As an important milestone in the opening up of the mainland's financial market, on 15 May, the Mainland-Hong Kong interest rate swap market interconnection and cooperation ("Swap Connect") celebrated its first anniversary.
Over the past year, the smooth operation of trading and clearing arrangements and the continuous increase in business volume have not only provided convenient and efficient risk management tools for domestic and foreign investors to carry out RMB asset allocation, but also promoted the steady development of the mainland bond and financial derivatives markets.
From "0" to "1" is just the beginning, and the pace of endeavor will never stop. In order to further meet the needs of the market, the regulators of the Mainland and Hong Kong have recently launched a series of new enhancement measures. In the view of industry insiders, this will promote the integration of the RMB interest rate swap market with the international market to a greater extent, meet the diversified needs of foreign investors, and promote the improvement of the professional capabilities of domestic investors, thereby further promoting the high-quality development and high-level opening up of the mainland financial market.
The average daily transaction volume increased by nearly 3 times
On 15 May 2023, with the simultaneous sounding of the gong in Beijing and Hong Kong, the much-anticipated Swap Connect was officially launched, which is also the first time that the Mainland and Hong Kong have introduced mutual access arrangements in the field of financial derivatives.
Domestic and foreign investors can conveniently complete RMB interest rate swap transactions and centralized clearing through the mechanism of mutual access between the Mainland and Hong Kong financial market infrastructure institutions in terms of trading, clearing and settlement, without changing trading habits and effectively complying with the laws and regulations of the two markets.
According to the latest data from the People's Bank of China, 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 RMB 1.77 trillion and an average daily transaction of about RMB 7.6 billion, with a monthly average of nearly three times the average daily transaction of notional principal, from an average of about RMB 3 billion in the first month of launch to an average of more than RMB 12 billion per day in April 2024.
At the same time, the mainland is already the world's second largest bond market, and the launch of Swap Connect complements Bond Connect, which facilitates international investors to hedge interest rate risks when investing in the mainland bond market, and is conducive to attracting more long-term overseas institutional investors to hold mainland bonds.
The reporter learned that since the launch of the "Swap Connect", the balance of bonds held by foreign institutions in China's bond market has increased by nearly 800 billion yuan. As of the end of March 2024, foreign institutions have been net buyers of Chinese bonds for 14 consecutive months.
According to Zhu Jing, General Manager of Global Markets Department of Bank of China (Hong Kong), the main reason why "Swap Connect" has received widespread popularity and attention is that it can greatly 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.
Li Bing, President of Bloomberg Asia Pacific, also pointed out that the "Swap Connect" provides an effective way for foreign investors to participate in China's domestic interest rate swap market, which is conducive to achieving more diversified investment and risk management strategies.
He observed that in the year since the launch of Swap Connect, as China's bond market has picked up and international investors have become more involved, there has been an increasing demand for the use of derivatives to manage interest rate risk. As a result, Swap Connect trading is becoming more and more active, showing a positive trend of continuous monthly growth.
Zhang Jinqiu, vice president and co-director of the capital market and securities services department of HSBC Bank (China) Co., Ltd., also told reporters that in the past year, various foreign investors have actively participated in the domestic RMB interest rate swap market with better liquidity and richer trading varieties through "Swap Connect", and used derivatives tools to better manage interest rate risks. "Swap Connect has added new vitality to the development of China's bond market, the activity of the onshore RMB interest rate swap market has been increasing, and the linkage between domestic and foreign financial markets has also been increasing."
Welcome a number of new enhancements
On the occasion of the first anniversary of the launch of the "Swap Connect", the People's Bank of China (PBoC) once again released favorable policies and optimized the mechanism arrangements for the "Swap Connect". Specifically, the optimization measures mainly include the following three aspects:
The first is to enrich product types and launch interest rate swap contracts (IMM contracts) with the settlement date of the international money market as the payment cycle. In the offshore interest rate swap market, IMM contracts are the mainstream trading products. On the one hand, the fixed value date of IMM contracts 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.
The second is to improve the supporting functions, and launch contract compression services and supporting historical value contracts. Contract compression is a centralized clearing value-added service widely provided by international clearing institutions for investors, which allows domestic and foreign investors to compress interest rate swap contracts that have been included in centralized clearing in opposite directions, contract elements in line with matching rules, and have been included in centralized clearing, so as to reduce the number of duration contracts and notional principal, so as to facilitate investors to better manage the business scale of duration contracts and reduce capital occupation. Historical value contracts are mainly used in conjunction with contract compression.
The third is to introduce other facilitation measures, such as extending the preferential fees of "Swap Connect" for another year, and implementing 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.
Crédit Agricole CIB's Global Financial Markets Department, Head of Macro Products and Co-Head of Trading, Asia Pacific and the Middle East, believes that the continuous optimization of the "Swap Connect" mechanism is enabling offshore banks and other financial institutions to continue to improve their market-making capabilities in RMB interest rate swap transactions. "When offshore market makers hedge their risks with onshore interest rate derivatives through Swap Connect, they can offer more competitive quotes to their clients, which will undoubtedly significantly reduce the operational costs of foreign investors in hedging interest rate risks and achieve more accurate maturity management of bond holdings."
He believes that with the launch of new features such as IMM contracts, contract compression services and historical value contracts under Swap Connect, overseas participants will not only be able to obtain forward interest rate derivatives quotations, but also increase the operational convenience of early delivery and settlement of existing transactions, thereby better assisting foreign participants in managing interest rate risk.
"A series of enhancements will further integrate the trading varieties and trading habits of the domestic market with those of the overseas market, which 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 in the mainland." Zhang Jinqiu said that with the launch of these 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.
Looking ahead, Zhang Jinqiu believes that the continuous recovery of China's economy provides a stable macro environment for foreign investors. At the same time, the regulators continue to promote the implementation of various business opening-up and optimization measures, which also creates a good investment environment for investors. As a result, the investment value of RMB assets continues to increase, and will continue to encourage more foreign institutions to use RMB assets as an important part of their global asset allocation.