Hong Kong Developing Alternative Clearing House After Euroclear’s Distribution Of Russian Assets

Hong Kong’s Exchanges and Clearing house, which runs the Hong Kong stock market, said last week that it was working with the Hong Kong monetary authority to develop an Asian international settlement house intended to rival Belgium’s Euroclear and Luxembourg’s Clearstream.

The move comes as a bid to lessen dependence on western financial infrastructure, and as Europe has made moves to seize €200 billion of frozen Russian assets. Euroclear has already sent two tranches of Russian-earned interest to Ukraine, totalling €3.55 billion after the EU passed legislation that applied a windfall tax to the profits generated by Russia’s assets. Financial and legal experts had already warned of the consequences of doing so, with Russian lawsuits against Euroclear already mounting up. Clearstream have not yet released any Russian-earned interest payments, however have frozen Russian assets and suspended use of the Russian rouble.

There may be further developments ahead. The London Stock Exchange sold its 4.92% stake in Euroclear in December.

Settlement houses are supposed to play a critical role in financial markets, safeguarding assets, maintaining records and transferring assets from seller to buyer. The HKEX and the Hong Kong Monetary Authority said the venture would provide a platform for Beijing’s ambition to “internationalise” the renminbi, by deepening the use of the currency as a global reserve asset and for settling trades.

The plan is to turn the HKMA’s Central Money markets Unit (CMU), which settles debt, into an international securities house that can handle cross-border payments and multiple currencies. Foreign investors would be able to manage renminbi-denominated bond liquidity and hold global assets under Hong Kong’s jurisdiction, which remains under a British-based legal system.

China is the world’s second-largest fixed-income market handling about US$25 trillion, with Hong Kong’s CMU holding US$5 trillion in assets under its custody. Euroclear is the global market leader, holding about US$42 trillion, while Clearstream holds about US$20 trillion.

China’s holdings of US Treasury bonds have fallen to levels last seen in 2009, Beijing continues to reduce its exposure to US sovereign debt. Hong Kong has positioned itself as a hub for the offshore renminbi with the HKEX expanding its services to buy CNH futures, hedge and trade interest rate derivatives.

In January the People’s Bank of China and the HKMA jointly announced the creation of a US$13.8 billion trade financing facility, an expansion of their bond connect programme and expanding the use of renminbi-denominated debt as collateral as part of efforts to “consolidate Hong Kong’s status as the global offshore renminbi business hub”.