Chinese regulators and market officials have been discussing the possible launch of a cross-currency swap market in China next year. The talks follow the recent liberalization allowing foreign houses to trade in the forwards mart. "This will likely happen by the second half of next year," predicted Philip Tsao, co-head of debt capital markets and head of risk management at UBS in Hong Kong.
Dealers have been in regular talks with regulators in recent months and believe cross-currency swaps will be one of the next major leaps for the domestic derivatives market, once the forwards market is well-established. "Firms are already testing in-house models and really just need to get licensing," said Tsao.
Given the large amount of foreign currency borrowing and the size of domestic banks' balance sheets, cross-currency swaps are likely to attract significant client interest. Tsao estimated there is roughly USD210 billion outstanding in foreign borrowing and 25-50% could potentially be swapped back into a renminbi liability when the exchange rate is perceived to be stable. "This will be a relatively large size market," he added.
In recent weeks, a handful of global houses including Deutsche Bank, HSBC, and Citigroup received the green light to begin trading renminbi forwards onshore. David Mu, a capital markets official at Bank of Montreal in Guangzhou, said the firm has done a few trades. "Volumes will increase, but you can't expect it to take off overnight. Everyone is testing the market at the moment," said Mu. "We're still finalizing settlement and documentation but we expect to complete our first deals within this month," said Dennis Wong, North East Asia regional head of interest-rate derivatives at Standard Chartered in Hong Kong.
