The establishment of the CNH Hibor fixing is believed to have been delayed due to the Libor scandal, but bankers admit that there’s no better alternative to these benchmarks and that financial institutions ought to show a more conscientious effort in setting the rates.
The fixing of the CNH Hibor, which is due to start this month, will have obvious benefits for the offshore renminbi market, leading to the proliferation of renminbi-denominated loans as well as hedging instruments, including interest rate swaps (IRS) and cross currency swaps (CCS).
But before that happens, banks need to submit rates that accurately reflect their true level of funding in order to prevent market manipulation and instill market confidence in the usage of such rates, say experts. Especially in the wake of revelations and multi-billion dollar fines related to the manipulation of Libor which saw traders base rates on commercial considerations rather than the actual cost of funding.
“For the banks the best place to start is just to submit a decent Hibor fixing on a daily basis. It’s a level that reflects the true funding cost of the real level that they’re willing to lend,” said Becky Liu, senior rates strategist at Standard Chartered to Asiamoney PLUS in a telephone interview on June 3. “The availability of a fixing rate can encourage liquidity or turnover in the interbank market, which itself will improve the usefulness of the fixing as a reflection of CNH cost of funding. But on the other hand, development of Hibor-based products would be a mutual process between the corporate and the bank.”
Once CNH Hibor gains in popularity, financial institutions will be able to price loans more accurately. This will increase the appeal of offshore renminbi-denominated bank lending to corporates which will in turn be able to hedge these exposures, with the introduction of IRS and CCS derived from the CNH Hibor.
“The [introduction of the CNH Hibor] has already been delayed because of the Libor scandal but banks across the world note that there’s nothing that can replace Libor. The idea is not to replace Libor but to streamline the whole process and make the whole pricing process more reliable and less easy to be manipulated,” said Liu. “I would think that the launch of the CNH Hibor would be a very careful process and it would learn the lessons from what has happened to Libor. Personally I would trust the Hibor.”
The CNH Hibor fixing – which will be calculated by the Treasury Markets Association from rates provided by 15 to 18 reference banks – will include tenors for overnight, one week, two weeks, one month and up to 12 months. Details on how the TMA will regulate the rate have not been disclosed.
Banks are already gearing up for the introduction of CNH Hibor. In addition to the cross currency swap, on May 29 Bank of China Hong Kong (BoCHK) branch closed the first certificate of deposit (CD) using CNH Hibor as the base rate. The Rmb200 million (US$31.75 million) issue introduces a new floating-rate instrument to the market. The coupon will be 36bp over the official three-month CNH Hibor.
This is a good start to the setting of the CNH Hibor rate because the main issuers of CDs are the banks and this is a reflection of the interbank lending level, which is a reliable benchmark for true costs of funding in the currency, say experts.
The offshore renminbi interbank market has also witnessed its first execution of the cross currency swap (CCS) transaction between Citi and BoCHK using the three-month CNH Hibor on May 29.
The transaction, serving as a tool to hedge against interest rate risks, will be effective in early July with a 12-month contract period. Interest rates for the two currencies are fixed every three months and are calculated based on the three-month CNH Hibor and the three-month US dollar Libor respectively, according to Citi in a press release on May 29.
“More banks are going to offer more CNH Hibor-linked products and they would want to do this as fast as possible in order to deliver the best solution to their clients. That will definitely help to build the offshore market and the rates that they use,” said a foreign exchange strategist.
As a result, market participants are confident that the offerings of CCS in the Chinese currency will expand beyond its regular one-year duration and can even go up to three years, but they warn that it’s going to be a gradual process.
“One year is going to be the most popular one but other tenor buckets are also available. We will definitely see that kind of those longer-dated CCS to come up in the market, like two years or even up to three years,” said Shiming Tan, head of renminbi products at Citi to Asiamoney PLUS in a telephone interview on June 3. “But it’s going to be step-by-step progress.”