Swap Connect and the Shanghai Clearing House

A bilateral market, and its risk

RMB interest-rate swaps had traded in mainland China since 2005, mostly exchanging a fixed rate for FR007, the seven-day repo fixing. For the first nine years, these contracts settled bilaterally: each counterparty carried credit risk directly against whoever happened to sit on the other side of the trade, the arrangement that makes a single default dangerous. On 1 July 2014, a rule from the People's Bank of China made central clearing mandatory for standard interbank RMB swaps referencing FR007 or Shibor, with a tenor of five years or less. From that date, these swaps had to be novated to the Shanghai Clearing House (SHCH), which had opened its clearing service for the product a few months earlier, on 2 January 2014. The timing placed China in the same post-2008 policy wave that produced Dodd-Frank in the United States and EMIR in Europe, all responses to the G20's 2009 commitment to move standardised over-the-counter derivatives onto central counterparties. China was not acting alone or late; it moved in step with a global regulatory response.

The access problem left unsolved

Central clearing solved the domestic bilateral-risk problem, but it left a separate question open: how could an overseas investor, who wanted exposure to onshore RMB rates but did not want to join the mainland interbank system directly, get access to this newly cleared market? The answer took nearly a decade to arrive. On 5 May 2023, the PBoC, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission jointly announced that a new scheme, Swap Connect, would launch on 15 May 2023. Under the northbound leg, an offshore investor trades an onshore RMB swap through China Foreign Exchange Trade System, and the trade is cleared jointly by OTC Clear in Hong Kong and SHCH in the mainland, linked through a new CCP-to-CCP arrangement built specifically for this purpose. The offshore investor's exposure sits with OTC Clear, a Hong Kong clearing house operating under a familiar legal and margin framework, and OTC Clear in turn faces SHCH on the mainland side.

A cautious quota, then steady growth

The scheme launched with a daily net quota of RMB 20 billion, deliberately conservative for a link nobody had tested before. By the end of April 2024, one year in, 20 mainland dealers and 58 overseas investors had completed over 3,600 transactions worth about RMB 1.77 trillion in cumulative notional, with average daily turnover up roughly fourfold from the first month. By the two-year mark in May 2025, the scheme added a 30-year tenor and LPR-referencing swaps, with 79 offshore investors and cumulative notional around RMB 6.5 trillion. In September 2025, the PBoC announced the daily quota would more than double, to RMB 45 billion from 13 October 2025, by which point the scheme had done over 15,000 trades totalling about RMB 8.2 trillion. The sequence, a cautious quota followed by measured growth followed by a larger quota, reads as regulators earning confidence in the link before relaxing it further.

Underneath the regulatory history, the instrument itself is a plain-vanilla interest-rate swap, two counterparties exchanging a fixed rate for a floating rate, usually FR007 onshore, on an agreed notional and tenor. Nothing about that contract changed. What changed over time was the plumbing behind the trade. Before 2014, that plumbing was bilateral: a defaulting counterparty left its loss with whoever traded against it. From 1 July 2014, a standard interbank RMB swap had to be novated to SHCH, the same novation mechanism the course covers for futures clearing, where the clearing house steps in as buyer to every seller and seller to every buyer, backed by daily variation margin and a default fund. This turns bilateral credit risk into CCP-managed, margined risk. It is not a free lunch: the market gains a central risk manager, but every participant now faces daily cash calls for margin.

Swap Connect neither creates a new clearing house nor a new contract type. It builds a link between two existing CCPs, so an offshore investor can access the onshore cleared market while keeping its own exposure inside a familiar Hong Kong legal and margin framework, rather than joining the mainland interbank system directly. That link itself is genuinely new: a CCP-to-CCP interoperability arrangement for interest-rate derivatives that had not existed before. The sizing of the scheme carries the same logic. The quota (RMB 20 billion daily at launch) and the associated clearing-risk-exposure cap (RMB 4 billion) are themselves risk-management tools, not incidental details: a regulator sizing a new, untested cross-border link conservatively, then raising the limit only after two years of stable operation and steady volume growth.