Ping An Securities Company Limited (Ping An Securities) is one of the first financial institutions authorized to trade interest rate options (IROs) in a trial of IRO trading and other related services launched early this year by the China Foreign Exchange Trading System & National Interbank Funding Center (CFETS). CFETS is the interbank trading and foreign exchange division of the People's Bank of China (PBOC). Ping An has already completed numerous transactions.
Products available include interest rate swap options and collar options linked to the one-year and five-year loan prime rate (LPR). IROs linked to the seven-day interbank fixing repo rate and the three-month Shanghai Interbank Offered Rate will be introduced in the future.
IROs are option products linked to interest rates, and also include treasury bond future options and bond options. IRO products are widely accepted in the international market and its trading volume accounts for nearly 10% of the overall interest rate derivatives market. China’s IRO market is still at an early stage with huge potential for further development.
Interest rate liberalization in China has been progressing steadily, from the loosening of loan interest rate controls on financial institutions in 2013 to the PBOC’s LPR reform last year. While this has helped with price discovery of financial assets and effective allocation of financial resources, it has also increased the fluctuation and unpredictability of interest rates. The interest rate risks faced by enterprises and financial institutions is rising, increasing the demand for tools such as IROs for hedging. It has also led to the introduction of LPR swaps and LPR options. IROs optimize the risk pricing mechanism of interest rates. It helps lower the lending interest rate, significantly reducing the cost of debt of issuers and supporting the real economy. Debt financing solutions based on IROs can significantly reduce financing costs for companies, and help them flexibly manage their liabilities.
Ping An Securities has engaged in the bond and interest rate derivatives market since 2017, and is a market leader in trading volume and holdings in IROs, treasury bond futures, interest rate swaps and bond issuances. Ping An Securities has also provided market-making services for products such as interest rate swaps, spot trading, and Bond Connect – the mutual bond access programme between Hong Kong and Mainland China, helping retail clients manage risks via interest rate products and supporting interest rate liberalization in China.