REFILE - CMU OmniClear builds Hong Kong gateway
Hong Kong’s central bank is developing an enhanced clearing and settlement system that aims to broaden liquidity in Chinese capital markets and make it easier for onshore investors to buy offshore securities.
The Hong Kong Monetary Authority set up the Central Moneymarkets Unit in 1990 principally to handle the issuance of exchange bills and notes, which is how it manages the Hong Kong dollar’s peg to the US dollar. For many years the Hong Kong government ran a budget surplus and low rates encouraged corporates there to issue in US dollars, so the CMU had relatively little to do. In 2008, assets under custody at CMU were just US$50bn-equivalent.
The launch in 2017 of Bond Connect, which facilitated two-way bond market investment flows between mainland China and Hong Kong, turbocharged CMU’s growth. Under the southbound channel, mainland Chinese investors could invest in securities in the Hong Kong market through a “closed loop” and this was not classified as a permanent capital outflow so flows were not constrained by foreign capital control rules.
Assets under custody at CMU reached HK$4.8trn (US$617bn) at the end of last year, one-third of which from Bond Connect. In addition, offshore renminbi bond issuance in Hong Kong has swelled as issuers take the opportunity to raise offshore funds at low rates that nevertheless seem attractive to onshore investors. That, in turn, has encouraged the use of related hedging instruments.
The launch of Bond Connect meant that CMU needed to develop the right infrastructure to safeguard cross-border asset holdings. Now, the closed loop is expanding to include a wider pool of assets with the launch of CMU OmniClear, which began carrying out operations for the CMU in January. The plan is to build on the Bond Connect infrastructure to make it easier for mainland investors to buy a broader range of offshore securities, including equities, and facilitate overseas investment into the mainland Chinese market.
“The establishment of CMU OmniClear is an important step towards developing CMU into a major international central securities depository in Asia,” said Eddie Yue, chair of CMU OmniClear and chief executive of HKMA, at its launch in October last year. “I believe with more commercialised operations under CMU OmniClear, the CMU’s future development would be further propelled.”
Capabilities will be expanded beyond fixed income to include equities, which will require enhancing systems to handle a wider range of corporate actions. CMU OmniClear is cooperating with bourse operator Hong Kong Exchanges and Clearing, which kicked off the latest phase of the internationalisation of Chinese securities markets when it launched Stock Connect in 2014 as a trading link between the Hong Kong and Shanghai stock exchanges, before expanding it to include Shenzhen in 2015.
CMU OmniClear said in January that expanding the southbound Bond Connect scheme would “further broaden the overseas investment channels for mainland institutional investors, address their needs for diversified asset allocation, and improve transaction and settlement efficiency”.
Last month, it changed its membership criteria to allow financial institutions, sovereigns and supranational institutions incorporated outside Hong Kong to join, with the aim of increasing international participation in the Hong Kong and mainland bond markets.
In January, CMU OmniClear launched a direct linkage with the central securities depository system of Macau, and it previously signed memoranda of understanding with SIX Swiss Exchange and the Central Bank of the United Arab Emirates.
CMU OmniClear is not expected to compete with Euroclear and Clearstream, the two big international central securities depositories. It uses their infrastructure to connect to some international markets and this cooperation is set to continue.
“We are looking to work closely with OmniClear, leveraging the infrastructure that we have today and use for our own CSDs,” said Philippe Laurensy, CEO of Asia Pacific for Euroclear. “Their objective is to have a more robust infrastructure, so we should all welcome that and we will see how we can work with them to accelerate that.”
A spokesperson for Deutsche Boerse, the parent of Clearstream, said: “Our clients enjoy the unique benefit of the network effects of our asset servicing platform, built up over five decades, especially with the growth of intra-APAC flows. We have fruitful and positive working relationships with all major market infrastructures in the region, and look forward to discussing any specific plans with them to understand how we could partner with local organisations to the benefit of our mutual clients and issuers.”
Foreign investors currently hold around US$600bn of paper in the Chinese interbank bond market. Allowing investors to use this as collateral either for repo transactions to raise short-term liquidity or in overseas clearing houses would make the market far more liquid and attractive to foreign investors.
Swap Connect was launched in 2023 through OTC Clearing Hong Kong, HKEx’s clearing subsidiary, in partnership with the China Foreign Exchange Trade System and Shanghai Clearing House, to facilitate renminbi interest rate swaps, but is expected to increase its scope over time.
Last month, OTC Clear began accepting Chinese government bonds and policy bank bonds held by international investors through Bond Connect as margin collateral for all derivative transactions, having in January allowed them to be used to cover initial margin requirements for northbound Swap Connect transactions.
This allows international investors to undertake onshore repo transactions, but the pledge of capital is done under Hong Kong law to international standards.
“It’s a good idea to position Hong Kong as the entry point for foreign investors into Chinese government bonds,” said Euroclear’s Laurensy. “The Hong Kong legal system gives comfort to investors.”
Broadening CMU OmniClear’s scope to more international securities could mean it competes with banks in Hong Kong that facilitate outward flows for Chinese investors.
CMU OmniClear is understood to be working with a handful of international and Chinese banks, as well as LCH, formerly called London Clearing House. A spokesperson for LCH declined to comment on its plans. Like IFR, it is owned by London Stock Exchange Group.