China Enhances Swap Connect Scheme to Boost Financial Market Access

China and Hong Kong regulators introduced three key enhancements to the Swap Connect scheme, aiming to increase China's financial market accessibility. The enhancements include accepting interest rate swap contracts with IMM dates and introducing compression and clearing of backdated swap contracts.

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China Enhances Swap Connect Scheme to Boost Financial Market Access

China Enhances Swap Connect Scheme to Boost Financial Market Access

On Monday, financial regulators in mainland China and Hong Kong introduced three key enhancements to the Swap Connect scheme, aiming to further open up China's financial markets and strengthen Hong Kong's status as an international financial center. The enhancements include accepting interest rate swap contracts with payment cycles based on International Monetary Market (IMM) dates, introducing compression and clearing of backdated swap contracts as ancillary services, and launching system enhancements and incentive programs by clearing houses in China and Hong Kong to reduce investors' participation costs.

Why this matters: The enhancements to the Swap Connect scheme demonstrate China's commitment to increasing its financial market accessibility, which can have significant implications for global economic integration and cooperation. As China continues to open up its markets, it may attract more foreign investment and talent, potentially reshaping the globalfinancial landscape.

Swap Connect, launched on May 15, 2023, is the world's first derivatives mutual market access program, providing Hong Kong and international investors access to mainland China's interbank swaps market. As of last month, 20 mainland dealers and 58 overseas investors had conducted over 3,600 interest-rate swap transactions under Swap Connect, with an aggregate notional amount of around 1.77 trillion yuan (US$245 billion) and an average daily turnover of 7.6 billion yuan. The average daily turnover calculated on a monthly basis increased to 12 billion yuan last month compared with 3 billion the month after the mechanism launched.

Bonnie Chan Yiting, CEO of HKEX, said, "As the world's first derivatives mutual market access program, Swap Connect has proved very popular with Hong Kong and international investors, providing them access to mainland China's interbank swaps market." She added, "We look forward to further enhancing and expanding our broader connect programs with our mainland partners, supporting the long-term sustainable development of markets in both Hong Kong and mainland China."

Zhaoting Xu, Head of China Investment Banking at Deutsche Bank, noted that the launch of interest rate swap contracts with payment cycles based on IMM dates will help investors avoid the risk of fluctuation in fixed interest rates. He also highlighted that international investors welcome the launch of the compression service and clearing of backdated swap contracts as supporting arrangements, which will help them reduce curve risks and costs efficiently.

The enhancements to the Swap Connect scheme demonstrate China's ongoing efforts to open up its financial markets and strengthen Hong Kong's role as a global financial hub. With the introduction of more tradeable products, ancillary services, and reduced participation costs, Swap Connect is poised to attract greater interest from international investors and further facilitate cross-border financial transactions between mainland China and Hong Kong.

Key Takeaways

  • China and Hong Kong enhance Swap Connect scheme to open up financial markets.
  • New features include IMM date-based interest rate swaps and compression services.
  • Changes aim to reduce participation costs and attract more foreign investment.
  • Swap Connect has seen 3,600 interest-rate swap transactions since its launch.
  • Enhancements to strengthen Hong Kong's role as a global financial hub.