Over-the-counter IRS trading slowly moves to platform

The interest rate swaps (IRS) market is slowly moving into platform trading mode, from the present over-the-counter (OTC) markets.

The IRS trades, done mainly through overnight index swaps (OIS), is an insurance against interest rate movement. Since it is an OTC market, where two parties trade between themselves informally, the volume is hard to gauge, but is estimated to be around Rs 70,000 crore daily.

There are OIS instruments for one to 10 years but the most actively traded lot is between one and five years. Recently, the one-year OIS rates fell to a five-year low of 6.98 per cent, as traders expected interest rates to fall in the near future.
 

However, the market is opaque and price discovery is not very transparent because of its OTC nature, but the Anonymous IRS Dealing System, or ASTROID, developed by Clearing Corporation of India Ltd (CCIL) recently saw trades worth Rs 2,400 crore through the platform. On January 7, a total of 31 trades were executed through this platform and bond dealers expect the platform to eventually take over the bulk of the IRS trades in the future.

CCIL works as the central counterparty for the trade and takes responsibility for the settlement of the trade.

"A central counterparty gives a lot of comfort as trades are guaranteed and even if one party to the trade goes bust, the other party remains protected. Recently a commodities spot exchange went bust, and traders were left scrambling for help. That won't happen if there is a central counterparty," said a foreign bank treasurer who did not wish to be named.

The ASTROID platform became operational in August last year but not all banks have migrated to the platform because they would have to change their trading desk and integrate the back-end with the system, but eventually all banks would move into this platform. "Eventually all OTC trades will move to platform mode but it will take time. The interest rate environment is pretty stable now and the market expects one more 25-basis point rate cut from RBI," said the foreign banker.

The platform will gain traction when there is uncertainty about rates," said the foreign banker.