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Hong Kong Stock Exchange Launched “Swap Connect”

On 5 May 2023, Hong Kong Exchanges and Clearing Limited (HKEx) announced news of a mutual access programme between Hong Kong’s and Mainland China’s interbank interest rate swap markets (Swap Connect), which is due to be launched on 15 May 2023. As a first step, Swap Connect will launch the Northbound trading channel to allow Hong Kong and international investors from other countries and regions to participate in Mainland China’s interbank financial derivatives market through the links established between financial institutions in the Hong Kong and Mainland China markets.

HKEx, through its clearing subsidiary OTC Clear, signed a swap connect framework agreement with China Foreign Exchange Trade System (CFETS) and Shanghai Clearing House (SHCH) on 4 July 2022 to prepare the groundwork and develop the infrastructure needed to support the launch of Swap Connect.

Subsequently, the Public Bank of China’s (PBoC) “Interim Measures for the Administration of Mutual Access between the Mainland and Hong Kong Interest Rate Swap Markets” (PBOC’s Public Notice No. 8 [2023]) were introduced, allowing eligible offshore investors to carry out “Northbound Swap Connect” transactions through CFETS.

Offshore investors who meet the requirements of PBOC and plan to carry out “Northbound Swap Connect” transactions should first submit applications, together with supporting documents, to CFETS through the e-filing system of Bond Connect Company Limited. In the event of changes to the investor’s name, trading platform, trading execution entity, cash settlement account, clearing agency, etc., the offshore investors should submit a completed “Northbound Swap Connect Registration Update Form” and other relevant materials through the same e-filing system.

Under the Swap Connect mechanism, CFETS and overseas electronic trading platforms recognised by PBOC will provide trading services to offshore investors. The major central clearing services provider for offshore investors is OTC Clear and the major central clearing services provider for onshore investors is SHCH. OTC Clear and SHCH will establish a central counterparty clearing institution to jointly provide clearing and settlement services to both onshore and offshore investors.

Conclusion

Following on from Stock Connect and Bond Connect, Swap Connect is another innovation of Hong Kong and Mainland China mutual access programme and is the world’s first derivatives mutual market access programme. The launch of Swap Connect will help forge stronger ties between Hong Kong’s and Mainland China’s capital markets, encourage the sustainable development of common financial markets and enhance Hong Kong’s role as an international financial centre. Swap Connect will also assist offshore investors and onshore business partners, as well as regional and international market participants, in working with each other. It will act as a bridge between China and the rest of the world.

Client Alert 2023-108

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