Experts: Swap Connect to attract more inflows

The long-awaited Swap Connect program, which is poised to attract more overseas capital inflows into the world's second-largest bond market, commenced trading on Monday.

Northbound trading of Swap Connect provides a secure channel for international investors to trade interest rate swap products on the mainland via a connection between institutions in the Hong Kong Special Administrative Region and the mainland.

The program aims to facilitate global investors' management of interest rate risks arising from their allocation to mainland bonds, the Hong Kong Monetary Authority said in a statement.

Financial institutions such as HSBC, Bank of China (Hong Kong), the Industrial and Commercial Bank of China, China CITIC Bank and Deutsche Bank executed the first batches of trade for overseas and Hong Kong institutional investors on the first trading day.

Guotai Junan International said that its subsidiary Guotai Junan Securities Hong Kong completed the first group of five swap transactions totaling 100 million yuan ($14.37 million).

At the online launch ceremony, People's Bank of China Vice-Governor Pan Gongsheng, said the rollout of the program marked an important step in China's financial opening-up and reflected the firm determination of the central government to support the long-term prosperity, stability and development of the HKSAR.

Wang Linggui, deputy director of the Hong Kong and Macao Affairs Office of the State Council, said the central government supports Hong Kong, and the mainland is continuously improving the level of financial cooperation in order to "attract more international capital to the nation, share the country's development dividends, and enhance Hong Kong's competitive advantages."

Under Swap Connect, the China Foreign Exchange Trade System and overseas electronic trading platforms recognized by the PBOC will jointly provide trading services for Hong Kong and international investors. OTC Clear, the subsidiary of Hong Kong Exchanges and Clearing, and Shanghai Clearing House will provide central clearing services for Hong Kong, international and mainland investors.

Hong Kong Chief Executive John Lee Ka-chiu said at the launch ceremony that Swap Connect will have a "synergistic effect" with Bond Connect. Initiated in 2017, Bond Connect allows global investors to trade onshore bonds in the mainland bond market through the trading and settlement platforms of Hong Kong.

"The new measures will provide international investors with richer investment and risk management tools, and strengthen Hong Kong's position as the world's largest offshore renminbi business center and international risk management center," Lee said.

Eddie Yue Wai-man, chief executive of the Hong Kong Monetary Authority, said at the launch that Swap Connect is another milestone in financial cooperation between Hong Kong and the mainland.

"It will create favorable conditions for global investors to increase their participation in the onshore bond market, and carries special significance for enhancing the recognition of and confidence in RMB (renminbi) bonds in the international market," Wai-man said. Swap Connect will also provide new opportunities for Hong Kong's financial institutions and strengthen the city's role as a global risk-management center and offshore renminbi hub, he added.

The HKMA said it will closely monitor the implementation of Swap Connect trading together with relevant Hong Kong and mainland regulators, and enhance operational arrangements in accordance with market developments and investors' needs.

HKEX Chief Executive Officer Nicolas Aguzin said that existing financial market connection programs and Swap Connect will facilitate mainland and international investors making diversified investments in different asset classes. This will also help the internationalization process of the renminbi, as the currency is used for bidding, trading and settlement, Aguzin said.

Fan Mingxi, head of China Global Markets at Switzerland-based investment bank UBS, said: "The implementation of Swap Connect will stimulate greater enthusiasm to participate in the world's second-largest bond market. The Chinese mainland's derivatives market has great potential for development."

Swap Connect's clearing link is a highly novel arrangement that has not been used between two derivatives clearinghouses before, said Terry Yang, a partner at global law firm Clifford Chance Hong Kong, adding that both parties will need to study the differences of the two distinct legal systems.