The People’s Bank of China has issued interim measures to standardise the interest rate swap market between the mainland and Hong Kong, protecting investor rights, and to maintain an orderly market. The measures are formulated in accordance with the People’s Bank of China Law of the People’s Republic of China, the Futures and Derivatives Law of the People’s Republic of China and other relevant laws and administrative regulations.
Trading is conducted via Swap Connect, the institutional arrangements whereby domestic and foreign investors participate in the Hong Kong financial derivatives market and the mainland’s inter-bank financial derivatives market through the connection between Hong Kong and the Mainland’s infrastructure institutions.
The measures apply to the Northbound Swap Connect, which means that foreign investors from Hong Kong and other countries and regions participate in the mainland’s inter-bank financial derivatives market through mutual access between Hong Kong and Mainland infrastructure institutions in terms of trading, clearing and settlement.
Provisions for the Southbound Swap Connect going from the mainland to Hong Kong are reported to be formulated separately.
According to the articles, foreign institutional investors who meet the People’s Bank of China requirements and have completed the filing of market access for inter-bank bonds may participate in the mainland’s inter-bank financial derivatives market through the Northbound Swap Connect and carry out derivatives transactions for risk management purposes.
Domestic investors participating in the Northbound Swap Connect must be legal persons of domestic financial institutions with “strong pricing, quotation and risk management capabilities, a good international reputation, a business system and a professional talent team to support the quotation trading of the Northbound Swap.”
Domestic investors have to sign a quotation agreement with a domestic electronic trading platform recognised by People’s Bank of China before launching the Northbound Swap Connect business.
Domestic and foreign investors carrying out Northbound Swap Connect transactions need to sign a master agreement or other agreement approved by the People’s Bank of China with the counterparty, with domestic investors recording the signing of the agreement.
The initial tradable instruments of the Northbound Swap Connect are interest rate swap products. The quote, transaction and settlement currency of Northbound Swap interest rate swaps is RMB.
Foreign investors may send transaction instructions to the domestic electronic trading platform through the connection between the People’s Bank of China approved overseas electronic trading platform and the domestic electronic trading platform.
The Northbound Swap Connect transaction is concluded on the domestic electronic trading platform, and once the transaction is concluded, it is deemed that the transaction has been completed. The transfer of existing contracts shall be carried out through domestic electronic trading platforms, unless otherwise provided People’s Bank of China.
A central counterparty clearing institution recognised by People’s Bank of China and a clearing house recognised by the Securities and Futures Commission of Hong Kong jointly provide clearing and settlement services to domestic and foreign investors through the interconnection of clearing institutions.
Domestic electronic trading platforms should promptly send the results of transactions applicable to centralised clearing to domestic and foreign clearing institutions for clearing and settlement. With domestic clearing institutions promptly providing feedback to domestic and foreign investors through the domestic electronic trading platform as to whether transactions have entered centralised liquidation. Transactions that are refused entry into centralised clearing by domestic or foreign clearing institutions shall be disposed of in accordance with the agreement between the parties to the transaction on the domestic electronic trading platform before the transaction is concluded.
Domestic clearing institutions and overseas clearing institutions jointly carry out cross-border fund settlement for centralised clearing transactions. Among them, overseas clearing institutions are responsible for the settlement of funds of overseas participants, and domestic clearing institutions are responsible for the settlement of funds of domestic participants and cross-border fund settlement of overseas clearing institutions. Cross-border fund payments are mainly handled through the RMB cross-border payment system.
An interconnection of central counterparty clearing institutions between domestic and foreign clearing institutions, needs to manage the risks of domestic and overseas clearing participants at both ends in accordance with the requirements of the principles of financial market infrastructure and their respective central counterparty clearing risk management systems, and jointly manage the net risks between each other, including the establishment of special risk reserve resources to cover potential losses in the default scenario of any domestic and foreign clearing institution, and establish corresponding default disposal arrangements to control spillover risks.
If either clearing institution defaults, the other clearing institution shall, in accordance with the business rules and the liquidation agreement between the two parties, use risk reserve resources to complete the default disposal of the defaulting clearing institution. A non-compliant clearing institution may recover from a defaulting clearing institution for the use of its own risk reserve resources and those funded by its clearing participants.
The Northbound Swap Connect implements quota management and makes adjustments according to market conditions.
Domestic and foreign investors and relevant financial market infrastructure need to report data related to Northbound Swap Connect transactions to the People’s Bank of China-recognised transaction report database, and properly keep all transaction-related data and exchange information records.
Where domestic and foreign investors reach transactions through the domestic electronic trading platform, the domestic electronic trading platform may report on their behalf. If the domestic electronic trading platform is a People’s Bank of China approved transaction report database, no separate report is required.
Domestic and foreign electronic trading platforms and domestic and foreign clearing institutions need to make timely, accurate and complete record and transmit transaction and clearing data, and regulate the use of Northbound Swap Connect data for domestic and foreign investors in accordance with laws and regulations, relevant regulatory requirements and business rules of the Northbound Swap Connect.
Domestic clearing institutions and other institutions with reporting responsibilities shall timely, accurately and completely report cross-border RMB revenue and expenditure information to the RMB Cross-border Receipt and Payment Information Management System (RCPMIS). Domestic clearing institutions, domestic investors and other relevant entities have to make statistical declarations of balance of payments, in accordance with the ‘Measures for the Declaration of Balance of Payments Statistics’ and relevant provisions.
Domestic and foreign electronic trading platforms and clearing institutions need to jointly monitor transactions and clearing activities related to the Northbound Swap Connect, and monitor abnormal cross-border transactions. Domestic electronic trading platforms perform transaction monitoring functions, domestic clearing institutions perform clearing monitoring functions, and overseas electronic trading platforms and overseas clearing institutions must cooperate with mainland infrastructure institutions to carry out market monitoring.
Foreign investors are told to strengthen their risk awareness, improve risk management, cooperate with domestic electronic trading platforms to carry out market monitoring, and prevent transaction risks.
Foreign investors can either use their own RMB or use foreign exchange to participate in Northbound Swap Trading and Settlement. FX users can exchange foreign currency at the Hong Kong RMB business clearing bank and the overseas RMB business participating bank in Hong Kong that is approved to enter the domestic interbank foreign exchange market for trading, the Hong Kong Clearing Bank. The resulting position of HKSCC can be flattened in the domestic interbank foreign exchange market. If a person participates in a transaction using foreign exchange, and the transaction expires or no longer completes, in principle, it should be exchanged back to foreign exchange through the Hong Kong Clearing Bank. Foreign investors should open a RMB fund account with a Hong Kong clearing bank for the purpose of fund exchange and settlement under the Northbound Swap Connect.
The exchange of funds under the Northbound Swap Connect is included in the management of RMB purchase and sale business. HKCC will comply with relevant regulations on anti-money laundering and counter-terrorist financing, RMB purchase and sale business, perform obligations such as anti-money laundering and anti-terrorist financing, authenticity check, information statistics and reporting, and divide the accounts of foreign investors in an appropriate manner.
When HKSCC closes its position in the domestic interbank foreign exchange market, it should ensure that the funds exchanged by the relevant foreign investors in the institution are based on the genuine and reasonable needs under the Northbound Swap Connect.
Northbound Swap Connect is supervised and administered by the People’s Bank of China in accordance with law, and establish regulatory cooperation arrangements with the Hong Kong Securities and Futures Commission, the Hong Kong Monetary Authority and other relevant regulatory authorities of relevant countries or regions.
People’s Bank of China and the State Administration of Foreign Exchange, supervise and administer the purchase and sale of RMB, capital remittance and inflow, information statistics and reporting under the Northbound Swap Connect with the Hong Kong Securities and Futures Commission, the Hong Kong Monetary Authority and relevant regulatory authorities.
Domestic electronic trading platforms and domestic clearing institutions will now have to formulate relevant business rules for the Northbound Swap Connect on the basis of these measures.
©Markets Media Europe 2023
