Taiwan rule change should help local interest rate derivatives market

The Taiwanese authorities’ decision to allow short selling of government bonds in mid-October is opening the door to new derivatives products on the Taiwan dollar market.

Participants can now develop products like interest rate options and swaptions that were difficult to hedge without the ability to short sell bonds, said John Li, vice-president and financial markets head of Citibank in Taiwan.

"Deregulation has helped the whole interest rate market, including interest rate swaps, cross-currency swaps and government bond trading. It also helped banks and market players to initiate products like interest rate options and digital options," Li said.

He noted that although products like interest rate options already existed in Taiwan, "there was no transactions because there was no way to hedge them."

“My feeling is that in the next six months, you will see more transactions,” he added.

Products such as structured notes have already been very popular in Taiwan and Citibank has already issued $700 million worth of structured notes this year. Inverse floaters were very popular in the second quarter of the year among local bond funds which had a very strong view that interest rates would go down.

Activity in those structured notes has since subsided, “because the equity market is now very bullish, some investors have tranferred their money from bond funds to the equity market,” Li said.