First USD/CNY cross-currency swap using SOFR trades

Crédit Agricole and Bank of China’s $10m trade marks a new milestone for risk-free rate


Crédit Agricole and Bank of China have transacted the first onshore Chinese renminbi versus US dollar cross-currency swap using the secured overnight financing rate (SOFR), breaking new ground in the acceptance of alternative reference rates in Asia.

The $10 million, one-year swap, struck on April 21, sees Bank of China receive compounded SOFR on the floating USD leg and pay a fixed rate of 0.48% on the CNY leg.

The trade was confirmed on the China Foreign Exchange Trade System platform.

Lilian Darbon, head of Asia trading at Crédit Agricole Corporate and Investment Bank in Hong Kong, says there is growing interest among Chinese banks in using SOFR as a benchmark for US dollar borrowing, which means more SOFR swaps with onshore Chinese counterparties are likely to follow this year.

“In China, the regulator is very keen on seeing the development of the SOFR market, so we believe it will become popular to use as a reference rate in the coming months,” says Darbon.

The trade is the latest milestone in the uptake of SOFR by Chinese banks. In September 2019, the Hong Kong subsidiary of Bank of China completed a US dollar trade finance loan for a corporate client and issued two-month dollar-denominated commercial paper, both of which were linked to SOFR. Two months later, the bank sold $350 million in three-year floating rate notes linked to the new benchmark.

The transaction is the first cross-currency swap between USD and CNY to reference SOFR. In late December last year, Westpac and Citi entered into the first SOFR-linked cross-currency swap involving an Asia-Pacific currency, the Australian dollar.

As has been the case for the other recently traded SOFR cross-currency swaps, Crédit Agricole and Bank of China had to use Libor as a base to price the USD leg of the swap. The implied fixed swap rate for USD/CNY was 0.95% versus USD Libor, from which they subtracted the basis between that benchmark and SOFR – 47 basis points – arriving at the rate of 0.48% for the fixed CNY leg.

Liquidity lacking in Asia hours

Darbon says the reason for using the Libor-SOFR basis market is the lack of liquidity in the SOFR swap market at longer tenors, something that is a particular issue during Asia hours.

“Of course you have to use an existing market to quote your first new RFR swap. But in the future, we hope this new market will be quoted with more liquidity and that the risk-free curve will appear. The reality of this market is that it is not very liquid outside of New York trading hours,” he says.

Libor rates across five currencies, including the US dollar, could cease publication after 2021 once banks are no longer compelled to participate in the rate-setting panel. In the US dollar market, SOFR has been selected as the alternative risk-free rate that will replace the Libor benchmark.

Although Darbon concedes that the Covid-19 pandemic has disrupted benchmark transition projects, he expects SOFR liquidity to improve after clearing houses start using the rate for calculating price alignment interest and the present value of future swap cash flows later this year. Use of SOFR will then continue to accelerate up to the end-of-2021 deadline. 

“This is going to be the first of a series [of onshore SOFR swaps],” he says. “I cannot deny it has been a bit slow in terms of how SOFR is traded – including in the United States – but clearly it will accelerate because that is what the regulator is wishing to see.”

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