HKEX Unveils Five-Year China Ministry of Finance Treasury Bond Futures
Yicai Global
HKEX Unveils Five-Year China Ministry of Finance Treasury Bond Futures

(Yicai Global) April 11 -- The Hong Kong Exchanges and Clearing Ltd. (HKEX) introduced the offshore markets' first Chinese government bond futures -- Five-Year China Ministry of Finance Treasury Bond (MOF T-Bond) Futures -- yesterday, marking a milestone in the yuan's internationalization and opening of China's bond market.

The MOF T-Bond fixed-price futures are pegged to an onshore Chinese Treasury bond and provide international investors with a tool for managing interest rate risks on the mainland's market, an insider told Yicai Global. The futures will strengthen the connection between the Chinese and global markets.

The launch of the fixed-price futures on the Chinese Treasury bond in Hong Kong represents a real milestone given the lack of a universally accepted pricing model for the yuan's exchange and interest rates, said Meng Xiaoning, chief executive at TF International Securities Group.

The HKEX's offshore Treasury bond futures are linked to a five-year onshore bond with a three percent coupon rate and annual coupon payment, in a similar way to China Financial Futures Exchange's five-year T-Bond futures.

The CFFE and HKEX futures products are different from each other in terms of settlement method and market-maker rules. CFFE's futures will be settled in cash bonds, while HKEX's will repaid in cash. The CFFE, and other futures exchanges in mainland China, still do not have a market-making system.

The HKEX offers offshore trading of bond futures, and physical delivery of bonds is not available, so the futures will be settled in cash, said a fixed-income and foreign exchange product developer at the exchange.

During the initial stages, the HKEx hopes to introduce well-established Chinese and global institutions to serve as market-makers, and they will determine the futures' price and provide liquidity in the market, he said.

"Of course, we hope that ultimately both sellers and buyers will be able to bid on the market, but the current situation dictates that we need established institutions to set the prices to maintain order," he said.

Some Chinese brokerages and banks as well as foreign banks have shown great interest in acting as market-makers for the offshore T-Bond futures, and have kicked off relevant internal product approval and system building processes, he said. The HKEX will disclose a list of the market-makers soon.

Some analysts worry that there are still uncertainties about where offshore T-Bond futures are headed, given regulators' unclear position, the limited number of investors, and the competition between the onshore and offshore Treasury bond futures markets.

Follow Yicai Global on