To promote the collaborative development of financial derivatives markets in both the Mainland and Hong Kong and establish a framework for high-quality financial opening-up, the People’s Bank of China (PBOC), the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) made a joint announcement on 4 July 2022 on their agreement for China Foreign Exchange Trade System (National Interbank Funding Center) (CFETS), Shanghai Clearing House (SHCH) and OTC Clearing Hong Kong Limited (OTC Clear) to collaborate in developing Swap Connect-mutual access between the Mainland and Hong Kong interest rate swap markets. The programme will begin with Northbound Trading, allowing overseas investors from Hong Kong and other countries and regions to participate in the Mainland interbank financial derivatives market through a connection between financial infrastructure institutions in the two markets. The preparatory work of Swap Connect has progressed smoothly since the joint announcement. Northbound Trading of Swap Connect will launch on 15 May 2023. To facilitate a smooth launch of Northbound Trading, we set out relevant details as below:
Trading and clearing arrangements under Northbound Trading of Swap Connect
(a) Investment products:
At the initial stage, eligible products will include interest rate swap contracts. The quotation, transaction and settlement currency will be in renminbi (RMB).
(b) Investors:
(i) In order to participate in Northbound Trading, Mainland investors (i.e. Swap Connect Dealers) shall sign an agreement with CFETS for providing price quotation and also be a Clearing Member of SHCH or a client of such a Clearing Member;
(ii) In order to participate in Northbound Trading, overseas investors shall be overseas institutional investors who meet the PBOC’s requirements and have completed filings for participating in the Mainland interbank bond market, and have been granted trading permission for Northbound Trading by CFETS. Overseas investors who intend to apply for Northbound Trading permission shall apply to OTC Clear to become its Clearing Member or a client of such a Clearing Member.
(c) Trading and clearing:
(i) Trading arrangement: CFETS and overseas electronic trading platforms recognised by the PBoC will jointly provide trading service;
(ii) Clearing arrangement: SHCH and OTC Clear will jointly provide clearing and settlement services to Mainland and overseas investors through a central counterparty link.
(d) Quota management:
(i) Trading quota: At the initial stage, the daily net notional principal amounts of the interest rate swap contracts traded by all overseas investors under Northbound Trading shall not exceed RMB20 billion. Subsequently, the quota amount may be adjusted as and when appropriate based on market conditions.
(ii) Clearing quota: SHCH and OTC Clear will establish a Swap Connect financial resources pool in respect of the risk exposure between the two clearing houses. At the initial stage, the Swap Connect financial resources pool corresponding to the risk exposure of the net positions between SHCH and OTC Clear shall not exceed RMB4 billion. Subsequently, the quota amount may be adjusted as and when appropriate based on market conditions.
The PBOC, the SFC and the HKMA have agreed on the principles and arrangements for cross-boundary regulatory cooperation relating to Swap Connect and have signed the Memorandum of Understanding on Matters relating to Bonds and Derivatives Markets in the Mainland and Hong Kong. The memorandum has enhanced the regulatory collaboration arrangements and liaison mechanisms among the Mainland and Hong Kong regulators for the bond and derivatives markets, in order to jointly maintain the normal operation of Swap Connect, financial market stability and fair and orderly trading.
CFETS, SHCH and OTC Clear shall perform their respective duties under Swap Connect in accordance with applicable laws and regulations and engage with market participants to facilitate the orderly operation of Northbound Trading businesses. Clearing Members shall comply with relevant regulatory requirements and operational rules, strengthen internal controls, prevent and manage risks, enhance investor education and services, and effectively safeguard the legitimate rights and interests of investors. Investors should familiarize themselves with the differences in laws, regulations, operational rules and practices between the Mainland and Hong Kong markets, assess and control risks, and invest rationally.
Market participants shall prepare themselves to ensure the successful launch of Northbound Trading of Swap Connect. Interested investors may contact CFETS, SHCH and OTC Clear in due course to prepare for their participation.
