Chinese Government Bonds and Policy Financial Bonds (CGBs) are now accepted by OTC Clearing Hong Kong Limited (OTC Clear) as collateral for Northbound Swap Connect trades.
In general, CGBs held via Bond Connect are subject to certain limitations such as non-trade transfer restrictions and single-custodian requirement, which made using such Bond Connect securities less practical for scalable collateral uses.
The design and solutions devised for OTCC help to overcome such limitations, which enable the CGBs to be taken as Swap Connect collateral on a scalable basis, unleashing the potential of CGBs as liquidity tools and achieving costs savings on margin for OTCC participants.
This signifies the evolution of CGBs as a treasury management and collateral liquidity tool in the international markets. When these refinements are tested as Swap Connect collateral, they may be extended for general use outside the Connect programs and boost the potential role of CGBs in the international markets.
Linklaters advised Hong Kong Exchanges and Clearing (HKEX) on the design, drafting of documentation for, and the regulatory and legal issues on taking CGBs as collateral.
Linklaters’ Asia head of Structured Finance and Derivatives, Chin-Chong Liew, said in a statement: “This project exemplifies the ongoing innovation in financial market infrastructure, with the potential to set a new precedent for the role of CGBs globally. We are proud to have played a pivotal role in advising HKEX on this landmark development, enabling greater scalability and cost efficiency in collateral use for the participants of OTC Clearing Hong Kong Limited.
“Our team is excited to continue to be involved in market-changing developments, deepening the connectivity between mainland China and international markets. We welcome discussions with market participants on the implications of using CGBs held via Bond Connect for Swap Connect collateral purposes.”