HSBC issues digital bond; HKMA aligns OTC with European laws

Getting your Trinity Audio player ready...

Hong Kong has become the global hub for digital bonds on the blockchain, with enabling regulations and an advanced investor base playing a major role. In yet another leap for the city-state, HSBC (NASDAQ: HSBC) has issued the first digitally native bond by a local private entity.

On the regulatory front, the city’s two main financial watchdogs have pledged to align their digital asset over-the-counter (OTC) derivative rules with those of the European Union, as local laws aren’t robust enough for the sector.

HSBC issues HK$1 billion digital bond

HSBC has been championing the tokenization of the bond market globally; in February, it anchored Hong Kong’s $750 million digital bond, the first to fully rely on blockchain technology for issuance and management.

Building on this experience, Hong Kong’s largest bank has issued a HK$1 billion (US$130 million) digital bond on its Orion blockchain platform. HSBC was the bond’s sole coordinator, fiscal agent, registrar and paying agent.

The bond is a Hong Kong dollar-denominated digitally native note (DNN) with a fixed 3.6% rate due next year with a T+2 settlement window and is listed on the Hong Kong Stock Exchange (HKEX). The bank says it’s the first digitally native bond issued by a private entity in the city. It’s also the first digital bond issued under English law.

“We expect to see increasing demand for digital bonds from the private sector if they can access the liquidity and scale seen on our HSBC Orion platform. We look forward to further developing this market,” commented John O’Neill, the head of digital assets at the bank.

His colleague, Eugene Ng, who heads debt capital markets in Greater China, described the bond as yet another leap towards “the digitisation of Hong Kong’s capital market, setting a benchmark for future digital bond issuances by the private sector.”

With this bond, HSBC integrated the Hong Kong Monetary Authority’s (HKMA) Central Moneymarkets Unit (CMU), a system that provides clearing, settlement and custody for debt securities.

This integration is vital to the bond’s success as it makes it available to investors who don’t use HSBC’s blockchain platform. This group can still invest in the bond via conventional channels, including through custodians, without having to interact with the Orion blockchain directly. The result is increased liquidity, solving the biggest challenge for blockchain bonds.

Hong Kong aligns OTC derivative rules with Europe

A key reason for Hong Kong’s sharp rise into a global blockchain and digital assets hub has been its enabling regulations. The city-state’s two top financial regulators seek to extend this oversight to digital asset over-the-counter (OTC) derivatives.

The HKMA and the Securities and Futures Commission (SFC) jointly announced that they will align their regulatory framework with the European Securities and Markets Authority (ESMA) standards after extensive consultations with stakeholders and public feedback.

The two watchdogs called on feedback from investors in a March consultation paper on the reporting requirements for industry players. They specifically wanted to assess the introduction of a mandatory Unique Product Identifier (UPI) and Critical Data Elements for OTC transactions. They also wanted to gauge the market’s reaction to a proposed Unique Transaction Identifier (UTI).

The watchdogs say that they received feedback from industry bodies, exchanges, financial institutions, standard-setting organizations and more.

The respondents were fully in support of integrating the UPI and UTI identifiers, and the regulators will now mandate their use for the underlying derivatives of each transaction submitted to the Hong Kong Trade Repository (HKTR).

A UTI is a unique code assigned to each financial transaction that allows regulators to track individual transactions across the lifecycle of a trade. A UPI, on the other hand, identifies a specific type of financial product, allowing regulators to identify the underlying product that’s being traded.

The Hong Kong watchdogs noted that most of the proposals that market participants supported align with standards set by the European Securities and Markets Authority (ESMA).

This includes using a digital token identifier to “unambiguously identify crypto-asset underliers for OTC derivatives.” It also includes reporting the direction of a trade from the reporting entity’s perspective.

Digital asset OTC services in Hong Kong came under scrutiny following the collapse of JPEX, a local exchange that went under with HK$1.6 billion (US$225 million) in investor funds. Investigators found that physical OTC outlets were “one of the main avenues for channelling retail investors’ funds into scams.”

The SFC has been getting increasingly involved in regulating the digital asset sector in recent years. Most recently, it launched consultations on introducing a licensing regime for digital asset custodians. 

Watch: Improving logistics, finance with AI & blockchain