Swap Connect: new tools, enhanced products and more solutions
Glenda So
Co-Head of Markets
May 22, 2024

Swap Connect launched in May 2023, marking a step forward for investors and creating the world’s first derivatives mutual market access programme.

Now, one year on, we have another step forward to celebrate: a new set of enhancements implemented this week giving investors new tools, enhanced product features and more solutions with which to risk-manage their RMB exposure according to international standards.

Make no mistake, this is an extremely exciting development.

At HKEX, we are always trying to make our markets better, and these new enhancements do just that.

Further, we are excited about the prospect of these enhancements helping our clients do more business with us.

International investors are increasingly active in China’s onshore bond markets and are asking for the tools, products and services implemented this week.

More fundamentally, the new enhancements send a powerful message from market regulators to the international investor community: namely, that we are going beyond hedging: we are applying international standards of risk management to RMB interest rate swap (IRS) products, and we are strengthening Hong Kong’s position as a RMB risk management centre.

Swap Connect: one year on

The new enhancements to Swap Connect come one year after the programme was launched on 15 May 2023.

Swap Connect was launched to provide international investors with a channel through which to trade and clear onshore RMB interest rate swaps, without changing their existing trading and settlement practices.

Trading volumes have grown over time, and an increasingly diverse range of market participants have entered the market. At the end of April 2024, market participants had made more than 3,600 interest rate swap transactions with an aggregate notional amount of approximately RMB1.8 trillion, representing an average daily turnover of around RMB7.6 billion.

The average daily turnover calculated on a monthly basis had increased by around three times from approximately RMB3 billion in May 2023 to over RMB12 billion in April 2024. This performance indicates that Swap Connect is working as intended, but it also points to more fundamental trends at play.

Firstly, the increasing allocation to China fixed income by international investors and, secondly, the need for risk management tools around fixed income exposure given the changing macroeconomic outlook for China over the past 12 months.

In terms of volume, performance has been strong.

But we know from speaking to market participants that there’s a demand to go further, implement more enhancements and further align Swap Connect with international practices.

New enhancements

Effective from May 20, three new enhancements have been made to Swap Connect:

  1. Solo Compression – allowing participants to offset opposite trades with equal economic characteristics effectively reducing the gross notional and minimising the cost of the cleared portfolio.

  2. CNY Back-Dated Trades – enabling participants to efficiently exit positions by executing trades with a past effective date, a feature that is common in offshore markets but new to Swap Connect.

  3. Swap Connect IMM Trades – allowing participants to enter forward-start IMM trades to lock in rates and aligns certain CNY swap contracts more closely with other contracts to ease trade offset and cash flow management.

These features give participants more flexibility and efficiency in their hedging strategies and portfolio management.

Further, these new enhancements bring Swap Connect closer in line with international standards and will hopefully bring a wider audience of traders to the platform, continuing the user diversification trend identified over the past 12 months.

The enhancements demonstrate a strong commitment from market regulators to cater to the needs of the international community and deliver more advanced risk management tools
The wider significance…

But there’s a wider significance to the new enhancements.

Beyond the operational and functional improvements, we believe the enhancements demonstrate a strong commitment from market regulators to cater to the needs of the international community and deliver more advanced risk management tools.

The fact that this practice is happening in Hong Kong first, before any other financial centre, also demonstrates a key aspect of Hong Kong’s ‘superconnector’ value proposition - the clearing and novation is handled here in Hong Kong, where the counterparty risk sits; meaning investors get to enjoy onshore market access and liquidity but with international standards of clearing in Hong Kong.

Finally, this new step forward for Swap Connect makes for another exciting chapter in the Connect story. Now celebrating 10 years since the launch of Stock Connect in 2014, it is a story of breakthroughs, enhancements and increasing connectivity in which Hong Kong is playing a key role.

And as we implement new enhancements to Swap Connect, look forward to further advances through 2024, and take forward the five measures announced by the CSRC to further enhance the Connect programmes, we look forward to further connecting China and the world, furthering the RMB internationalisation process and progressing our markets for the prosperity of all.