(Sept 24): China plans to expand a major derivatives trading link with Hong Kong by granting global investors access to two onshore interest-rate products with standardised contracts, according to people familiar with the matter.

The China Foreign Exchange Trade System (CFETS) and the Shanghai Clearing House are working with OTC Clearing Hong Kong Ltd on adding standard interest rate swaps and standard bond forwards to the Swap Connect programme by 2028, said the people who requested anonymity discussing private information. The discussions are under the guidance of China’s central bank, they added.

The plan marks the latest move by authorities to further open up the world’s second-largest debt market to foreign capital as they look to internationalise the yuan and cement Hong Kong’s status as the top offshore hub for the currency. The two standardised onshore interest rate derivatives products have surged in popularity in recent years, thanks to more efficient settlements and the more targeted hedging they offer.  

The People's Bank of China and CFETS didn’t immediately reply to separate requests for a comments. Shanghai Clearing House declined to comment.

“HKEX remains committed to working closely with regulators and market infrastructure partners to continuously enhance Swap Connect, support its sustainable long-term development and further strengthen Hong Kong’s role in advancing RMB internationalisation,” Hong Kong Exchange, the parent of the city’s clearing firm, said in a written response to Bloomberg’s queries. 

Introduced in 2023, Swap Connect has been a key channel for global investors to protect their fixed income exposure in China’s local market against fluctuations in interest rates. The clearing volume under the trading link with Hong Kong rose to 1.7 trillion yuan (US$253 billion or RM1.03 trillion) in the second quarter, up nearly 48% on year, according to data from the Shanghai Clearing House.

Investors and businesses use interest rate swaps, or IRS, to hedge their interest rate exposure by exchanging a fixed-rate income stream for floating rates.

Compared with conventional IRS, which are over-the-counter (OTC) transactions with customised contracts between the counter-parties, standardised IRS carry uniform elements such as the pricing benchmark, maturity date, and tenor. They currently use the issuance rate of banks’ negotiable certificates of deposit as the reference rate in China’s onshore market. 

The standardised bond forwards are linked to highly liquid policy bank notes issued by China Development Bank and Agricultural Development Bank of China.

The two onshore standardised derivatives instruments adopt a centralised but anonymous price-bidding mechanism, which tends to attract better liquidity. They also feature central clearing, rather than more cumbersome bilateral settlement agreements. 

Currently, the Swap Connect programme supports bilateral price quotations where the counterparties are identifiable before the transaction, with mandatory credit risk management agreements between them as a pre-requisite.   

While traditional OTC-settled IRS continue to dominate China’s onshore market, the two standardised interest rate derivatives tools have become increasingly popular in recent years. The former’s clearing volume rose 36% on year to 44 trillion yuan in 2025, with the latter up 2.3 times to 13.8 trillion yuan, according to data from the Shanghai Clearing House.

Uploaded by Tham Yek Lee