Singapore makes first Overnight Index Swap

Singapore entered into the ovenight index swap (OIS) market in early April, joining India and Japan as oneáof the few Asian nations to offer this hedging tool. An OIS is an exchange of a fixed for a floating interest rate with a designated overnight index used for the floating rate. SingaporeÆs designated overnight rate will be referred to as SONAR or Singapore Overnight Average Rate.á

OIS provides a flexible hedging tool for bank asset and liability managers and corporate treasurers looking to minimise risk. Because OIS is a derivative instrument for use at the overnight end of the yield curve, it means that overnight interest rate risk can be managed off-balance sheet, and thereforeámeans money market participants can reduce credit risk,ácredit lines, capital charges, and transaction costs whilst exploiting the flexibility of making interest rate decisions independentlyáof balance sheet decisions.

The OIS market has proved popular in Europe, and is gaining acceptance in Asia. Who can benefit from OIS? Pavan Sukhdev, head of MoneyáMarket, Asia, for Deutsche Bank ináSingapore, saysá"banks with short-term Singapore dollar asset and liability management operations, for one".

"Others include financial institutions wishing to de-link their interest rate risk profile from their liquidity management requirements as well as local corporates seeking to hedge against, or to earn from, relatively steep short-end yield curves, can all benefit from SONAR."

Call money

India was the first south Asian country to participate in the OIS market in 1999, where participants trade on the MIONA OIS (Mumbai Interbank Overnight Average). This rate is a weighted average of call money business transacted by 25 institutions including banks, primary dealers and financial institutions.

The weightages are determined by giving weightages toáfive groups of players, ie, nationalised banks, foreign banks, private banks, financial institutions and primary dealers. Within the groups, each player is weighted based onáits balance sheet size, and in time this weightage will be based on actual transacted volumes.

In Singapore, the participating banks have agreed that the implied overnight interest rate was the appropriate index to use, with TELERATE publishing a neutral index daily at 11am.

In Singapore, Deutsche Bank and Societe Generale Singapore, through money broker, Nittan AP Singapore Pty Ltd, took part in the swap.