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Top corporates, banks go big on ‘swaption’ deals

Top corporates, banks go big on ‘swaption’ deals

27 Sep 2021

MUMBAI: Top private and foreign lenders and corporates including ICICI Bank, , Standard Chartered Bank, HSBC and Reliance Industries, are cutting ‘swaption‘ deals, a risk-focused interest-rates derivative product introduced about a month ago, multiple people familiar with the matter told ET.

In the past six weeks, the notional value of transactions rose to Rs 1,900 crore on the platform, which helps both local borrowers and investors to rein in funding costs in a rising rate scenario and retain investment returns in a falling rate cycle.

To be sure, the data available with the Clearing Corporation of India point to only interbank transactions and exclude corporate client statistics, which can be meaningful but not yet made public.

“Swaptions have begun to gain traction as a derivative instrument to help manage interest rate risks more effectively,” said B Prasanna, Group Head, Global Markets, Sales, Trading and Research, ICICI Bank. “While we and some banks have already started dealing in this instrument, others are setting up the infrastructure. The product should be a success with participation from both banks and end-users, such as corporates.”


HDFC Bank seems keen on swaption. Besides Reliance, some other large corporates are also said to be interested in swaption deals.

Reliance Industries, HDFC Bank and IndusInd Bank did not reply to ET’s query.

“We expect demand for interest rate swaptions from domestic clients to continue to grow,” said Parul Mittal Sinha, Head – Financial Markets, India Standard Chartered Bank. “In the current macroeconomic backdrop, demand for interest rate swaptions should probably see an increase as they provide an additional avenue for flexibly hedging interest-rate risks.”

Swaptions are based on OIS (Overnight Indexed Swap), which is a relatively liquid instrument that potentially offers good enough scope for hedging.

“Interest rate risk management has to be an active part of any financial institution’s asset-liability management,” said Ashish Vaidya, head of treasury and markets at DBS Bank India. “If the regulatory framework moves toward mark-to-market practices, then the dynamics of portfolio management will be required.”

This, in turn, will pave the way for a more liquid and vibrant swaption market, he said.

A swaption gives the buyer the right, but not the obligation, to enter into an interest rate swap. Banks and primary dealers will likely be involved in market making along with corporates.

“We have executed a couple of interest rate options (IROs) products…,” said Pradeep Khanna, Interim Head of Markets, HSBC India. “With time, we hope the depth of the markets increase so as to enable constituents to have one more product to manage INR interest rate risks on an ongoing basis.”

Issuers selling bonds with put options that get exercised in rising interest rate markets now have a tool to protect them.

If a borrower raises local bonds with a ‘put’ option, investors could well surrender those papers in rising interest rate scenarios, forcing a borrower to issue new bonds at higher rates.

This is where the utility comes in for a borrower if it buys a swaption contract. That will protect the borrower against any rate losses in case investors exercise the put option on the bonds.

The reverse is also true in case bonds issued with call options.