China CSD goes live with DvP settlement for Bond Connect

The adoption of the new settlement system could significantly boost foreign investment into the Chinese domestic bond market.

China’s main central securities depository (CSD) has gone live with delivery verses payment (DvP) settlement for its cross-border fixed income trading platform.

The Hong Kong Monetary Authority (HKMA) announced that DvP settlement has become available for bonds transacted on Bond Connect and settled by the China Central Depository and Clearing (CDCC).

The adoption of the new settlement system could significantly boost foreign investment into the Chinese domestic bond market. Under the previous model, foreign investors wanting to trade Chinese rates products were required to pre-fund their onshore broker before the bond is delivered.

With the adoption of DvP settlement, foreign investors will no longer be required to pay their correspondent bank directly to the counterparty’s Mainland settlement bank.

“This is a significant step forward for the Bond Connect scheme since its launch on 1 July last year, and we anticipate that it will spark further interest from international investors wanting to capture a slice of the Chinese bond market which is now the second largest in the world having recently overtaken Japan,” said Gary O’Brien, regional head of custody product, APAC, BNP Paribas Securities Services.

“This enhancement to reduce counterparty risk, as well as the expected launch of the London – Shanghai Stock Connect by the end of the year continues to demonstrate the improved investment opportunities for both onshore and offshore investors.”

Industry experts have also expressed mixed opinions about the actual workability of a London-Shanghai Stock Connect. Glaring red flags which may impede the idea’s success include Chinese limitations on short-selling; divergent settlement time-frames; the use of renminbi in settlements, not to mention capital controls and frequent share trading suspensions on the mainland.   

However, China has a number of other Connect-esque initiatives in the development stages. ETF (exchange traded fund) Connect has been touted for launch in late 2018, although ongoing issues remain, namely an absence of a consolidated settlement time-frame for ETFs on the Shanghai and Shenzhen exchanges, and ongoing regulatory debate within China as to whether an ETF is a fund or a security.

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