Latest EBRD innovation in RUB swap market to extend yield curve

By Richard Wallis

Share this page:

The EBRD has inaugurated a market in a new Rouble interest rate swap derivative through a one-year transaction based on ROISfix concluded with Deutsche Bank.

This opens the way for extending the yield curve on Russian swaps instruments, which give market participants a mechanism to convert real overnight interest rate risk into longer-term exposure.

The derivative at the heart of this operation is an interest rate instrument based on ROISfix, which itself is based on the RUONIA (Rouble Overnight Index Average) launched in September 2010 and calculated on a daily basis by the Central bank of Russia. The new instrument is thus essentially a double-swap, or a swap on a swap.

ROISfix is an index comprised of RUONIA Overnight Interest Rate Swaps. It basically reflects market expectations of where RUONIA will on average reset over the term of a swap.

The new transaction involving a ROISfix Interest Rate Swap (IRS) is the first to give market participants the means to manage pure interest rate risk over a longer term.

“The EBRD’s pioneering transaction in this market marks an important step forward in the development and deepening of Russian capital markets. We hope these ROISfix-indexed swaps will help extend the maturity of the curve for Russian swap instruments,” said the EBRD’s Treasurer, Axel van Nederveen.

This is the latest of a series of innovations in Russian derivatives spearheaded by the EBRD as part of its long-standing commitment to developing the country’s capital markets.

All of the EBRD’s recent debut transactions have been based on RUONIA, a daily fixing based on actual overnight unsecured money market transactions, but the latest one is the first to extend the maturity of RUONIA-linked instruments to one year.

In the autumn of 2010, the EBRD concluded the first two RUONIA-based Overnight Index Swaps (ROIS) with Deutsche Bank and ING.

ROISfix was then launched as an index calculated on a daily basis by the National Foreign Exchange Association in April 2011. Three months later, the EBRD concluded a loan to a Russian client based on this new benchmark, a first for the Russian market. In January 2013, the EBRD launched the first-ever Rouble bond linked to three-month ROISfix.

One of the main advantages of ROISfix-indexed IRS’s is that they are linked to the Central Bank of Russia’s policy rates. For that reason, unlike similar swaps linked to interbank money market benchmarks such as LIBOR (London Interbank Offered Rate), it is a cleaner measure of interest rate expectations. It is also virtually free of the credit and liquidity risk premiums attached to these traditional benchmarks.

Another advantage is that ROISfix-linked swaps are not burdened with the need to calculate the floating leg of the swap on a daily basis, which would be the case for long term RUONIA-based swaps. This makes ROISfix-indexed swaps better suited for long-term transactions and is another argument supporting their chances of extending the maturity curve.

ROISfix-indexed instruments allow better risk management by, for instance, giving banks a possibility to borrow overnight money, swap the overnight interest rate to a three-month one via ROIS and finally swap this three-month exposure into longer dated tenors via a ROISfix-indexed IRS.

Their use is particularly appropriate in markets such as the Russian one where the vast majority of inter-bank transactions are concluded on an overnight basis and where long-term interest rate risk is rarely hedged.

The EBRD believes the new derivative instrument fills an important gap and is keen on participating in the development of this market, not only as part of its commitment to local currency capital markets, but also as an active market participant.

“The EBRD is both a significant rouble lender and a borrower on the Russian market and this by definition exposes the Bank to interest rate mismatches, hence the logic of using Rouble derivative instruments to manage this risk,” Mr. van Nederveen added.

Share this page: