The PBOC also said the pilot interest rate swaps programme, which is currently limited to the interbank bond market, will be gradually expanded and the central bank will step up its efforts to put in place other regulations relating to interest rate swaps.
The reference rates for interest rate swaps will be based on benchmark interbank bond market rates and the one-year deposit rate set by the PBOC.
Under the new rules, commercial banks, including both domestic and foreign banks that hold derivatives licences, can conduct RMB interest rate swaps with customers or other banks that have derivatives licences.
“This is a significant improvement in the market, as interest rate swaps are the foundation of a derivatives market. [It is] positive for banks as it provides a very important risk hedging tool, as well as a new revenue generating product line,” said Jun Ma, chief economist of Greater China and head of China/Hong Kong macro strategy at Deutsche Bank in Hong Kong.
China Everbright Bank and China Development Bank signed an agreement in October to conduct an interest rates swap on a notional principal of RMB5 billion ($620 million), but sources said they have been waiting for the PBOC’s final approval and the new rules to come out.
The PBOC has been opening up the RMB-denominated derivatives market over the past 12 months, and in August loosened regulations to allow banks to trade RMB-denominated cross-currency forwards and swaps.
In a statement on its website, the PBOC said the decision to open up the RMB interest rate swaps market is in response to the need for participants in the interbank bond market to better manage interest rate risk, as well as their assets and liabilities. The PBOC added that the interbank bond market has developed rapidly in recent years, and investors holding large amounts of fixed rate bonds have accumulated huge interest rate risks. The latest move will help accelerate market-oriented interest rate reforms, the statement said.