China's Swap Connect further enhanced to promote financial opening up

BEIJING - Swap Connect, which is about to celebrate its first anniversary, is ready to further promote the opening up of China's financial market as regulators made new arrangements under the scheme.

Launched on May 15, 2023, Swap Connect is an interest rate swap market access scheme under which domestic and overseas investors are allowed to conduct RMB interest rate swap trading and clearing via infrastructure institutions in the Chinese mainland and the Hong Kong Special Administrative Region (HKSAR).

In a bid to further promote the coordinated development of financial derivative markets in both the Chinese mainland the HKSAR, the People's Bank of China (PBOC), the Securities and Futures Commission of Hong Kong and the Hong Kong Monetary Authority (HKMA), jointly rolled out several enhancement measures concerning the scheme on Monday.

These measures will expand the range of products falling under Swap Connect, improve the efficiency of the program and lower participation costs, so that the needs of investors from both home and abroad will be better addressed and trading bolstered, a spokesperson for the HKSAR government said.

These measures are the second batch of enhancements unveiled within a month following the China Securities Regulatory Commission's announcement last month of five measures to support the expansion of mutual access for the capital markets of the Chinese mainland and Hong Kong as well as the listing of leading mainland enterprises in Hong Kong, the spokesperson said.

"Since the commencement of Swap Connect, we have reached interest rate swap deals with a number of overseas central banks, commercial banks and asset management institutions, involving a variety of floating benchmark interest rates and terms, thereby helping foreign investors effectively hedge against interest rate risks," said Zhang Jinqiu, vice-president of HSBC Bank (China).

As of the end of April 2024, a total of 20 mainland dealers and 58 overseas investors had conducted more than 3,600 interest rate swap transactions with an aggregate notional amount of approximately 1.77 trillion yuan ($249.1 billion), with the average daily turnover rising from 3 billion yuan in the first month after launch to 12 billion yuan in April this year, data from the PBOC showed.

However, some domestic foreign investors previously reported that a duration management function was lacking under the scheme and recommended the adding of standardized contracts to facilitate cash flow management for financial institutions. In this regard, the enhancement measures allow for more enrichment of product types and optimization of supporting functions.

To enrich product types, the scheme will accept interest rate swap contracts with payment cycles based on international monetary market dates for clearing, to align with mainstream products traded globally and meet diverse risk management needs.

Compression services and clearing of backdated swap contracts as supporting measures will be offered to help participating institutions manage the notional amount outstanding, lower capital costs, and bolster active trading.

In addition, the fee discount of the scheme will be extended for another year, along with other incentives to be rolled out by the financial market infrastructures of both the Chinese mainland and the HKSAR, to reduce participation costs for investors.

These measures will further optimize the product functions of Swap Connect and improve the convenience of transactions as well as risk management, thus allowing more foreign investors to enter the market, expanding transaction scales and improving market liquidity, said Huang Yi, general manager of the financial market department of the Bank of Communications.

It is expected that the trading enthusiasm of foreign investors will be further boosted, which will help attract more foreign investors, especially long-term funds, to invest in China's bond market, Zhang added.

Over the years, China has steadily promoted the high-level opening up of the financial market, actively catered to the needs of international investors, and facilitated investment in China's financial market. Swap Connect, along with other moves aimed at promoting financial opening up, has continuously injected vitality into the development of the HKSAR financial market.

Also notable is the Bond Connect program, launched in July 2017, which is a mutual market-access scheme that allows overseas investors to invest in the Chinese mainland's interbank bond market.

Looking ahead, regulators from the mainland and the HKSAR will guide financial infrastructure institutions in both markets to extend business collaboration under Swap Connect in a steady and orderly manner and further enhance the operational arrangements of the scheme, according to the HKMA.