Linklaters Advises HKEX on Use of CGBs as Swap Connect Collateral
- Chinese Government Bonds and Policy Financial Bonds (CGBs) are now accepted by OTC Clearing Hong Kong Limited (OTC Clear) as collateral for Northbound Swap Connect trades.
Linklaters advised Hong Kong Exchanges and Clearing Limited (HKEX) on the design, documentation drafting, and regulatory and legal considerations for accepting CGBs as collateral. This initiative officially came into effect on Monday, 13 January 2025.
CGBs held through Bond Connect have traditionally faced limitations, such as restrictions on non-trade transfers and the requirement for a single custodian. These constraints have made Bond Connect securities less practical for scalable collateral use. However, the solutions designed for OTCC address these challenges, allowing CGBs to serve as scalable collateral for Swap Connect. This innovation unlocks the potential of CGBs as effective liquidity tools while delivering significant cost savings on margins for OTCC participants.
This marks a significant step in the evolution of CGBs as a treasury management tool and a source of collateral liquidity in international markets. When tested as collateral within Swap Connect, these refinements could potentially be expanded for broader use beyond the Connect programs. This development holds the promise of reshaping the role of CGBs in global financial markets.
The Linklaters team was led by Asia Head of Structured Finance and Derivatives Chin-Chong Liew, with support from structured finance and derivatives counsel Simon Zhang and solicitor Shirley Chan. Zhao Sheng Law Firm provided PRC law support to HKEX in relation to this project – consolidating Linklaters’ long-standing reputation for providing seamlessly integrated Chinese and international legal advice to clients through its joint operation in China. The Zhao Sheng team was led by capital markets partner Ying Zhou and supported by associate Yvette Bao.
Linklaters’ Asia Head of Structured Finance and Derivatives Chin-Chong Liew commented:
“This project exemplifies the ongoing innovation in financial market infrastructure, with the potential to set a new precedent for the role of CGBs globally. We are proud to have played a pivotal role in advising HKEX on this landmark development, enabling greater scalability and cost efficiency in collateral use for the participants of OTC Clearing Hong Kong Limited.
