DERIVATIVES

With Shenzhen link on back burner, HKEx homes in on China’s OTC market

China’s fixed-income and currency markets are a target for Hong Kong stock exchange operator

PUBLISHED : Wednesday, 18 November, 2015, 7:22pm
UPDATED : Wednesday, 18 November, 2015, 7:22pm

After extinguishing hope for a direct stock market link between Hong Kong and Shenzhen this year, Hong Kong Exchanges and Clearing (HKEx) is talking up a different target for netting China’s financial markets: fixed-income and currency markets.

“What we see as the biggest opportunity is where the liquidity is right now”, including foreign exchange derivatives and cross-currency swaps, Calvin Tai Chi Kin, head of global clearing at HKEx, said on the sidelines of a Euroclear conference in Hong Kong on Wednesday.

HKEx’s OTC Clear, a central counterparty for settling over-the-counter derivatives, plans to clear cross-currency swaps between offshore yuan and US dollars. The focus of the market would be on yuan and mainland counterparties, with the purpose of creating a level playing field for mainland banks in the market, Tai said.

What we see as the biggest opportunity is where the liquidity is right now
Calvin Tai, HKEx

He also noted that, pending approval from regulators, OTC Clear would accept as collateral yuan-denominated offshore bonds issued by China’s Ministry of Finance.

The push into China’s fixed-income and currencies markets was in line with HKEx’s long-term strategy to replicate the Shanghai-Hong Kong Stock Connect, which launched a year ago, across multiple asset classes.

“Connecting with the mainland on that would be helpful but it’s too early for that now,” Tai said when asked if OTC Clear would link with a mainland exchange.

The South China Morning Post reported last month that talk on a China-Hong Kong Bond Connect scheme was eclipsing that on the linkage with the Shenzhen market.

The Asia Securities Industry & Financial Association has said that the existing trading mechanism from the original stock connect is ready to be expanded to give international investors access to China’s onshore bond market.

Hong Kong would need to link up with the China Foreign Exchange Trade System, a platform run by the People’s Bank of China that provides trading for bonds, derivatives and currencies. It is the leading provider for bond clearing, data, risk management and surveillance services

HKEx’s share price closed down 1.63 per cent at HK$205.2 on Wednesday after its chief executive, Charles Li, said on Tuesday that a Shenzhen-Hong Kong Stock Connect would not launch this year.

HKEx’s share price hit an all-time high in late May, during the final days of the mainland market’s bull run, but has since fallen by more than 30 per cent. The rout in the mainland equities market was the likely the cause of the delay in connecting Hong Kong with Shenzhen.

During a speech at the conference on Wednesday, Tai said that all parties including regulators and investors had been happy with the results of the stock connect with Shanghai.

However, turnover has generally been low. Average daily southbound turnover was just HK$3.3 billion, or less than 1 per cent of the Hong Kong stock exchange’s total. Average northbound daily investment was just 0.6 per cent of the Shanghai’s daily turnover.