BNY Mellon Opens $4 Trillion Repo Niche to Holders of China Debt

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Bank of New York Mellon Corp, one of the world’s biggest custodian banks, may give another boost to the booming Chinese bond market.

BNY Mellon, which holds $41 trillion on behalf of its customers, said late Monday that it has started allowing investors to pledge Chinese debt purchased through Hong Kong’s Bond Connect as collateral for so-called tri-party repurchase agreements, a nearly $4 trillion corner of the global short-term financing market.

The step, first executed in a transaction last week, makes BNY Mellon the first U.S. bank to accept the nation’s government and corporate bonds in such agreements. That promises to remove a barrier that has discouraged some big investors from joining the rush into the Chinese bond market as regulators further open it to those outside the country.

BNY Mellon’s move “should help liquidity and demand for government securities, and incentivize holders of Chinese government bonds, given they now can use them for collateral,” said Sacha Tihanyi, head of emerging market strategy at TD Securities.

In a traditional repo agreement, one borrows funds by selling securities to lenders with an agreement to repurchase them back in the future. These securities, usually high-quality assets such as U.S. Treasuries, essentially act as collateral that lenders can seize upon when borrowers default.

In a tri-party transaction, a third entity acts as an intermediary between the borrower and lender to facilitate services like collateral selection, payment and settlement.

The bank said its platform is custody agnostic, meaning that clients can use BNY Mellon as an agent without having the bank act as the custodian for the assets involved in the trades.

BNY Mellon’s move follows a similar program launched in 2018, when the bank allowed clients to pledge Chinese stocks purchased via Hong Kong’s Stock Connect as collateral.

“It is a big deal,” Brian Ruane, chief executive of BNY Mellon’s clearance and collateral management business, said in an interview. “While it’s in the early stage of development, over time, this could be a large opportunity, given the size of the fixed-income market.”

©2021 Bloomberg L.P.

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