May 15 marks the third anniversary of the official operation of the Northbound 'Swap Connect'. Over these three years, the 'Swap Connect' has operated smoothly with continuous optimization of measures, and the range of product types included in the Northbound 'Swap Connect' has become more diverse. Following optimizations in daily net limits and market makers, there are now 23 market makers, the number of overseas investors has exceeded 90, and the cumulative notional settlement amount has surpassed 11 trillion yuan. Notably, the settlement amount in March this year reached a single-month record high since its launch. The 'Swap Connect' has become a vital component of the connectivity mechanism between the Mainland and Hong Kong. During the 15th Five-Year Plan period, the launch of the Southbound 'Swap Connect' holds practical significance.
1. What is 'Swap Connect'? 'Swap Connect' refers to the interest rate swap (IRS) market connectivity cooperation between Hong Kong and the Mainland. It is an institutional arrangement that allows domestic and overseas investors to participate in the financial derivatives markets of both regions through the connection of financial market infrastructures in Hong Kong and the Mainland. The construction of 'Swap Connect' was announced in July 2022. On April 28, 2023, the 'Interim Measures for the Administration of Interest Rate Swap Market Connectivity Cooperation between the Mainland and Hong Kong' were officially implemented, clarifying arrangements related to the mechanism, channels, settlement and clearing models, and participation quotas for 'Swap Connect'. On May 15, 2023, the interest rate swap market connectivity cooperation between the Mainland and Hong Kong officially commenced operation, starting first with the 'Northbound Swap Connect'.
Building upon the foundations of 'Shanghai/Shenzhen-Hong Kong Stock Connect', 'Bond Connect', and 'Cross-boundary Wealth Management Connect', 'Swap Connect' represents another expansion of the two-way connectivity mechanism between Mainland and Hong Kong financial markets. It is also a significant milestone in the deepening of China's financial market opening. Through 'Swap Connect', domestic and overseas investors can conduct Renminbi interest rate swap (IRS) transactions and centralized clearing while maintaining their original trading habits and adhering to the respective market laws, regulations, and trading rules. This leverages the interconnected infrastructure and mechanisms for trading, clearing, and settlement between Mainland and Hong Kong financial markets. It addresses previous issues such as inconvenience and high costs for overseas investors managing Renminbi interest rate risk, meeting the needs of cross-border investors for convenient participation in the financial derivatives markets and interest rate risk management in both regions.
In the three years since its launch, domestic and overseas investors have actively participated in 'Swap Connect'. The number of investors has continuously increased, product types have become more diverse, and the trading volume of Renminbi interest rate swaps has risen steadily. Mechanism arrangements for trading and clearing have operated smoothly, and the linkage between domestic and international financial markets has strengthened progressively. By the end of March 2026, 95 overseas investors had cumulatively executed over 21,000 Renminbi interest rate swap transactions with a notional settlement amount of 11.7 trillion yuan. In the first quarter of 2026 alone, the amount reached 1.77 trillion yuan, setting a new quarterly record. The single-month notional settlement amount in March was 820.8 billion yuan, a historical peak. Northbound 'Swap Connect' trading volume now accounts for approximately 10% of the total trading volume in the Mainland's interest rate swap market.
Clearly, 'Swap Connect' has effectively enhanced the efficiency of risk management and hedging for overseas investors. It has played a crucial role in optimizing the cross-border investment environment and promoting the internationalization of the Renminbi. It has injected new vitality into the development of China's bond and derivatives markets and further strengthened Hong Kong's position as a global international financial center.
2. Optimization and Considerations for the 'Swap Connect' Trading Mechanism Over the past three years, the infrastructure, functionality, and mechanisms of the Northbound 'Swap Connect' have been continuously optimized. Regulatory authorities and participating parties have consistently improved trading measures, diversified product types and investor structures, enhanced supporting functions, and provided full exemption from trading fees, making 'Swap Connect' a vital platform for overseas investment institutions to participate in the domestic financial derivatives market. In May 2024, the Northbound 'Swap Connect' added contract compression functionality, IMM contracts, and historical value date contracts. In December 2024, overseas investors were allowed to use onshore government bonds and policy financial bonds held through Bond Connect Northbound as collateral for Northbound 'Swap Connect', further broadening the scope of market openness. On May 15, 2025, based on summarizing the operational experience of 'Swap Connect' and considering feedback from domestic and overseas investors, the People's Bank of China, the Hong Kong Securities and Futures Commission, and the Hong Kong Monetary Authority announced further diversification of 'Swap Connect' product types. First, the contract maturity was extended to 30 years for interest rate swap contracts to meet the diverse risk management needs of market institutions. Second, the product spectrum was expanded by introducing interest rate swap contracts referencing the Loan Prime Rate (LPR). The measure to extend contract maturities was implemented on June 30, 2025. Approved by the People's Bank of China, the National Interbank Funding Center, the Shanghai Clearing House, and the Hong Kong OTC Clearing Limited jointly issued a notice announcing the launch of optimized functions including the extension of contract maturities for Northbound 'Swap Connect'. It was decided to extend the contract maturity for Northbound 'Swap Connect' business to 30 years. The three infrastructures jointly support the trading and centralized clearing of FR007 and Shibor_3M interest rate swap contracts with a maximum remaining maturity of 30 years, and correspondingly support IMM contracts, historical value date contracts, and contract compression functionality for such contracts. Simultaneously, the full exemption of interest rate swap transaction fees for domestic and overseas institutions under Northbound 'Swap Connect' was extended for another year. On September 19, 2025, a notice was issued regarding the launch of new LPR interest rate swaps and other optimization functions under Northbound 'Swap Connect'. Starting September 22, 2025, interest rate swap contracts referencing the one-year Loan Prime Rate (LPR1Y) were added for trading and centralized clearing under Northbound 'Swap Connect', with corresponding support for IMM contracts, historical value date contracts, and contract compression functionality for such contracts. The centralized clearing business for IMM contracts linked to LPR1Y in the interbank interest rate swap market was launched simultaneously. On September 26, 2025, under the guidance of the People's Bank of China, the China Foreign Exchange Trade System further expanded the number of market makers by adding three new ones, bringing the total list to 23, based on the dynamic adjustment mechanism and expansion of Northbound 'Swap Connect' market makers. Starting October 13, 2025, the daily net limit dynamic assessment mechanism was improved, raising the daily net limit to 45 billion yuan. The inclusion of 30-year interest rate swap agreements and interest rate swap contracts referencing the one-year Loan Prime Rate (LPR1Y) into Northbound Swap Connect helps fill the gap for overseas investment institutions in accessing ultra-long-term interest rate management tools via 'Swap Connect' and enhances the diversity of cross-border investment strategies. The increase in the daily net limit broadens and deepens investor participation in interest rate swaps, allowing for larger swap volumes, attracting more international capital, and boosting the market activity of Northbound 'Swap Connect'. In the future, based on the development of the 'Swap Connect' market, further increases in the number of overseas investors, diversification of investment products, adjustments to trading and clearing quotas, and optimization of trading and clearing arrangements could be considered to provide overseas investors with richer, more convenient, and efficient risk management tools. First, consideration could be given to including interest rate swap contracts with more maturity structures, such as those referencing the five-year Loan Prime Rate (LPR5Y). This would better meet the diverse interest rate risk management needs across different maturities and strategic diversity requirements of overseas investors, improve the yield curve's term structure, and attract more 'patient capital' to participate in China's bond market. When market timing and conditions are ripe, other on-exchange and over-the-counter interest rate derivatives could be gradually incorporated, such as standard bond forwards, interest rate options, and government bond futures, allowing overseas investors greater participation in the domestic financial derivatives market. Second, quota increases could be gradually implemented. China's financial market opening currently employs quota management, and 'Swap Connect' has corresponding quotas. Initially, considering the practical situation of overseas investors in the interbank bond market, the initial daily trading net limit for the entire Northbound 'Swap Connect' market was set at 20 billion yuan, with a clearing limit of 4 billion yuan. Once the daily net limit was reached, the trading center only accepted unilateral reverse trades to release quota, which concerned some overseas institutional investors about potential impacts on liquidity for interest rate swap participation. Therefore, in October 2025, the daily trading net limit was raised to 45 billion yuan, while the clearing limit remained unchanged. In the future, as operations become more mature and the market expands, and based on thorough research into the needs of domestic and overseas investors, gradual expansion of trading and clearing quotas could be considered. Additionally, building on the existing foundation, gradual optimization and improvement of the trade matching mechanism could reduce operational delays, thereby enhancing overall market liquidity.
3. Timely Launch of Southbound 'Swap Connect' Unlike the two-way opening of 'Bond Connect', 'Swap Connect' remains a one-way opening, facilitating Hong Kong and overseas investment institutions' participation in the domestic interest rate swap market. However, domestic investors cannot yet participate in Hong Kong's offshore interest rate swap derivatives market. Although the scale of Hong Kong's derivatives market is smaller than the Mainland's, Hong Kong, as an international financial center, offers a more diversified derivatives market. The southbound opening of 'Swap Connect' would benefit domestic investors in managing offshore market risks. Given the current global financial environment characterized by increased diversity, uncertainty, and instability—such as trade conflicts, divergent interest rate policies, and geopolitical conflicts—a two-way 'Swap Connect' could better meet the practical needs of domestic and overseas investors for interest rate risk management and hedging. Southbound 'Swap Connect' could provide convenience for Mainland investors to participate in international interest rate swap transactions through the Hong Kong market, thereby broadening the investment channels for Mainland institutions. It would allow Mainland investors to utilize the Hong Kong swap market, expanding their risk management toolkit, and also contribute to Hong Kong's development as an offshore risk management hub. At the inception of Northbound 'Swap Connect', regulatory authorities indicated they would study extending it to Southbound 'Swap Connect' in due course. In late 2025, Mr. Leung Chung-yin, Executive Director of the Market Surveillance Department at the Hong Kong Securities and Futures Commission, mentioned that authorities from both sides had begun discussions on Southbound 'Swap Connect', suggesting that preparations and communication are likely underway. Related advancement work focuses on rule design, technical connectivity, and risk control. As the Northbound 'Swap Connect' marks its third anniversary, China's Northbound 'Bond Connect' is also approaching its ninth anniversary. Launched on July 3, 2017, Northbound 'Bond Connect' commenced smoothly, marking the official trial operation of bond market connectivity cooperation between the Mainland and Hong Kong. In the fourth year of Northbound 'Bond Connect', on September 24, 2021, Southbound 'Bond Connect' was successfully launched, achieving two-way opening for 'Bond Connect', which has now operated for nearly five years. Northbound 'Swap Connect' has already established the connectivity of trading and clearing systems between Hong Kong (OTC Clearing Limited) and the Mainland (National Interbank Funding Center, Shanghai Clearing House), providing the infrastructure framework for the southbound opening of 'Swap Connect'. Since its launch, Northbound 'Swap Connect' has operated stably. With accumulated experience from market operation and increasingly mature systems, launching Southbound 'Swap Connect' in a timely manner has a solid foundation and practical significance. Relevant central and Hong Kong authorities could conduct research with institutions and investors, considering various factors and Mainland investment demand. Under the premises of mature conditions, controllable risks, and reciprocity and mutual benefit, and drawing on the experience of Bond Connect Southbound and Swap Connect Northbound, they could implement steps gradually. This could include enriching more maturities and diversified interest rate swap derivatives and opening access to more types of domestic investors. The year 2027 will mark the 30th anniversary of Hong Kong's return, the 10th anniversary of 'Bond Connect' opening, and the fourth anniversary of Northbound 'Swap Connect' launch. It presents an opportunity to deepen the implementation of the 15th Five-Year Plan outline's directive to "orderly advance the connectivity of financial markets between Hong Kong, Macao, and the Mainland" and further enrich the two-way connectivity mechanism between Mainland and Hong Kong financial markets. The southbound opening of 'Swap Connect' would contribute to more robust financial market infrastructure construction in Hong Kong, expand the ecosystem of offshore Renminbi products and the continuous improvement of financial functions, and develop Hong Kong into an offshore risk management hub. Through the four driving forces of Southbound 'Shanghai/Shenzhen-Hong Kong Stock Connect', 'Bond Connect', 'Cross-boundary Wealth Management Connect', and 'Swap Connect', Hong Kong's status as an international financial center can be consolidated and elevated. This is a tangible reflection of the Central Government's consistent support for Hong Kong and aligns with China's process of steadily and prudently advancing high-quality opening of the financial market.
4. Promoting Institutional Opening of Financial Markets with Southbound 'Swap Connect' China's stock and bond markets rank second globally in size. As of May 14, the bond market's outstanding scale exceeds 200 trillion yuan, and the stock market stands at 135 trillion yuan, with continuous improvement in market depth, resilience, and liquidity. Data shows that by the end of 2025, overseas institutions and individuals held over 10 trillion yuan in Renminbi financial assets in the Mainland, including stocks, bonds, deposits, and loans. By the end of March 2026, overseas institutions held 3.19 trillion yuan in bonds in the interbank market, accounting for approximately 1.8% of the total custody volume in the interbank bond market. A total of 1,194 overseas institutional entities had entered the market, with 630 entering via the settlement agent channel, 840 via the 'Bond Connect' channel, and 276 via both channels. Starting April 24, 2026, qualified overseas investors were permitted to participate in government bond futures trading, limited to hedging purposes. China's modernization process must uphold the banner of reform and opening up. The proposals and outline for the 15th Five-Year Plan, charting economic development for the next five years, included "building a financial powerhouse" for the first time. Financial market opening is an integral part of China's overall reform and opening-up endeavor, and the construction of a financial powerhouse is inseparable from financial market opening. Since the 18th National Congress, institutional opening of China's financial markets has been continuously advanced and deepened. Beneficial explorations and attempts have been made in areas such as market access, cross-border Renminbi payments, financial market trading system arrangements, infrastructure construction, international financial market exchange and cooperation, data transmission, risk governance, and anti-money laundering, achieving significant progress. On March 22, 2026, at the China Development Forum Annual Meeting, People's Bank of China Governor Pan Gongsheng stated that China will steadily promote high-level opening of the financial sector and the internationalization of the Renminbi, serving China's economic opening and high-quality development. First, financial market opening: deepen financial market connectivity and cross-border payment system interconnections to facilitate more investors investing in China's financial markets. Second, Renminbi internationalization: continuously improve the institutional arrangements for cross-border Renminbi use and financial infrastructure construction to facilitate cross-border trade, investment, and financing activities. The 15th Five-Year Plan sets new requirements for China's financial market opening. Regarding financial infrastructure, international financial centers, and participation in global economic and financial governance reform, the 15th Five-Year Plan proposals and outline propose to "build safe and efficient financial infrastructure," "accelerate the construction of Shanghai as an international financial center," "support Hong Kong in consolidating and enhancing its status as an international financial center," "advance the reform of global economic and financial governance," and "promote the establishment and maintenance of a fair, just, open, inclusive, and cooperative international economic order." Concerning connectivity and financial opening, the 15th Five-Year Plan outline further clarifies to "steadily and prudently expand financial market connectivity, optimize the qualified foreign investor system, expand the range of investable products, orderly advance cross-border two-way direct financing for eligible enterprises, and support cross-border investment by equity investment funds"; "promote efficient, convenient, and secure cross-border data flow"; and "strengthen financial security safeguards under open conditions, and improve the monitoring, early warning, and response mechanism for cross-border capital flows." We believe that the content of future financial sector opening will be richer, with two-way opening at the market access and egress levels and steady advancement of institutional opening. Under more connectivity mechanism arrangements, capital market opening and Mainland investor participation in international financial market investments will become more convenient, with continuous expansion of participating entities and product ranges. The internationalization of the Renminbi and its application in multilateral trade settlement will broaden further. The pace of building Shanghai and Hong Kong as international financial centers will accelerate, and China's financial markets will undoubtedly occupy a more prominent position in the international financial market landscape. Simultaneously, our considerations regarding financial market opening are as follows: First, advance steadily and prudently, integrating financial market opening into China's overall opening-up strategy, with equal emphasis on opening and security. Second, continuously enrich the content of opening, lower 'access' thresholds under financial security and entity regulation, provide institutional convenience for more investors to 'come in' and 'go out', and enhance the potential of Chinese financial institutions to play a greater role in the global financial market. Third, promote the integration of Renminbi internationalization and financial market opening to enhance the Renminbi's international voice. Fourth, as China fully implements 'AI+', accelerate the promotion and application of artificial intelligence and large models in financial sector opening to improve the external service levels of domestic financial institutions. Fifth, pay attention to data security during cross-border movement in the financial opening process and prevent the cross-border transmission and diffusion of financial risks.
Comments