Swap Connect announces first anniversary developments

In a bid to extend the opening up of financial markets, China has announced it will launch a key standardized interest rate swap contract under the Swap Connect, and continue to waive clearing fees, as the program approaches its one-year anniversary.

The Swap Connect, which commenced on May 15th 2023, is a connection mechanism between the Chinese mainland and Hong Kong that facilitates offshore investors executing interest rate derivatives transactions with investors in the mainland.

The country's central bank, the People's Bank of China, or PBC, said on Monday that the Swap Connect will incorporate interest rate swap contracts with payment cycles based on the International Monetary Market, or IMM dates, which are highly standardized and aligned with the mainstream trading contracts in global markets.

This move will facilitate investors' global risk management and respond to investors' demand for more standardized products under the Swap Connect.

The connection program will also launch contract compression services, the PBC said, which allow investors to compress eligible interest rate swap contracts with opposite buy and sell directions, thus helping to reduce the capital requirements for trading via the program.

Also, the fee discount policy for the Swap Connect will be extended for another year, with the transaction and clearing fees conducted via the Swap Connect fully waived.

The package of measures would further meet investors' diversified risk management needs and effectively reduce the cost of taking part in the Swap Connect, the PBC said, thus helping attract more foreign institutional investors to invest in the Chinese bond market and advance the internationalization of the renminbi.

Official data showed that, as of the end of April, 58 foreign institutional investors from more than 10 countries and regions have entered the Chinese derivatives market via the Swap Connect, including commercial banks, securities firms and asset management firms.

They have conducted more than 3,600 transactions of renminbi-denominated interest rate swaps, with a total nominal principal amount of nearly 1.77 trillion yuan ($244.64 billion).

Xu Zhaoting, head of Investment Bank China, Deutsche Bank, which is a dealer of the Swap Connect, said that international investors are positive about the launch of interest rate swap contracts that have payment cycles based on IMM dates, and look forward to the contract compression services, which will help them to reduce costs efficiently.