By Nimesh Vora and Siddhi Nayak
MUMBAI (Reuters) – The Reserve Bank of India’s revamp of rules that govern the investment portfolio of commercial banks could have the collateral benefit of deepening the domestic overnight index swaps (OIS) market, bankers said on Thursday.
OIS is a type of interest rate swap where one party pays the other a fixed rate and the other a floating rate on a notional principal, with the floating leg linked to an overnight index.
This market, while a gauge of future interest rates, is dominated by foreign banks and some large domestic private banks, with limited participation from state-run banks that are the largest holders of domestic debt.
The new rules, effective next April, do away with the asymmetric treatment of mark-to-market gains and losses on bonds and remove the 90-day holding period for securities in the held-for-trading (HFT) category.
“Now, banks may hold illiquid, higher-yielding long bonds without the constraint of churning it in 90 days and hedge it with OIS for better spreads,” said Arun Bansal, executive director and head of treasury at IDBI Bank.
This could increase demand for such swaps.
The data on volumes currently traded on the over-the-counter OIS market is not available.
Further, the new rules say MTM profits and losses across all investments in the available-for-sale (AFS) category will be aggregated and accounted for in an ‘AFS reserve’, without being routed through a bank’s profit and loss account.
“At present, any appreciation in an AFS portfolio is ignored and losses are to be provided,” said Bansal.
“Now, with the revised guidelines, both are to be considered and aggregation among categories is permitted, which will incentivise taking OIS position and holding in HFT/AFS.”
The new guidelines will encourage bond-OIS arbitrage activity by banks, a trader at a private sector bank said.
“Generally, OIS trades are coupled with bond investment trades.
So, with the new norms, negative MTM can be compensated with positive MTM, which allows for more flexibility in managing the OIS and bond books,” said Ritesh Bhusari, joint general manager for treasury at South Indian Bank.
“We (will) see more participation from public sector banks in OIS.”
Separately, the new rules are also expected to boost demand for three- to seven-year government bonds and corporate debt.
“Corporate bond inclusion in the HTM category should help deepen the corporate bond market and squeeze the corporate spreads,” Madhavi Arora of Emkay Global said in a note.
(Reporting by Nimesh Vora; Editing by Savio D’Souza)
