Plans for a Hong Kong international settlement house would create an alternative to established European services at a time of rising geopolitical tension and other emerging market-led developments of parallel banking platforms.
An agreement between local stock market operator Hong Kong Exchanges and Clearing and CMU OmniClear, announced on March 4, will establish an international central securities depository as part of a series of measures to improve Hong Kong’s post-trade securities infrastructure and further develop the fixed income and currency ecosystem within the territory.
The new ICSD will be the first of its kind to be established in Asia, a market dominated by the European settlement houses of Euroclear, headquartered in Belgium, and Luxembourg’s Clearstream.
The creation of a new international settlement house in Hong Kong comes amid growing tensions between the US and China, and raises questions on the possible bifurcation of the financial system between east and west.
Settlement houses conduct a number of roles in the banking sector: they settle securities transactions including bonds, equities and investment funds, both domestically and cross-border; additionally, they hold securities and manage transactional risks.
An ICSD based in Asia would process information outside of western systems. It would also serve to enable the internationalisation of China’s renminbi and Hong Kong’s status as an offshore renminbi hub, according to HKEX chief executive Bonnie Y Chan, as well to support the financial centre’s development as a fixed income market.
A spokesperson for CMU OmniClear, a wholly owned subsidiary of the Hong Kong Monetary Authority’s exchange fund, said the initial goal is enabling more efficient management of the fixed income and equity holdings of investors, with the creation of a multi-asset class custodial platform in the longer term.
What does this mean for European houses?
The development of the new settlement house could further fracture the established global financial order, with the development of alternatives to the western-dominated international systems of Euroclear and Clearstream. A new ICSD would provide a regional option for Asian investors.
And there is considerable business available. Euroclear is the world’s largest settlement house, holding $42tn in assets under custody. While Euroclear does not break down its regional business split, in its most recent annual report it noted 13 per cent of revenue streams — equivalent to just over $5tn — come from global and emerging markets.
There is considerable business in China, which has a fixed income market of $25tn. Additionally, the Central Moneymarkets Unit currently holds a further $4.8tn in assets under custody.
RMB internationalisation
The settlement house could assist with the greater internationalisation of the RMB, a long-held goal of the Chinese government.
A spokesperson for HKEX said that the partnership with CMU would boost “liquidity management tools for investors and enhanc[e] the appeal of RMB denominated bonds, which in turn will promote RMB internationalisation and create more use cases for non-cash collaterals, in particular RMB denominated bonds”.
The CMU is an integral part of the Bond Connect scheme, which allows investors in mainland China and overseas to trade in each other’s fixed income markets, via Hong Kong. These transactions are settled by the CMU. In 2024, total offshore RMB issuances through the CMU reached Rmb1tn ($138.2bn).
At present, investors are still limited in using mainland bonds in the international markets. The CMU has been aiming to expand its network, setting up direct linkages with the Monetary Authority of Macao, and further afield with the Central Bank of the United Arab Emirates. The new settlement house could expedite internationalisation plans.
Alternative financial systems
Finding alternatives to the established payments networks like Swift has picked up pace in some countries since the imposition of sanctions following Russia’s invasion of Ukraine. There has been considerable discussion on this between Brazil, Russia, India, China and South Africa — otherwise known as the Brics countries — as they seek an alternative to the western-operated systems.
After being removed from the Swift network, Russia moved its domestic transactions to its System for Transfer of Financial Messages. Banks in countries including China, India, Iran, and Armenia have connected to the network, with financial institutions from Germany and Switzerland stated to be members prior to Russia’s invasion of Ukraine.
The US has previously said the system is used to avoid sanctions imposed on Russia, and will target financial institutions that use the network as they could be helping Russia to evade sanctions.
Further division of financial systems has been seen with the development of central bank digital currencies and the potential establishment of Brics Bridge, which would see the combination of digital assets including CBDCs, and allow for payments to circumvent existing systems.
