In a first, ICICI, StanChart and HSBC enter ‘swaption’ deals

In a first, ICICI, StanChart and HSBC enter ‘swaption’ deals

MUMBAI: Private sector lender Tuesday cut India’s first set of ‘swaption’ deals with HSBC and Standard Chartered Bank, heralding a new era of risk management in the country’s interest-rate derivatives market that needs to introduce world-class solutions to draw more overseas funds into local debt assets.

The ‘swaption’ interest-rate derivative product should help both local borrowers and investors to rein in funding costs in a rising rate scenario and retain investment returns in a falling rate scenario. In June, 2019, the Reserve Bank of India (RBI) issued guidelines for ‘swaption’ deals.

A swaption contract gives the buyer the right, but not the obligation, to enter into an interest-rate swap deal.

Three people familiar with the matter told ET that ICICI Bank and the two overseas lenders transacted ‘swaptions’ on Overnight Index Swap (OIS) for a total notional sum, which formed a significant majority of the total worth of transactions reported on day one. Trading in the instrument began Tuesday on a Clearing Corporation of India (CCIL) platform, which showed six separate deals for a total notional sum of Rs 700 crore.

“These transactions are a welcome step toward managing interest rate risks more effectively,” said B Prasanna, Group Head, Global Markets, Sales, Trading and Research, ICICI Bank. “Issuers who have issued bonds with Put options which get exercised in rising interest rate markets now have a tool that can protect them. These products will help make our debt markets reach global standards, and attract more international debt investors.”

If a borrower raises local bonds with a ‘put’ option, investors could well surrender those papers in a rising rate scenario, forcing a borrower to issue new bonds at higher rates. This is where the utility of the instrument is evident for the borrower.

If the borrower buys a swaption contract, the instrument will protect the borrower against any losses from rate movements in the event of investors exercising their put options.

Similarly, if a borrower raises bonds with call options, and exercises them in a falling interest market, the investor has to invest at lower rates. If s/he buys a swaption contract, it will shield for any rate losses.

“We expect the demand for interest rate swaptions from domestic clients to increase in the short to medium term as the proportion of external benchmark linked lending by banks continues to rise,” said Parul Mittal Sinha, Head – Financial Markets, India Standard Chartered Bank.

HSBC declined to comment on the matter.

The transactions took place at the lenders’ Mumbai offices, sources told ET.

To be sure, ICICI Bank and

are the only two banks in India that are traded in the global Credit Default Swap (CDS) market, which has significantly gained traction after the Lehman Brothers collapse in 2008.

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