Expectations are mounting over the Bond Connect's launch, which China premier Li Keqiang said would go live this year. While chatter about the scheme kicked off over two years ago, discussions are now ramping up on what the scheme will look like and what will be the challenges the HKEX will have to solve with its Chinese counterparts to make the scheme viable.
A fundamental question is whether an additional bond access scheme is needed at all.
China already offers quota-free access to global institutional investors to the China interbank bond market via the CIBM Direct scheme. Existing qualified foreign institutional investors and RMB QFIIs (RQFIIs) can also access the onshore bond market with their quotas.
Matthew Chan, head of product and strategy, post-trade services, Asia Pacific, DTCC, told GlobalRMB that China was being purposeful in creating multiple means of entering the market.
"There will be horses for courses, different ways to best meet each need," Chan said. "China is deliberately providing a variety of ways to access equities and there will always be multiple ways with the bond market, too. In my view that is the goal; it is not about seeing certain flows through a single channel but whether there is sufficient access overall."
As for the Bond Connect itself, Chan said it was not surprising that HKEX — which confirmed it was preparing for the scheme’s take-off — was taking the lead given the exchange's portfolio.
"There is a sense of familiarity given the existing Stock Connect programme that makes the Bond Connect project more tangible for people," he said. "It remains to be seen what it will look like; I don't think you can assume it will look identical. There will likely be a different way to trade bonds in the China market given that bonds are typically traded over-the-counter."
GlobalRMB reported previously that confidential conversations are taking place between fixed income platform Tradeweb and HKEX on the set up of a Bond Connect trading platform.
Looking onshore
"Even with Hong Kong Exchange as the access point, there is quite a way to go to define what the model is: who will do the clearing, what will execution look like. On price discovery, the question is how that will take place, whether through the exchange or on a bilateral basis."
While DTCC is not officially involved in HKEX's Bond Connect initiative, the firm is still seeking to play a role in helping its users access the onshore fixed income market.
"We have an ongoing discussion with the local bond depository CFETS on the complexities faced by the international investors into the China bond market. These discussions show an appetite in China to have this access be as frictionless as possible."
No formal agreements have been reached on the nature of a possible DTCC-CFETS collaboration, but Chan noted the firm could provide its central trade manager capabilities, which it already deploys to facilitate matching of cross-border transactions in other markets.
"We have links to other depositories like KSD [the Korean Securities Depository] and so on. There is a precedent for people to have connectivity to the infrastructure in certain markets through existing links with us. That is the broad shape of some of the scenarios discussed with CFETS."