To kick-start the cross-border renminbi and Hong Kong dollar repurchase market, HKMA has partnered with JP Morgan and Euroclear to launch a collateral management service allowing offshore financial institutions to borrow these currencies against securities.
Esmond Lee, executive director at the Hong Kong Monetary Authority (HKMA), says for the first phase local and foreign banks in Hong Kong that are members of its debt instrument clearing and settlement system -- the Central Moneymarket Units (CMU) -- could lend their HKD or CNH to offshore institutions with eligible collateral deposited at Euroclear or JPMorgan’s custodian arms.
Effectively, these banks could conduct such repo transactions through their CMU account; and JPMorgan and Euroclear would provide their global repo system so that the collateral, including government treasuries, equities or gold, could reach the money lenders in Hong Kong and settle in their CMU accounts.
The two will also apply such things as daily mark-to-market haircut execution on collateral used to secure a loan for the lender. Euroclear has a €10.8 trillion ($12.7 trillion) securities pool, while JPMorgan has $17.9 trillion.
While the service also covers US dollars and euro, HKMA officials say they have received strong interest in CNH, given that Hong Kong has the world’s largest pool of offshore renminbi totalling Rmb674 billion as at the end of April.
Already 30 banks operating in Hong Kong that are CMU members have expressed interest, and the first transactions could take place in four to six weeks’ time from three of these players.
“This will promote the development of the repo-market," says Lee. "For financial institutions that get funding through interbank swaps, now with cross-border collateral arrangement the lender will feel more secure even in times of market volatility."
As a second phase, banks in Hong Kong could also switch roles and become borrowers, although this will be for US dollar liquidity.
Expected to be launched in the third or early fourth quarter, phase two could make it possible for hedge funds, pension funds and other institutional investors outside Hong Kong to lend out their US dollar liquidity to banks in Hong Kong, in return for securities.
As the CMU system is also the biggest offshore renminbi bond settlement system globally, such an arrangement could enable foreign investors to lend their excess US dollars in return for CNH securities.
Olivier Grimonpont, general manager and Asia-Pacific head of Euroclear Bank, says for now these fund managers or investors could get access to the cross-border collateral management system through global custodian banks that are CMU members.
“Through these global custodian banks, investment managers such as hedge funds that are not direct customers of Euroclear could lend or borrow cash from the domestic market of Hong Kong,” he says.
But whether there would be any significant repo demand from international fund managers for extending dollar loans secured by CNH securities would seem to hinge on how deep the dim-sum bond market grows.
As at April this year, there was Rmb300 billion in outstanding dim-sum bonds, by Standard Chartered data. This is a pool with no promise of constant growth, and these are bonds often unrated as of now.
Still, the latest cross-border collateral programme represents a step by the HKMA to foster other offshore RMB markets such as London, as officials foresee how banks in Hong Kong could lend RMB cash to help foreign banks increase their offshore renminbi liquidity pool outside of Hong Kong.
“Through this platform, we expect banks [without access to CNH liquidity in Hong Kong] to be able to get this renminbi liquidity now for trade settlement purposes, project finance purposes. Hong Kong banks could also help offshore banks cover their renminbi payment needs related with their offshore renminbi-linked investment product,” says Lee.
London, which is vying to be another offshore renminbi centre, formed a private sector-led “Hong Kong-London Forum” earlier this year to help steer development in offshore renminbi liquidity, payment and settlement arrangements and the development of products and services.