International investors will be allowed to use their holdings of Chinese domestic bonds as margin collateral for Northbound Swap Connect transactions, the People’s Bank of China announced on Tuesday (July 9).

The bonds covered are those issued by China’s Ministry of Finance and policy banks and held under the Northbound Bond Connect.

The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) welcomed the announcement, saying the move will deepen financial cooperation between Hong Kong and mainland China and further promote the internationalization of the renminbi in a steady, orderly and sound manner. 

The measure will provide Northbound Swap Connect investors with the additional choice of non-cash collateral, reducing their liquidity cost and improving capital efficiency. It will help vitalize offshore investors’ onshore bond holdings while further enhancing the attractiveness of onshore bonds, the financial authorities say. The measure will also promote synergies between Bond Connect and Swap Connect, thereby further invigorating market participation in the Connect Schemes.

Swap Connect is a new derivatives market access scheme that will allow international investors to trade and clear onshore RMB interest rate swaps without changing their existing trading and settlement practices. Bond Connect allows investors from mainland China and overseas to trade in each other’s bond market through connection between mainland and Hong Kong financial infrastructure institutions.

Following the PBoC announcement, the HKMA and SFC say they will continue to provide guidance to the financial infrastructure institutions, including the HKMA Central Moneymarkets Unit and OTC Clearing Hong Kong Limited (OTC Clear), to take forward the preparatory work, including promulgating rules for the provision of collateral by way of security interest or title transfer, and for the transfer of the relevant bonds, with a view to implementing the new measure as soon as practicable. 

The Swap Connect programme is a collaboration between China Foreign Exchange Trade System (CFETS), Shanghai Clearing House (SHCH) and Hong Kong Exchanges and Clearing (HKEX) through its clearing subsidiary OTC Clear.

Commenting on the latest PBoC move, William Shek, head of markets and securities services, Hong Kong, at HSBC, says: “We welcome this significant development for our international investors as they now have added benefits when buying onshore bonds under the Bond Connect scheme. Once this is launched, they can post these onshore bonds as eligible collateral for swaps under the Swap Connect scheme, which was previously restricted to just cash and certain offshore securities. This step further contributes to the internationalization of onshore bonds and strengthens Hong Kong’s position as the world’s leading offshore RMB centre.”