign investors have actively participated, and the business volume has continued to rise.
As of the end of April 2024, 20 domestic quotation providers and 58 foreign investors have reached more than 3,600 RMB interest rate swap transactions, with a total notional principal of about RMB1.77 trillion and an average daily transaction of about RMB7.6 billion, with a monthly average daily transaction of nominal principal increasing by nearly three times, from an average daily of about RMB3 billion in the first month of launch to an average of more than RMB12 billion per day in April 2024, providing convenience for domestic and foreign investors to carry out RMB asset allocation. Efficient risk management tools.
"Swap Connect has received widespread popularity and attention, mainly because it can significantly improve transaction efficiency, reduce trading and clearing costs, and enable foreign investors holding RMB assets such as Chinese bonds to better achieve their position risk management goals." Zhu Jing, general manager of the global market department of Bank of China Hong Kong, told reporters that as a clearing agent member recognized by the OTCC, Bank of China Hong Kong provides "Swap Connect" agency central clearing services for a number of foreign investors, further broadening the risk management channels of customers.
As one of the first batch of quotation providers, CITIC Securities has reached a "Swap Connect" trading volume of more than 400 billion yuan, serving more than 10 overseas customers. Chen Zhiming, general manager of the fixed income department of CITIC Securities, told reporters that the "Swap Connect" provides foreign investors with a hedging tool to manage RMB interest rate risk and attract more foreign investors to enter the RMB interest rate swap market.
A number of relevant persons in charge of the first batch of quotations of "Swap Connect" told the Securities Times reporter that since the launch of "Swap Connect", foreign institutional investors can more conveniently and directly access one of the world's largest derivatives markets. In the past year, foreign investors have received positive feedback on Swap Connect and have been active in trading.
The optimization function of "Northbound Swap Connect" was launched
On May 13, the China Foreign Exchange Trade System announced that the "Swap Connect" business has been running smoothly since its launch. In previous communication and research with market institutions, foreign investors reported that the "Swap Connect" does not yet support IMM contracts and lacks an effective contract early exit mechanism, which restricts the enthusiasm of foreign institutions to participate to a certain extent.
With the approval of the People's Bank of China, CFETS, Shanghai Clearing House and OTCC will jointly launch the "Northbound Swap Connect" business optimization function on May 20, 2024. Specifically:
The first is to add a contract compression function for Northbound Swap Connect to reduce the number of Northbound Swap Connect contracts and the notional principal amount of Northbound Swap Connect contracts for clearing participants.
The second is to add historical value contracts and IMM contracts. Optimize the introduction of historical value contracts and add a single compression service to achieve early exit of Northbound Swap Connect contracts. Launched interest rate swap contracts with the settlement date of the International Monetary Market as the payment cycle, with a view to better meeting the trading needs of overseas asset management institutions.
Third, the transaction fee is fully reduced. In order to reduce the cost of market institutions participating in the Northbound Swap Connect, CFETS will extend the implementation period of the Northbound Swap Connect preferential scheme and continue to reduce or reduce the full handling fee of interest rate swap transactions for domestic and foreign institutions under the Northbound Swap Connect, and the fee adjustment will be notified separately.
The optimization function is expected to increase the enthusiasm of foreign investors for trading
For the new functions of the "Northbound Swap Connect", the transaction fee will continue to be reduced in full. A number of relevant persons in charge of the first batch of quotations of "Swap Connect" told the Securities Times reporter that the introduction of a series of optimization measures is conducive to foreign investors to manage cash flow more effectively, improve the efficiency of margin use in transactions, and strengthen the convenience of foreign investors to participate in the interbank interest rate swap market in the mainland.
Regarding the enhanced functions of the Northbound Swap Connect, Chen Zhiming pointed out that the historical value contract and contract compression are two supporting functions, which are designed to provide early termination of interest rate swap contracts for the participating institutions of both sides, which is expected to greatly increase the enthusiasm of overseas participants. On the one hand, IMM contracts have a fixed value date, which helps investors manage the fixed interest rate risk, better carry out various investment strategies and manage interest rate risk; On the other hand, international investors can use different interest rate swap contracts with the same IMM date to carry out macro hedging transactions between interest rates in various countries to better meet the needs of global investors.
Dai Zhiying, General Manager of the Capital Operation Center of China Merchants Bank, believes that the CFETS and Shanghai Clearing House jointly promoted the launch of the optimized function of the "Northbound Swap Connect", and innovated and created functions such as historical value contracts, IMM contracts and contract compression, which will help better meet the investment needs of foreign institutional investors and is another innovative measure in the process of continuous improvement of the interconnection mechanism.
Zhang Jinqiu, vice president and co-director of the capital market and securities services department of HSBC Bank (China) Co., Ltd., told reporters that with the launch of a series of optimization functions, it is expected that the trading enthusiasm and activity of foreign investors will be further enhanced, which will also help attract more foreign investors, especially long-term funds, to invest in China's bond market.