Japan debuts swaptions linked to risk-free rate

Sparse liquidity in Tonar swaps may put premium on swaption pricing, dealers warn

Japan-banks
Japanese bank signs: swaptions trades are shifting to the risk-free rate, Tonar

Yen interest rate swaptions linked to the Tokyo overnight average rate, Tonar, have begun to trade in recent weeks, in a move dealers say is an important milestone in the adoption of the alternative risk-free reference rate in Japan’s swaps market.

But experts are sounding caution over thin trading in Tonar swaps, which could result in a liquidity premium for swaption pricing. And plans for clearing houses such as LCH and Japan Securities Clearing Corporation to stop accepting yen Libor swaps

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