Mainland China and Hong Kong will launch Swap Connect mutual access program for interbank interest rate swap markets

Hong Kong Exchanges and Clearing Limited (HKEX) has announced a collaboration with the China Foreign Exchange Trade System (CFETS) and Shanghai Clearing House (SHCH) to make a mutual access program for interbank interest rate swap (IRS) markets in Hong Kong and the Chinese mainland.

China and Hong Kong will launch “Swap Connect” following a half year, permitting mutual access to interest rate swap exchanging at first, to advance financial derivatives markets on the two sides, regulators said on Monday.

The mutual access scheme, known as Swap Connect, will offer to exchange and clearing for Hong Kong and international investors wishing to get to derivatives markets in Mainland China, and for members of the Chinese mainland that wish to get to the Hong Kong derivatives market.

The new arrangement, called “swap connect”, will permit offshore investors in Hong Kong to exchange and clear swaps through Hong Kong Exchanges and Clearing, as per a joint statement from the People’s Bank of China, the Hong Kong Monetary Authority, and the Hong Kong Securities and Futures Commission.

The release of Swap Connect will follow mutual access schemes previously established between Hong Kong and Mainland China for equities and fixed income exchanging known as Stock Connect and Bond Connect.

HKEX’s clearing subsidiary, OTC Clear, has signed a framework agreement with CFETS and SHCH to foster the infrastructure expected to help the release of Swap Connect. At first, this will empower Hong Kong and international investors to get to the interbank IRS market in Mainland China without amending their current exchanging and settlement methodology.

Under the Swap Connect program, CFETS will give exchanging services, with Hong Kong and international participants likewise ready to get to the interbank derivatives market in the mainland utilizing overseas third-party exchanging platforms supported by the People’s Bank of China, the regulatory authority for this segment on the Chinese mainland.

OTC Clear will work with SHCH to lay out the clearing link for this facility, with OTC Clear supporting clearing services for Hong Kong and international investors and SHCH giving clearing to investors in Mainland China. These will uphold the everyday margin of the executives and settlement payments between the two clearing houses and will make a central counterparty margin fund to mitigate default risk.

The regulators and infrastructure entities engaged with the improvement of Swap Connect have anticipated that the service is probably going to launch in roughly a half year.

Stock Connect was launched in November 2014 among Shanghai and Hong Kong stock trades and was stretched out to the Shenzhen trade in 2016. This empowers investors in the Chinese mainland to purchase Chinese and Hong Kong-based organizations listed in Hong Kong and gives streamlined to Hong Kong and international investors to Chinese A-shares listed on the mainland.

Bond Connect was launched in July 2017, giving northward admittance to offshore investors to the China Interbank Bond Market.

The scheme will uphold the further advancement of China’s capital markets, and give international investors an open and convenient method for dealing with their China openness, he added.

At first, northward exchanging will begin first, permitting overseas investors to take part in China’s interbank financial derivatives market, China and Hong Kong financial regulators said in a joint statement.

Southward Trading, which permits mainland investors to get to the Hong Kong financial derivatives market, will be investigated at the appropriate time.

The scheme, launched days after the 25th anniversary of the handover of Hong Kong to Chinese rule, “is another important measure of the central government to support the development of Hong Kong and enhance Mainland-Hong Kong cooperation,” according to the statement.

At first, interest rate swaps will be qualified under the scheme, with different products to be remembered for proper way relying upon market situations, the statement said, adding the official launch of Swap Connect will happen following a half year.