Swap Connect: Taking collateral over Bond Connect Securities

The PBoC announced its support for the use of CGBs held at Bond Connect as collateral for Northbound Swap Connect transactions, paving the way for wider acceptance of CGBs as collateral in the international markets. This ground-breaking proposal, launched by the end of 2024, improved capital efficiency and reduced liquidity costs for investors, and further invigorated the China Connect schemes as we celebrated its 10th anniversary.

In this seminar, experienced China Connect advisors from Linklaters discussed how title transfer and security interest collateral arrangements over China Government Bonds and Policy Financial Bonds (“CGBs”) were allowed for Northbound Swap Connect, despite “non-trade transfer” restrictions, and the implications for clearing members and clearing clients of OTC Clear.

Topics we will discuss include:

• Background

> Swap Connect

> Non-cash collateral

• Taking CGB as non-cash collateral

> What and how (PBOC rules, CMU requirements, OTCC rules and deeds of charge): Single custodian and non-trade transfer requirements

> House trades and Client trades

• Legal opinions: Hong Kong, China and regulatory capital treatment by CM and Client
• ISDA FIA Addendum
• The way forward