Non-deliverable renminbi rate swaps have sparked to life over the last few weeks. Bankers said the flows are piggybacking on the launch of onshore interest rate derivatives and the growing demand for interest rate hedging given recent rate rises in China. Market participants have also been waiting for liquidity in the domestic market, which is used as the benchmark for pricing, before kick-starting offshore trades, noted a fixed-income official at Citigroup. "There's a lot of potential," said the official. Domestic trades were fired up earlier this year (DW, 3/17).
"I believe this will be one of the biggest markets in Asia in the coming two-to-three years," said Dennis Wong, North East Asia regional head of interest rate derivatives at Standard Chartered in Hong Kong. Wong said the firm has already traded its first few swaps and that prices are actively being quoted in the interbank market. Traders noted a handful of deals have been traded through the market per week recently, each with a notional of RMB100 million (USD12.6 million). Participants thus far also include Citigroup,JPMorgan and HSBC. Trades have mainly been in the shorter end of the curve, including one, three and five-years.
Advantages of offshore swap trades include greater liquidity, lower counterparty credit risk, established trading credit lines and more experienced counterparties, noted Claudio Piron, regional currency strategist at JPMorgan in Singapore, in a recent report to clients. Traders also said international corporates that have renminbi exposure will likely be more inclined to use the non-deliverable contracts as they use International Swaps and Derivatives Association documentation, which may give them greater comfort than the domestic contracts based on Mainland law introduced this year (DW, 7/28). "It may be easier for corporates to hedge offshore as U.K. laws would likely be applied," said a fixed income dealer.
Other major non-deliverable interest rate markets in Asia include Korea and Taiwan.
