Xinhua Finance and Economics, Beijing, May 14 (Reporter Zhai Zhuo) On May 15, 2023, the Mainland-Hong Kong Interest Rate Swap Market Connectivity Cooperation (hereinafter referred to as "Swap Connect") was officially launched, which has played an important role in improving the risk hedging efficiency of foreign investors, optimizing the cross-border investment environment, and promoting the internationalization of the RMB.
On the occasion of the first anniversary of the launch of the "Swap Connect", in order to further meet the needs of the market, the three optimization measures were launched at the same time, which aroused enthusiastic responses from domestic and foreign financial institutions. The industry expects that the introduction of the new function will greatly promote the integration of the RMB interest rate swap market with the international market, meet the diversified needs of foreign investors, and promote the professional ability of domestic investors, which is conducive to further promoting the opening up of the financial market and the construction of a financial power.
The cumulative turnover on the first anniversary of its launch was nearly 1.8 trillion yuan
As an important milestone in the process of opening up China's bond market, the launch of "Swap Connect" marks the official entry of RMB interest rate swaps into the international financial market, and is another major measure of the opening up of the mainland financial market.
Chen Zhiming, general manager of the fixed income department of CITIC Securities, said that on the one hand, the "Swap Connect" provides foreign investors with a hedging tool to manage RMB interest rate risk, which will help attract more foreign funds to participate in the RMB bond market. On the other hand, it can also attract more foreign investors to enter the RMB interest rate swap market, bringing more diversified trading needs and strategic concepts of mature financial markets to the market, thereby improving the professionalism and competitiveness of financial institutions.
It is understood that in the past year since its launch, the "Swap Connect" transaction clearing and other mechanisms have been running smoothly, with the active participation of domestic and foreign investors, and the steady growth of trading volume.
As of the end of April 2024, 58 foreign institutional investors have entered the market under the "Swap Connect" channel, covering more than 10 countries and regions, and have reached more than 3,600 RMB interest rate swap transactions, with a total notional principal amount of nearly RMB1.77 trillion (the same below), and the average daily trading volume has increased from less than RMB3 billion in the first month of launch to more than RMB12 billion in April this year.
According to Zhu Jing, General Manager of Global Markets Department of Bank of China Hong Kong, the reason why Swap Connect has been widely welcomed and concerned is mainly due to the fact that it can greatly improve trading 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.
For example, in terms of liquidity, compared with offshore, the onshore RMB interest rate derivatives market has more participants and is more active in trading, resulting in better market depth and narrower spreads. Taking the 5-year interest rate swap as an example, it is understood that the spread in the offshore market may be more than 4-5 times that of the domestic market at the same amount.
"When offshore market makers can hedge their risks with onshore interest rate derivatives through Swap Connect, they essentially have the ability to provide more competitive quotes to customers, thereby reducing the cost of hedging interest rate risks for foreign investors." Crédit Agricole CIB's Head of Macro Products for Asia Pacific and the Middle East said.
In addition, in terms of term management, compared with the offshore market, the onshore RMB interest rate derivatives market is more transparent in terms of term prices within one year, so that participants can manage interest rate risk more accurately through onshore interest rate derivatives through Swap Connect.
"In the fourth quarter of last year, for example, the 1-year interest rate swap fluctuated within 30 basis points, while the 3-month swap fluctuated by as much as 50 basis points. In the past, some offshore market participants were often vulnerable to losses due to their inability to hedge interest rate risk with a maturity of one year, but this problem has been solved with the launch of Swap Connect. Hu Wentao said.
At present, Swap Connect has become one of the main channels for foreign institutional investors to manage interest rate risk in the RMB fixed income market. Since its launch, the balance of bonds held by foreign institutions in China's bond market has increased by nearly 800 billion yuan.
A package of optimization measures focuses on "new"
On the occasion of the first anniversary of its opening, in order to further meet the needs of the market, infrastructure institutions such as Shanghai Clearing House and Foreign Exchange Trading System have further optimized the business functions of "Swap Connect", mainly including the following aspects:
The first is to enrich product types. The launch of interest rate swap contracts (IMM contracts) with the settlement date of the international money market as the payment cycle not only improves the degree of standardization, but also better integrates with international mainstream trading varieties, and can also alleviate the operational burden of domestic and foreign investors.
The second is to improve the supporting functions. Launched contract compression services and supporting historical value contracts to facilitate investors to better manage the scale of duration contract business and reduce capital occupation by reducing the number of duration contracts and notional principal.
The third is to launch other facilitation measures. The financial market infrastructures of the two places will simultaneously extend the preferential fee of Swap Connect for another year, and implement a full fee reduction for domestic and foreign investors to carry out transactions and clearing through Swap Connect, so as to promote the reduction of business participation costs.
A source close to the regulator told reporters that the introduction of a series of optimization measures will further meet the diversified risk management needs of domestic and foreign investors, help attract more foreign institutional investors to participate in China's bond market and hold RMB assets, and will also further promote the coordinated development of the financial markets of the mainland and Hong Kong.
For the optimization of the new functions, market institutions also responded enthusiastically. For example, in Zhu Jing's view, the new mechanisms such as IMM and contract compression launched this time can facilitate customers to carry out new transactions more flexibly, optimize risk management, and manage existing transactions more efficiently.
Zhang Jinqiu, Vice President and Co-Head of Capital Markets and Securities Services, HSBC Bank (China) Limited, also mentioned that the introduction of a series of enhancement measures will help foreign investors manage cash flow more effectively, improve the efficiency of margin use in transactions, and enhance the convenience for foreign investors to participate in the interbank interest rate swap market on the mainland.
With the launch of the series of enhancements, Zhang Jinqiu expects 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.
As one of the first batch of domestic offerers, Dai Zhiying, General Manager of the Capital Operation Center of China Merchants Bank, also said that the launch of the optimization function is another innovative measure in the process of continuous improvement of the interconnection mechanism, and China Merchants Bank has actively cooperated with the preparatory work, and will continue to play the role of a bridge connecting Chinese mainland and overseas institutional investors in the future, helping the high-quality development and high-level opening up of China's financial market.
Looking ahead, the People's Bank of China said that in the next step, the regulators of the mainland and Hong Kong will guide the financial market infrastructure institutions of the two places, promote the "Swap Connect" business cooperation in a steady and orderly manner, continue to improve various mechanisms and arrangements, help steadily expand the opening up of China's financial market, and consolidate and enhance Hong Kong's status as an international financial center.
Editor: Wang Zhe
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