HKMA moves to revive cross-border repo platform

Hong Kong’s de facto central bank is optimistic its partnership with Clearstream can revive interest in its cross-border repurchase agreement (repo) settlement platform amid thin trading.

The Hong Kong Monetary Authority (HKMA) and international central securities depository Clearstream had aimed to launch the platform at the beginning of this year, but it was pushed back to the fourth quarter.

Market participants say the delay was caused by terminology issues in the contract between the two partners, but these have since been resolved, AsianInvestor understands.

Initially the HKMA united with JP Morgan and Euroclear in June last year to launch the cross-border collateral management service, intended to promote cross-border liquidity of offshore renminbi (CNH) repo trades. It also represents an HKMA initiative to promote Hong Kong as a leading offshore renminbi financial centre.

Yet the service, which allows local and foreign banks in Hong Kong to lend CNH, Hong Kong dollars, US dollars or euros to offshore institutions with collateral deposited with Euroclear or JP Morgan’s custodian division, has only attracted a trickle of trades.

The maiden deal was completed in August 2012 between Bank of China (Hong Kong) and Barclays Bank, involving a Hong Kong dollar-loan backed by US Treasuries. (The size of the deal could not be ascertained.) However, since then less than a handful of transactions have been completed.

Esmond Lee, executive director of financial infrastructure at HKMA, says that despite efforts to encourage more repo usage through this cross-border platform, banks turned to the FX swaps market for funding as this provided sufficient liquidity.

“Some transactions in both US dollar and CNH have been processed through the repo platform,” Lee tells AsianInvestor. “However, turnovers of the repo transactions are relatively thin.

“This is probably because there was ample US dollar liquidity in the market in the past few months and market players [can easily] obtain liquidity through the FX swap [market] of US dollar against other currencies.”

Lee declined to offer details about the US dollar and CNH trades that have occurred, although other market participants say they have not heard of any other transactions, barring the deal between Bank of China (Hong Kong) and Barclays.

The addition of Clearstream bulks out the HKMA platform’s securities pool by €550 billion ($724.4 billion). At the time of the platform launch last June, Euroclear’s collateral was worth €10.8 trillion, while JP Morgan’s totaled $17.9 trillion.

Although the cross-border repo platform formally launches to Clearstream’s clients later this year, dim-sum bonds can now be issued and settled on Clearstream accounts, notes Alton Chan, regional head of North Asia for Clearstream, who says he’s seeing an increasing number of buy-and-hold investors holding offshore renminbi bonds.

When dim-sum bonds were first introduced, the only clearing and settlement system was the central money-market units (CMUs) in Hong Kong.