Participants attend a ceremony held by Hong Kong Exchanges and Clearing Limited to launch the "northbound" mainland-Hong Kong bond connect in Hong Kong, south China, July 3, 2017.
BEIJING, May 11 (Xinhua) -- Many financial institutions are actively preparing for the May 15-launch of the northbound trading under Swap Connect, which, as experts say, will help overseas bond investors better manage related interest rate risks, reported Xinhua-run China Securities Journal on Wednesday.
Previously in early May, Bond Connect Co., Ltd. released on its website the first batch of 20 dealers for the northbound trading of Swap Connect, including HSBC Bank (China) Co., Ltd., Deutsche Bank (China) Co., Ltd. and other foreign financial institutions.
Swap Connect is a mutual market access scheme between the Chinese mainland and China's Hong Kong Special Administrative Region (HKSAR) interest rate swap markets. At the initial stage, northbound trading will enable overseas investors to participate in the interbank financial derivatives market in the Chinese mainland.
As another milestone event for China's financial market opening up, Swap Connect is expected to unlock potential of overseas investors in taking part in China's financial derivatives market and further improve their participation in the Chinese market, said Li Bing, head of Asia Pacific at Bloomberg.
In the future, Bloomberg and China Foreign Exchange Trade System (CFETS) will cooperate and roll out Swap Connect trading solutions to facilitate participation of overseas investors in the program, according to the newspaper.
Currently, many global investors are willing to participate at the first time in the trading of Swap Connect, hinting the convenience of the financial markets infrastructure inter-connectivity, and they also expect further opening of products such as bond repurchase, futures, and options.
Products tradable under the northbound trading of Swap Connect will include interest rate swap contracts and the currency for related quotation, trading and settlement will be Renminbi, reported the newspaper citing the People's Bank of China (PBOC), the Chinese central bank.
Daily quotas for northbound trading at the initial phase will be capped at no more than 20 billion yuan, referring to the upper limit of aggregate net nominal principal after netting for all related interest rate swap transactions by overseas investors per day and the quota ceiling is up to adjustment in accordance to market conditions.
The report quoting an official with PBOC said that the Chinese central bank will add tradable products under Swap Connect at an appropriate time, adjust trading and clearing quotas, and optimize clearing arrangements to provide overseas investors with more efficient risk management vehicles.
At present, interest rate swap, as the first product tradable in northbound trading of Swap Connect, boasts one of the largest transaction volumes among all the financial derivatives at home and plays a fine role for investors to manage related risks, said an expert.
Recent years, alongside the bond holdings increase of overseas investors and their trading activity improvement, demand for financial derivatives as tools for them to hedge interest rate risks has been growing.
Against such backdrop came the launch of Swap Connect. The above-mentioned expert added that a sufficiently diversified risk hedging vehicles kit will further encourage overseas investment in China's bond market as most of their bond holdings in China are products sensitive to interest rate and exchange rate changes. (Edited by Duan Jing with Xinhua Silk Road, duanjing@xinhua.org)
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