The inclusion of Chinese bonds in the Bloomberg Barclays Global Aggregate benchmark on April 1 has been called a seismic event for markets, but the smaller tremors being felt now are more related to global money managers hustling to get their trading arrangements for mainland bonds in order.
Many are looking to use both of the major platforms offering access to foreign investors — China Interbank Bond Market Direct Access, launched by the People's Bank of China in early 2016, and Bond Connect Co. Ltd., the joint venture of China Foreign Exchange Trade System and Hong Kong Exchanges and Clearing Ltd., which debuted in mid-2017.
Industry veterans say both Bond Connect's principal model, which allows foreign managers with global custodians to trade mainland bonds via Hong Kong, and CIBM Direct's agency model, which requires local custodians and settlement agents, have enduring roles to play.
If you're a huge national pension fund with only one account and your counterparty as an agent is the central bank, then using CIBM Direct is a "no-brainer," said Julien Martin, a managing director with HKEX and the exchange's head of fixed income and currency product development, market development.
But for money managers with multiple clients, including clients with segregated accounts, and ties to global custodians, Bond Connect offers operational advantages, he said.
A CIBM Direct license is tied to a specific asset manager or asset owner so if a money manager's clients want to set up a segregated mandate, they would have to appoint their own settlement agent bank, said Edmund Goh, a Shanghai-based Asian fixed-income investment manager with Aberdeen Standard Investments.
As of April 1, just more than half of the top 100 global money managers "are registered with us, and 39 are ready to trade," Mr. Martin said.
"There's varying degrees of readiness here," said Nick Gendron, global manager for Bloomberg's fixed-income benchmark index business. "For whatever reason, some clients got a late start, sometimes maybe it was the account approvals holdings things up," he said.
A rush of global managers all heading to the entrance of China's onshore bond market at the same time looks to be straining the ability of the system to take them all in for now, noted Tariq Ahmad, Singapore-based CEO and director, head of Asia (ex-Japan) with Brandywine Global Investment Management (Asia) Pte. Ltd.
Almost 12 months ago, Brandywine began the "onerous, operational process" of getting clients' permission to trade mainland bonds on their behalf through the Bond Connect and China Interbank Bond Market platforms, Mr. Ahmad said.
The firm's operations team set up a dedicated project to drive that process, and today "we're almost there — not completely, but we're ahead of the game," he said.