The much anticipated real-time delivery-versus-payment (DvP) upgrade for Bond Connect has now been fully implemented, with all transactions now trading via the new settlement.
DvP, which ensures that payment and delivery of securities occur simultaneously, helps reduce or eliminate the exposure to settlement risk by the counterparties of a trade.
The Hong Kong Monetary Authority said there had been strong market demand for DvP settlement since Bond Connect was launched in July 2017.
According to Andy Seaman, partner and chief investment officer at Stratton Street, the lack of a true DvP is one of the reasons regulators in Luxembourg and Ireland had not given approval for Undertakings for Collective Investment in Transferable Securities-compliant funds to buy Chinese bonds.
This move paves the way for regulatory clearance and a broader range of investors should be able to buy Chinese government bonds where yields are very attractive compared to those elsewhere, particularly in Europe for instance.
In many jurisdictions, the availability of DvP is a regulatory prerequisite for investors to participate in financial markets.
The full implementation of DvP for Bond Connect enables international investors under such regulatory requirements to join the scheme and seek investment opportunities in China Interbank Bond Market.
The new DvP settlement system increases settlement efficiency and reduces settlement risks, giving global investors greater convenience to invest through Bond Connect.
Under the old settlement system, there was a delay of a few hours between bonds being delivered and cash being received.
The DvP implementation is one of the conditions of Bloomberg Barclays index inclusion which will happen in April 2019.
Buy side investors
The most active buy side investors on Bond Connect are banks and asset managers.
Meanwhile, the most active onshore dealers are large domestic commercial banks and foreign banks in China.
According to information released early this month, negotiated certificates of deposit, policy bonds, and Treasury bonds are the most traded types of bonds for Bond Connect.
As of end-July, a total of 391 international institutional investors had joined Bond Connect.
Among the accounts, 60% are opened by global asset managers and fund managers in the form of various investment products.
Meanwhile, the other 40% are for prop trading purposes by banks, securities companies, and other financial institutions.
In Asia, investors for Bond Connect come from different jurisdictions, including those from Hong Kong Special Administrative Region (SAR), Taiwan, Singapore, South Korea, Japan Philippines.
Outside Asia, Bond Connect investors come from the US, Canada, Luxembourg, UK, Australia, Germany, Ireland, France and Switzerland.