China's Foreign Exchange Trade System (CFETS) has launched four derivatives linked to the standardised Shanghai Interbank Offered Rate (Shibor) linked derivatives today in a move to diversify its pool of financial products.
The derivatives rolled out today include a one-month overnight index swap based on the overnight Shibor rate, a three-month interest rate swap based on the one-week Shibor rate, a three-month interest rate swap based on the seven-day repurchase rate and a three-month forward rate agreement based on the three-month Shibor rate.
A CFETS spokesperson told SRP that the reason for introducing these new derivatives is to cater for the growing demand of investors for a diversified interest rate product line-up that enables more efficient trading and hedging of interest rate risks.
“All members of the interbank interest rate derivatives market will be able to participate in the trading of the newly launched products,” she said. “In terms of clearing method, members can choose either bilateral clearing or central counterparty clearing.”
Beng-Hong Lee, head of markets at Deutsche Bank told SRP that the launch of standardised Shibor-linked derivatives will serve as the reference to gauge market expectation. “There are already various over-the-counter Shibor-linked derivatives with various maturities on the shelf,” he said. “These shibor linked derivatives will provide a standardised point of reference and allow players to better track the short term market expectation.”
According to Lee, if the current Shibor3M rate is at 4.42pct and the market price for the new three-month forward rate agreement expiring September 2015 offers a rate of 3.72, then the market would be pricing in a decline of the Shibor over the next three months of 70 bps.
Lee also said that standardised Shibor-linked derivatives can be used by traders as an interest rate hedging tool, and will further promote the interest rate liberalisation through enhanced market transparency and price guidance.
Shiwen Qi, dealer at Hang Seng Bank China said that these products can provide price reference for Shibor-based instruments with less liquidity, such as the three-month Shibor rate. He also said that these products will enhance the chance of arbitrage for structured products issuers.
“I will wait to see how these derivatives work and I think other players are thinking the same, so their trading volumes might be limited and it will take a while for markets to get to know the new derivatives,” he said.
CFETS is a subsidiary under monetary regulator People Bank of China.
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