HK banks trade first Shibor interest rate swaps

HSCB and StanChart use new Shibor benchmark to spur development of non-deliverable renminbi interest rate swaps.
HSBC and Standard Chartered have traded the first non-deliverable renminbi interest rate swap based on the new Shanghai interbank offered rate, or Shibor.

The notional Rmb100 million one-year transaction involves HSBC receiving a fixed 2.9% note from Standard Chartered and paying three-month Shibor. The trade was brokered by Nittan on January 4, ShiborÆs opening day.

HSBC has been at the forefront of the development of China options and swaptions thanks to its involvement in the Treasury Market Association, which is chaired be Anita Fung, HSBCÆs treasurer and head of global markets, Asia-Pacific. In 2006, the bank pioneered renminbi non-deliverable interest rate swaps and swaptions, with Standard Chartered as the counterparty in both instances.

Previously, such trades used the PeopleÆs Bank of ChinaÆs deposit and lending rates, or the seven-day repo rate, to serve as benchmarks. Shibor should improve the pricing of money market instruments in China.

"This is a very important step for the liberalisation of the interest rate market," says Justin Chan, Head of Hong Kong Trading at HSBC. "ItÆs still in the early stages and we donÆt know what the demand will be like yet, but the launch of Shibor takes us a step closer to a market-driven interest rate system."

Shibor should also open the door to derivatives products such as forward rate agreements and caps and floors. "We expect to see rapid development of derivative products based on Shibor," says Fung.

There are eight rates, which are established daily at 11am: overnight, one-week, two-week, one-month, three-month, six-month, nine-month and one-year. The Shibor rates are the average of the quoted rates of 16 banks, with the two highest and two lowest rates discounted.
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