Mainland, Hong Kong Swap Connect Adds New Features to Attract Investors

Financial regulators from both the Chinese mainland and Hong Kong are set to enhance the Swap Connect program, which was initiated a year ago to open China’s substantial swap market to international investors [para. 1]. The People’s Bank of China, along with Hong Kong’s Securities and Futures Commission and the Hong Kong Monetary Authority, announced on Monday that they will implement three major improvements to the Northbound Trading of Swap Connect starting May 20. These enhancements aim to simplify transactions and reduce costs for investors [para. 2].

The Swap Connect program, launched in May 2023, facilitates overseas funds' access to derivatives necessary for hedging against risks in the world's second-largest bond market. It establishes a link between financial infrastructures in Hong Kong and mainland China, allowing investments based on fluctuations in money-market rates crucial to China’s monetary policy [para. 3][para. 4].

Originally, the program only permitted northbound trading, meaning it allowed Hong Kong and global investors to engage with the mainland’s interbank financial derivatives market. This setup helps manage risks associated with yuan-denominated assets [para. 5]. The newly announced features include introducing interest rate swap contracts that adhere to International Monetary Market (IMM) dates. This alignment with globally traded products is expected to streamline processes further [para. 6].

Additional services will be introduced for compressing and clearing outdated swap contracts. These services are designed to help institutions manage outstanding notional amounts more effectively, thereby reducing capital costs and encouraging active trading [para. 7]. Moreover, clearing houses involved in Swap Connect across both mainland China and Hong Kong—namely the China Foreign Exchange Trade System, Shanghai Clearing House, and OTC Clearing Hong Kong—are set to roll out system improvements and incentive programs aimed at lowering participation costs for investors [para. 8].

These initiatives are part of a broader strategy aimed at fostering coordinated development between the financial derivatives markets of mainland China and Hong Kong. They also seek to establish a robust framework that supports further opening up of financial markets. Regulators have indicated plans to guide infrastructure institutions in enhancing business collaboration under Swap Connect [para. 9].

Swap Connect follows other collaborative financial access programs like Stock Connect (2014) and Bond Connect (2017), reflecting Beijing's ongoing efforts to attract foreign investment into its domestic markets while bolstering Hong Kong's role as an international financial hub [para. 10]. Since its inception until April's end, Swap Connect has seen significant activity: 20 mainland dealers and 58 overseas investors executed over 3,600 interest rate swap transactions through the platform. These transactions amounted nearly 1.77 trillion yuan ($245 billion), with an average daily turnover reaching about 7.6 billion yuan by April—an increase from approximately 3 billion yuan during its first month [para. 11][para. 12].