Swap Connect -Opening new doors, connecting you to new opportunities
Swap Connect marks the opening up of China’s derivatives market to the world, following in the footsteps of the hugely successful Bond Connect scheme, which provides foreign investors access to China’s onshore bond market, the world’s second-largest.
Run in partnership by China Foreign Exchange Trade System (CFETS), Shanghai Clearing House (SHCH) and Hong Kong Exchanges and Clearing Limited (HKEX) through its clearing subsidiary OTC Clearing Hong Kong Limited (OTC Clear), Swap Connect is the world's first mutual market access programme for derivatives.1
The launch of Swap Connect is another milestone for China’s Connect programme and we have seen strong demand from our clients. Before Swap Connect, CNY non-deliverable interest rate swaps (NDIRS) were being traded like other Asian emerging market currencies.
It allows a wider group of foreign investors to actively participate in the onshore CNY interest rate swaps (IRS) market, with a trading and clearing process better aligned to international practices.
How Swap Connect works
The Swap Connect advantage
Swap Connect fulfils the growing demand for better risk management tools from international investors active in the Chinese onshore bond market. The scheme’s ability to provide offshore investors with greater certainty due to its near-instant clearing mechanism is a marked difference from the onshore model where investors must wait at least half a day before they are notified of their trade result. Furthermore, as the IRS market moves faster in response to market-driving news compared with the onshore cash bond market, the speedy clearing offered by Swap Connect better equips investors to trade on China's rates market.
Bilateral risk is minimised as foreign investors settle all post-trade events with HKEX OTC Clear (QCCP) based on HKEX clearing rules under Hong Kong law and the International Swaps and Derivatives Association (ISDA).
Additionally, investors enjoy a simplified onboarding process as bilateral documentation is not mandatory under People’s Bank of China rules, which means foreign investors are not required to sign an ISDA or National Association of Financial Market Institutional Investors (NAFMII) agreement with an onshore market maker before they can start to trade.
Swap Connect is also a better option compared to existing investment channels in terms of accessibility. For instance, while foreign investors can access onshore CNY IRS through the China Interbank Bond Market, the complex process can be a deterrent. Meanwhile, without the option to trade cross-border CNY IRS, Bond Connect investors are limited to 7-day repo trading in USD-settled NDIRS, increasing their FX risk. Swap Connect seeks to mitigate these challenges by providing investors with an alternative channel to the CNY IRS market, thereby driving better pricing and as a superior hedging tool against their bond and USD exposures.
Facilitating client access
Global investors familiar with Bloomberg bond or IRS trading screens and workflows can continue to enjoy a similar user experience and FIX connection that facilitates straight-through processing and connectivity into their in-house interface while using Swap Connect.
Standard Chartered, which has been supporting efforts aimed at the internationalisation of the RMB, facilitates greater access to mainland capital markets through our participation in the various Connect Schemes, including Swap Connect. Indeed, we were among the first clearing brokers to offer clients access to Swap Connect on its launch date.
Standard Chartered’s client onboarding process
Source: Standard Chartered Prime Services
In addition to offering client clearing on OTCC for Swap Connect, Standard Chartered Prime Services also offers a Single Currency Margining service, where clients can choose either CNH, USD or HKD denominations to pay for all three types of margins. Without the need to maintain three different cash accounts, investors can expect more streamlined operational workflows.
More enhancement on the way
As demand for Swap Connect picks up, more work is underway to enhance its features and provide traders and investors with a better user experience.
Bloomberg is working on improving trading access on Swap Connect by assessing the rollout of using its BOLT service for trade unwinding – an important feature for offshore investors - as well as including the IMM swap, another in-demand feature, on its platform.
HKEX is looking to allow investors to trade on weekends and Chinese market holidays in the near future and in enabling Swap Connect to start accepting China Government Bonds (CGB) as collateral.
Most Swap Connect investors are Bond Connect investors who are holding the bonds and use Swap Connect to manage their risk. Therefore it is quite natural for them to post CGB to CCP to fulfil margin requirements. More investors are expected to be interested in Swap Connect after CGB is accepted as collateral as that would lower their funding cost.
The way forward
Building on our close working relationships with the mainland Chinese and Hong Kong governments, and other partners such as HKEX and Bloomberg, Standard Chartered continues to work with them on these ongoing market developments. We are strategically positioned to offer clients our full suite of services that helps them diversify their portfolios and gain access to a dynamic and fast-growing universe of opportunities.
