Hong Kong Exchanges and Clearing Limited (HKEX) has announced a collaboration with the China Foreign Exchange Trade System (CFETS) and Shanghai Clearing House (SHCH) to create a mutual access programme for interbank interest rate swap (IRS) markets in Hong Kong and the Chinese mainland.
The mutual access scheme, known as Swap Connect, will offer trading and clearing for Hong Kong and international investors wishing to access derivatives markets in Mainland China, and for participants on the Chinese mainland that wish to access the Hong Kong derivatives market.
The release of Swap Connect will follow mutual access schemes already established between Hong Kong and Mainland China for equities and fixed income trading known as Stock Connect and Bond Connect.
HKEX’s clearing subsidiary, OTC Clear, has signed a framework agreement with CFETS and SHCH to develop the infrastructure required to support the release of Swap Connect. Initially, this will enable Hong Kong and international investors to access the interbank IRS market on Mainland China without amending their existing trading and settlement procedures.
Under the Swap Connect programme, CFETS will provide trading services, with Hong Kong and international participants also able to access the interbank derivatives market on the mainland using overseas third-party trading platforms approved by the People’s Bank of China, the regulatory authority for this segment on the Chinese mainland.
OTC Clear will work with SHCH to establish the clearing link for this facility, with OTC Clear supporting clearing services for Hong Kong and international investors and SHCH providing clearing for investors in Mainland China. These will support daily margin management and settlement payments between the two clearing houses and will create a central counterparty margin fund to mitigate default risk.
The regulators and infrastructure entities involved in the development of Swap Connect have predicted that the service is likely to launch in approximately six months.
Stock Connect was launched in November 2014 between Shanghai and Hong Kong stock exchanges and was extended to the Shenzhen exchange in 2016. This enables investors on the Chinese mainland to buy Chinese and Hong Kong-based companies listed in Hong Kong and provides streamlined access for Hong Kong and international investors to Chinese A-shares listed on the mainland.
Bond Connect was launched in July 2017, providing northbound access to offshore investors to the China Interbank Bond Market.
