New rate swap contract in the offing

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

Experts said the new measures will be in line with global market practices and further attract overseas investor participation in China's bond and derivatives markets.

The Swap Connect, which commenced exactly a year back, 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, 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.

The move, experts said, responds to investor demand for more standardized products under the Swap Connect to optimize their global risk management.

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

Also, the fee discount policy for the Swap Connect will be extended for another year, with the transaction and clearing fees 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, thus helping attract more foreign institutional investors to the Chinese bond market and advance the internationalization of the renminbi, the PBOC said.

Tan Yueheng, chairman and executive director of investment bank BOCOM International Holdings Co Ltd, said the enhancement measures are in line with international investors' trading practices, indicating that the renminbi interest rate swap market will further integrate with the global markets.

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, which will further assist with their risk management, while the contract compression services will help them reduce costs.

Li Bing, head of Asia-Pacific at Bloomberg, which provides trading services for the connection program, said the Swap Connect has increasingly emerged as a popular channel for foreign institutional investors to hedge the interest rate risks associated with their rising investments in the onshore bond market.

Official data showed that, as of the end of April, 58 overseas institutional investors from more than 10 countries and regions have conducted more than 3,600 interest rate swap transactions via the Swap Connect, with a total principal amount of nearly 1.77 trillion yuan ($244.64 billion).

"With the enhancement of Swap Connect, trading activity is expected to further increase," Li said.

The optimization of the Swap Connect came after the China Securities Regulatory Commission released a series of measures to expand the mutual access between the capital markets of the Chinese mainland and Hong Kong, demonstrating the country's continuous efforts in financial opening-up.

Oswald Chan in Hong Kong contributed to this story.