HKMA and SFC Endorse PBoC’s New Margin Collateral Measure for Northbound Swap Connect

The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have expressed their support for the People’s Bank of China (PBoC)'s recent announcement aimed at offshore investors. Effective from July 9, 2024, this new measure allows the use of onshore bonds issued by the Ministry of Finance and policy banks on the Mainland, held under Northbound Bond Connect, as margin collateral for Northbound Swap Connect transactions, according to the Hong Kong Monetary Authority.

Enhancing Capital Efficiency

The new initiative is expected to provide Northbound Swap Connect investors with an additional choice of non-cash collateral. This move aims to reduce liquidity costs and improve capital efficiency for investors. Moreover, it is anticipated to vitalize offshore investors’ onshore bond holdings, thereby enhancing the attractiveness of onshore bonds. The measure will also create synergies between Bond Connect and Swap Connect, further invigorating market participation in the Connect Schemes.

Deepening Financial Cooperation

This arrangement follows the inclusion of onshore bonds in the list of eligible collateral for the HKMA’s RMB Liquidity Facility earlier this year on February 26. It is seen as a step forward in the collaborative efforts between the HKMA and the PBoC to deepen financial cooperation between Hong Kong and Mainland China. The objective is to promote RMB internationalization in a steady, orderly, and sound manner.

Implementation and Future Steps

According to the HKMA, both the HKMA and the SFC will continue to guide financial infrastructure institutions, including the HKMA Central Moneymarkets Unit and OTC Clearing Hong Kong Limited, in preparing for the implementation of this new measure. This will involve promulgating rules for the provision of collateral by way of security interest or title transfer, and for the transfer of the relevant bonds. Further details are expected to be announced in due course.

Potential Market Impact

Analysts suggest that this measure could significantly boost the attractiveness of onshore bonds to offshore investors, potentially leading to increased market participation and liquidity. The initiative is also likely to bolster confidence in the stability and efficiency of the Chinese financial markets, aligning with broader goals of integrating Mainland financial markets with global systems.