New Hong Kong IRS benchmarks could boost local derivatives market

New longer-dated benchmarks for Hong Kong interest rate swaps could boost the city’s local derivatives market, say some market participants.

The International Swaps and Derivatives Association (Isda)is in talks with Reuters and 16 banks to launch a new daily fixing of Hong Kong interest rate swaps of one year or more, people involved with the talks said.

“We’re aiming for the week of June 25 [to launch the new benchmark]," said a Singapore-based official at Isda, who declined to comment further until all the details are finalised.

The new swaps benchmarks will facilitate the cash settlement for longer-dated or constant maturity transactions and will offer a more reliable day-to-day reference for mark-to-market purposes, said one local interest rate swap dealer.

The new fixings will help develop Hong Kong’s derivatives market and boost products like swaptions – options to enter into interest rate swap agreements - and constant maturity swaps, said Dennis Wong, head of interest rate derivatives for northeast Asia at Standard Chartered.

But a foreign dealer said: “I don’t see a very huge future in swaptions in Hong Kong because the market in Hong Kong is not sophisticated enough for that kind of product.”

According to several sources familiar with the plan, the new fixing is likely to be calculated using a method similar to the existing short-term Hong Kong interest rate swaps fixing for one-month and three-month contracts. In other words, the benchmark will be the average of the contributions, excluding the four highest and the four lowest.

Daily fixings are expected to be posted on Reuters every morning at 11 am, Hong Kong time. The 16 contributing banks will probably be the international banks that already contribute to the other Hong Kong swap fixings, such as ABN Amro, Bank of America, Barclays Capital, BNP Paribas, Citigroup, HSBC, JP Morgan Chase and/or Standard Chartered, plus some local banks like Bank of East Asia, Dao Heng Bank and/or Hang Seng Bank.