Finadium: International Access to China’s Securities Finance and Collateral Markets

Finadium has conducted an analysis of the current state of play of securities finance in mainland China and the broader use of Chinese securities as collateral in global markets. This report should be read by any market participant across financing, repo, treasury and collateral with an interest in the development of these activities globally. China’s expansion will impact funding and financing markets from New York to Tokyo.

Recent actions by Chinese authorities show that revenue opportunities for international firms in mainland securities finance and collateral markets could start to be realized. This dynamic is complex and relies on multiple actors, including government, asset managers, banks and market infrastructure, all with their own incentives, to deliver a hoped-for end result. If successful, the opening of China’s securities finance market to international firms, and the global use of Chinese bonds as collateral in OTC derivatives and repo transactions, could introduce important new asset classes to collateralized markets.

The drive for the internalization of Chinese bonds as collateral and the availability of Chinese securities through Stock Connect and Bond Connect is long standing. China’s November 2020 reform of its Qualified Foreign Institutional Investor (QFII) rules may mark a turning point. The idea that large international asset managers can now set up local funds may bring a wave of institutionalization and reduced volatility to domestic markets.

Global managers in securities finance and collateral businesses should be aware of what China’s growth means to their franchises. This is a multi-faceted issue, ranging from what participation a firm should have in mainland China to what the use of Chinese securities means to their businesses outside of China. The more that securities loans are conducted, the more both offshore agent lenders and their clients want a piece of the revenue pie. Moreover, as China opens and provides reliable regulation for global financial institutions and encourages the idea of the RMB as a global reserve currency, so too Chinese debt issues could rival US Treasuries and European bonds as high quality liquid assets (HQLA) and collateral for OTC derivatives transactions.

This report looks at where the Chinese securities finance and collateral markets are now, regulatory and business dynamics driving the market, and how developments may play out over the next two years. We assess the variables that speak to the desire of investors to utilize Chinese bonds as collateral, alongside the actions of both mainland and international infrastructure providers. The report is a business-oriented analysis of the markets and competitive dynamics for future growth.

A direct link to the report for Finadium research clients is

For non-subscribers, more information is available here.

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