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View of Huaxin Capital: monkeypox virus (1)

2022-06-06

Author: Zhu Xiaojun, Director of Hong Kong China Financial Association, Director of Hong Kong OTC Clearing Company and Chairman of Huaxin Capital


Source: Xinbao Financial News


Since Hong Kong's return to the motherland, its financial industry has flourished and become an international financial center. At present, Hong Kong is one of the most important banking centers in the world. 78 of the world's largest 100 banks have set up institutions in Hong Kong. The total deposits in the banking system have been growing for 18 consecutive years, reaching HK $15 trillion by the end of 2021; The liquidity and capital adequacy ratio of major banks are far higher than international regulatory standards, and their financing capacity is excellent and stable. Hong Kong is also one of the largest IPO centers in the world. Since the 2008 global financial tsunami, the scale of fund-raising has been the largest in the world for eight years. Hong Kong is also the world's largest offshore RMB business center, with RMB deposit balance of 926.8 billion yuan at the end of 2021. By the end of 2021, Hong Kong's foreign exchange reserves were 496.8 billion US dollars, ranking sixth in the world and maintaining a stable linked exchange rate system. Hong Kong is also the most important foreign exchange market and one of the most active derivatives markets in the world. It has a rich variety of transactions, diverse categories of participants, sound trading mechanisms and outstanding global pricing characteristics. According to the latest survey results of foreign exchange and derivatives market turnover released by the Bank for International Settlements, Hong Kong ranks third in the world in terms of over-the-counter interest rate derivatives, the world's fourth largest overseas exchange market, and the world's largest offshore RMB foreign exchange and interest rate over-the-counter derivatives market.


Leading in Asia


Over the past two decades, the participation of Asia Pacific institutions in the OTC derivatives market has continued to increase, and interest rate, exchange rate, credit, stocks, and bulk commodity related businesses have developed rapidly. However, for a long time, Hong Kong has lagged behind its supporting post transaction services. Compared with New York, the United States and London, there are significant gaps in the types of settlement, the number of participants, the amount of settlement, and the construction of the central settlement system. In most cases, transactions take place in the Asia Pacific time zone, but are collected for settlement in Europe and the United States. The advantages of Hong Kong's international financial center have not been fully utilized due to the weakness of its comprehensive service capacity.


With the opening of the Chinese market and the process of economic development, Chinese funded institutions have increasingly conducted OTC derivatives business with international financial institutions in response to the actual needs of overseas business and risk management, becoming a new force in the market. However, since countries strengthened the supervision of derivatives business after 2008, forcing standardized products to conduct central settlement, or bilateral settlement must comply with higher capital and margin requirements, Chinese institutions are often required by their counterparties to settle at the clearing houses recognized by their domestic regulators, such as the London Clearing House or the Chicago Mercantile Exchange Clearing Company. On the other hand, due to various restrictions, the vast majority of Chinese funded financial institutions have been unable to become direct settlement members of European and American clearing houses up to now, and can only settle through the settlement broker as its direct settlement member as an agent, subject to others.


In order to grasp the opportunity of OTC derivatives settlement business in the Asian time zone, Hong Kong government, regulatory agencies and market participants have made efforts to develop in the institutional and commercial levels, and have gradually taken a leading position in the competition with Tokyo, Japan, Singapore and Sydney, Australia.


In terms of system, in line with the development trend of global supervision on financial derivatives transactions, the Hong Kong Monetary Authority and the Securities Regulatory Commission jointly announced the regulatory reform plan for OTC derivatives in November 2011. In March 2014, the Securities and Futures Regulations were revised to clarify the mandatory reporting and central clearing responsibilities for OTC derivatives transactions in a phased manner, followed by the OTC Derivatives Reporting Rules. The first and second phase of mandatory reporting has come into effect successively in 2015 and 2017, and the first phase of mandatory settlement has come into effect in 2016, covering interest rate derivatives transactions between major dealers. At the commercial level, the Hong Kong Stock Exchange took the lead in setting up OTC Clear in May 2012, and invited five Chinese banks and 12 banks including Citigroup, JPMorgan Chase, Deutsche, Barclays, HSBC, Standard Chartered and East Asia to become founding members and the first batch of settlement members. In 2013, the Hong Kong Stock Exchange was approved by the regulatory authority to become a recognized clearing house and officially opened to the public. After years of hard work, OTC Clear has become a leading clearing house in the Asian time zone. In terms of settlement members, it has developed to 25 corporate banks in Europe, America, the mainland and Hong Kong. OTC Clear is the only overseas central clearing house in the world that accepts mainland registered banks as direct settlement members, and it is more cost-effective and autonomous than entrusted brokers to settle in Europe and the United States. OTC Clear has been recognized by regulatory agencies in the United States, the European Union and other regions to provide settlement services to financial institutions in these regions; We will also expand customer settlement business, strive for more market participants to use central settlement services, improve efficiency and reduce risks.


Connection with mainstream trading system


In terms of financial technology, the settlement platform has been continuously improved, connected with the mainstream market recognized transaction registration system, providing multiple functions such as transaction cycle processing, collateral and margin settlement, and supporting remote settlement. As for risk control, we will inherit the effective management and control foundation of HKEx, establish and improve the margin and collateral management system, achieve cross product net margin calculation, cover all asset categories with a single clearing fund, manage capital efficiently, reduce the occupation of credit lines, and effectively improve the risk prevention ability of settlement members. In addition, we continue to expand the standardized products of the U.S. dollar and other major currencies, from the initial interest rate swaps (IRS), cross currency swaps (CCS) to foreign exchange forwards and swaps (DFX), non deliverable interest rate swaps (NDIRS), etc., and are the first in the world to launch offshore RMB interest rate and exchange rate derivatives settlement services, becoming the only global central clearing house for offshore RMB swaps. In terms of settlement volume, interest rate derivatives will reach about 200 billion dollars in 2019; In the past three years, foreign exchange derivatives have achieved an average annual growth of three times.


Looking ahead, the construction of the Hong Kong International Financial Center faces significant historical opportunities. On the basis of a simple and low tax rate, a sound legal system, a free economy system, and international professionals, we will actively give play to the advantages of the "one country, two systems" system, and deeply integrate into the new national "double cycle" pattern, so as to provide development momentum for Hong Kong to become an international OTC derivatives settlement center.


Give full play to advantages and integrate into double circulation


With the continuous improvement of the over-the-counter trading regulatory system in Hong Kong, the gradual deepening of the RMB internationalization process, the increase of the market participation of Chinese funded institutions, the improvement of the bridge role and the whole process service capability of the Hong Kong Stock Exchange, and more national recognition of OTC Clear, capital and operation efficiency will be greatly improved. The ongoing benchmark reform of interest rates, the prospect of connectivity developing to "derivatives connectivity", and the geopolitical crisis driving the diversification of settlement centers all provide new opportunities for Hong Kong to become an international OTC derivatives settlement center and promote the lasting prosperity of Hong Kong's international financial center.

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