Non-residents compressed OIS portfolios last week, mkt sources say
Informist, Tuesday, Aug 27, 2024
--Mkt sources: Non-residents compressed OIS portfolio last week
--Mkt sources: Bks advising foreign clients to compress OIS portfolio
--Mkt sources: OIS portfolio compression freed up non-resident limit
--CONTEXT: Non-resident OIS limit utilisation has fallen sharply Aug
--Mkt sources: Freed up OIS limits enabling more FPI rate cut bets
--CONTEXT: Non-resident OIS limits were near full last month
By Aaryan Khanna
NEW DELHI – Non-residents have undergone several rounds of portfolio compression in India's overnight indexed swap rates to reduce their utilisation of trading limits that were nearing saturation, according to bank treasury officials aware of the development. The largest round of portfolio compression so far took place last week, they said.
In a portfolio compression exercise, market participants which have OIS exposures in both directions can terminate a portion of their outstanding trades before the actual termination dates of their derivative contracts. While it leaves the net exposure unchanged, it brings down gross exposure.
The total exposure of non-residents in the Indian OIS market is capped at a total price value per basis point value of 3.50 bln rupees, of which 3.46 bln rupees had been utilised as of Jul 26, according to Clearing Corp of India data. Price value per basis point is the change in value of the position for a single basis point movement in swap rates.
As a result of the portfolio compression exercise reducing the gross exposure, the unutilised limit has increased to 265 mln rupees on Wednesday from 35 mln rupees as on Jul 26.
"Non-residents have begun netting out and cancelling their positions in OIS to make sure they meet the gross limit," one of the bank treasury officials said. "It is going to be a continuous process, and some rounds have already happened."
The compression of these contracts happened between two offshore counterparties, and not through CCIL, the officials said.
Banks have not only been encouraging their foreign clients to undertake portfolio compression to open up statutory limits, but also facilitating the exercise, one of the treasury officials said. CCIL, which runs the Anonymous System for Trading in Rupee OTC Interest-Rate Derivatives trading platform, acts as a central counterparty and does its portfolio compression exercise on a quarterly basis.
The lack of available limits had brought foreign participation in the OIS market to a near standstill, leaving non-deliverable OIS as the main derivative avenue for a play on Indian interest rates. Consequently, the gap between onshore and offshore OIS rates widened, leading to an arbitrage opportunity.
The fresh availability of limits following the portfolio compression has allowed foreign portfolio investors to increase their rate bets on India, especially amid increasing certainty of imminent rate cuts in the US starting September.
Over the past week, offshore receiving of fixed rates across OIS contracts traded on CCIL has increased, even as flows towards the rest of Asia have been stagnant, dealers said. India's one-year OIS rate fell to a near two-year low on Monday, while the five-year swap rates ended at its lowest since Jun 6, 2023.
RBI Deputy Governor Michael Patra said earlier this month that limits on non-resident investment in derivatives are constantly being monitored. He also said this was part of the central bank's capital account controls, and would review it when the overall limit was near.
"There are some discussions happening where the RBI could raise the overall limit as part of other measures on derivatives. But right now, this seems like the only way for foreigners to continue trading in the OIS market," another treasury official said.
While portfolio compression was a stopgap measure, several banks have flagged the need for overall limits to be raised as the size of the overall derivatives market had increased since the current limit was set in March 2019, dealers said. Even if the overall limit isn't raised, but the positions are considered on their net value rather than gross value, then the utilisation could fall to something like 1.5 bln rupees, the first official said. End
