Hong Kong Expands Repo Financing

Terry Flanagan

Hong Kong is building out its infrastructure for clearing and settling cross-border trading in fixed-income securities, part of a broader move to establish a more robust financial infrastructure for the Asia region.

Hong Kong Monetary Authority (HKMA), its central bank, has launched a repo financing program with a view to enhancing financial stability and providing secured channels for liquidity provisions to the financial markets in Hong Kong.

The program will facilitate repo financing transactions between members of Hong Kong’s Central Moneymarkets Unit (CMU) and international financial institutions. CMU is a debt securities clearing, settlement and custodian system in Hong Kong operated by HKMA.

The program enhances services currently provided to CMU members who will be able to accept a broad spectrum of international securities housed with J.P. Morgan and other international securities depositories as collateral.

Additionally, international financial institutions, by entering into repo financing transactions with CMU members, will obtain access to liquidity for offshore Chinese yuan, euros, Hong Kong dollars and U.S. dollars in Hong Kong.

“This is a key step forward in the development of Asia’s capital markets,” Kirit Bhatia, head of technical sales, Asia ex-Japan, at J.P. Morgan Worldwide Securities Services, told Markets Media.

By providing more local liquidity to market players in a secured manner and contributing to enhancing the financial stability of Hong Kong, the repo financing program represents a step forward in the development of Asia’s capital markets, according to HKMA.

J.P. Morgan has developed a collateral management platform to efficiently manage the end-to-end flow of repo activity between CMU members and international financial institutions operating regionally or anywhere around the world.

The platform will provide daily repo valuations, collateral valuations and margin calls, streamlined management of income and corporate action events, and shore cash settlement via the real-time gross settlement system (RTGS) in Hong Kong.

It will also provide secure and real-time online reporting of repo activity and collateral positions, and facilitate administration of securities recalls and collateral substitutions.

“Developed in partnership with the Hong Kong Monetary Authority, the new repo financing and collateral management infrastructure will provide enhanced local liquidity to market players in a secured manner, and it will be instrumental in enhancing the stability of Hong Kong’s financial markets,” said Bhatia. “This robust and scalable platform will be central in managing the end-to-end flow of repo transactions between CMU members and international financial institutions, and it will also be an effective risk mitigation solution for market participants.”

Regulatory reforms such as Dodd-Frank and MiFID/MiFIR/EMIR, which relate to over-the-counter derivatives, have driven home the theme of providing transparency to financial markets generally.

“There is the need for institutional transparency but also the ability to track risks, exposures and profitability back to the transaction or trader level,” Bob Park, chief executive of Fincad, told Markets Media.

Separately, HKMA, Bank Negara Malaysia (BNM) and Euroclear Bank are launching a pilot platform for the cross-border investment and settlement of debt securities, which will go live on March 30, to enhance the settlement efficiency of cross-border debt securities and strengthen the capacity for debt securities issuance activities in the Asian region.

Through the pilot platform, investors in Hong Kong and Malaysia can buy and hold foreign debt securities and settle cross-border transactions on a Delivery-versus-Payment (DvP) basis, while local and international bond issuers can issue a wide range of debt securities. The pilot platform also includes a comprehensive debt securities database of Asian debt securities maintained by Euroclear Bank.

The pilot platform entails the optimization of existing system links between the CMU of the HKMA, the BNM’s Real-time Electronic Transfer of Funds and Securities System (Rentas) and Euroclear Bank and the connections between local central securities depositories (CSDs) and foreign currency RTGS systems in Asia as well as sharing certain Asian CSD services.

Related articles

  1. CEDX is planning to expand its range of products in 2023, subject to regulatory approvals.

  2. The CFTC regulated derivatives market and clearer was not included in FTX's bankruptcy filing.

  3. Schroders cleared NDF trades across a Asian and Latam currency pairs via Citi.

  4. The derivatives venue owned by FTX wanted to offer products that were not fully collateralized.

  5. Trading Europe From ‘Across the Pond’

    Cboe acquired EuroCCP on 1 July 2020.