“The new scheme will strengthen Hong Kong’s role as an offshore yuan trading centre and as a risk-management centre,” Hong Kong’s Chief Executive John Lee Ka-chiu said during a launch ceremony at the Connect Hall in Central, which was the former trading hall of the stock exchange.

Swap Connect will first debut with interest-rate swaps, which are over-the-counter, bilateral contracts that allow holders of a bond to manage their risks by swapping one stream of future interest payments for another, based on a specified principal amount. At the initial stage, the daily trading quota of Swap Connect is set at 20 billion yuan.

The introduction of Swap Connect comes at a time when more overseas investors are participating in the onshore cash bond market, and their demands for risk-management tools for yuan interest rates are also soaring.

The international investors held a combined 3.21 trillion yuan of onshore bonds as of the end of March, accounting for 2.5 per cent of all such bonds, according to data from People’s Bank of China. The amount of bonds held by overseas investors has increased four times since 2017.

“Swap Connect adds to the ecosystem of renminbi assets in that it offers international investors the use of offshore renminbi to invest in the onshore interest-rate swap market,” Nicolas Aguzin, chief executive of HKEX, said at the launch ceremony.

The scheme offers more choices for investors and supports the broader “sustainable renminbi internationalisation process, a very important process that enhances the role of the currency in global markets”, he said.

“Hong Kong is the international financial centre that is uniquely positioned to lead the advancement of the renminbi internationalisation and Swap Connect is a very important component of that drive going forward,” Aguzin added.

Swap Connect “deepens connectivity between Mainland and overseas capital markets and bolsters Hong Kong’s position as a risk-management hub”, Julia Leung, the Securities and Futures Commission’s CEO, said at the ceremony.

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Hong Kong’s three note-issuing banks – HSBC, Standard Chartered, and Bank of China (Hong Kong) – were among the lenders that took part in the northbound trading of Swap Connect. Citibank China, China Citic Bank International and Guotai Junan International also said they traded for clients in the new scheme.

HSBC concluded trades for several global clients via Swap Connect on Monday, including Asia investment managers Dymon Asia and CSI Capital Management, with HSBC China acting as the designated market maker and HSBC Hong Kong acting as the mandated clearing broker.

“Swap Connect has immediate value for global investors and is a timely move in China’s ongoing commitment to its markets opening up,” said Candy Ho, HSBC’s head of business development for Greater China markets and securities services.

“Swap Connect makes participating in the world’s second-largest fixed-income market more attractive by introducing a central clearing model and providing better access to the deep onshore liquidity in financial derivatives markets,” Ho added.

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Standard Chartered completed multiple transactions for its customers, including Eastfort Asset Management and CICC International, the lender said.

“Our international institutional investors have shown a very positive response to the launch of the Swap Connect,” said John Thang, Standard Chartered’s head of financial markets for Hong Kong and the Greater Bay Area.

“They are interested in participating in the programme’s northbound trading to better manage the interest-rate risks of holding mainland Chinese bonds,” Thang said.

“The launch of the Swap Connect programme marks an exciting development in the People’s Republic of China and Hong Kong derivatives market, and creates a new channel enabling overseas investors to participate in the mainland OTC [over the counter] derivatives market,” said Terry Yang, a partner of legal firm Clifford Chance Hong Kong.

The Swap Connect is conducted via a connection between the clearing houses in both China and Hong Kong, namely the China Foreign Exchange Trade System (CFETS), Shanghai Clearing House, and HKEX’s subsidiary OTC Clearing Hong Kong.

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“Compared to offshore interest-rate swaps, onshore interest-rate swaps are less volatile and correlate better with onshore bond yields,” HSBC wrote in a note about the Swap Connect scheme in March. “This makes onshore interest rate swaps more efficient interest rate hedges of onshore bonds. The other benefit of entering the onshore swap market is having access to SHIBOR interest rate swaps, which are rarely quoted in the offshore market.”

HKEX’s Aguzin said the southbound Swap Connect, which will enable mainland investors to access the Hong Kong financial derivatives market, will take some time to develop before launching at a later stage. The Bond Connect scheme, which was launched in July 2017, also debuted only with a northbound leg initially before a southbound leg was added in 2021.

The first Connect scheme started in 2014, linking the stock markets between Hong Kong and Shanghai for cross-border trading, before the Shenzhen leg was added two years later.

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The Wealth-Management Connect was introduced in 2021 for cross border trading of investment products in the Greater Bay Area.

The ETF Connect was added to the basket in July last year to mark the 25th anniversary of the city’s handover.