HKMA and SFC Support PBoC’s Announcement
The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have shown their endorsement for the recent announcement made by the People’s Bank of China (PBoC) concerning offshore investors. Starting from July 9, 2024, a new measure permits the utilization 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, as per the Hong Kong Monetary Authority.
Enhancing Capital Efficiency
The introduction of this new initiative is set to offer Northbound Swap Connect investors an alternative non-cash collateral option. The goal is to decrease liquidity costs and improve capital efficiency for investors. Additionally, it is expected to revitalize offshore investors’ onshore bond holdings, thereby enhancing the appeal of onshore bonds. This measure will also create synergies between Bond Connect and Swap Connect, further stimulating market participation in the Connect Schemes.
Deepening Financial Cooperation
Following the inclusion of onshore bonds in the list of eligible collateral for the HKMA’s RMB Liquidity Facility on February 26 this year, this arrangement signifies 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
Both the HKMA and the SFC will continue to provide guidance to financial infrastructure institutions, including the HKMA Central Moneymarkets Unit and OTC Clearing Hong Kong Limited, in preparing for the implementation of this new measure, as per the HKMA. This will involve issuing rules for the provision of collateral through security interest or title transfer, and for the transfer of the relevant bonds. Further details are expected to be disclosed in due course.
Potential Market Impact
Industry experts suggest that this measure could significantly enhance the appeal of onshore bonds to offshore investors, potentially leading to increased market participation and liquidity. The initiative is also likely to strengthen confidence in the stability and efficiency of the Chinese financial markets, aligning with broader objectives of integrating Mainland financial markets with global systems.
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