Insurers consider new BarCap EM indices

The product provides an interest rate hedging alternative in certain Asian markets where there is little else available.

New Barclays Capital indices that replicate the performance of interest rate swaps (IRSs) could be a useful tool in Asian markets where few such products are available, say insurers.

The Barclays Capital Emerging Markets (EM) Asia Swap Index Family was launched this week and covers Hong Kong dollar, Korean won, Singapore dollar, Taiwan dollar and Thai baht.

The indices provide a constant-duration hedge at a slight extra cost to an IRS, says Avnish Kaira, Asia-Pacific chief risk officer at UK insurance group Aviva. Merrill Lynch offers similar products, but only in majors, while FTSE offers these in dollar, sterling and euro -- but there's not much available for Asian markets or currencies, he says.

The indices offer transparency in that the published price is tradable as opposed to using over-the-counter swap prices, adds Kaira. They will also make life easier for the middle office, in terms of ease/availability of marking to market.

On the downside, the indices will suffer from illiquidity issues at certain maturities and are not as transparent and objective as multi-contributor platforms.

"We may not use them right away, as the 20-year index in Singapore, where we have some interest, will still suffer from the same issues of wide bid-offer spread due to illiquid markets in that part of the curve," says Kaira. "We may, however, still look at this and see what sort of prices and bid-offer spreads are quoted to get an idea of the development of this product before we decide whether or not to trade."

If such swap indices are run by market-neutral parties, such as the one run by FTSE on dollar interest rate swaps, they are more transparent and objective because they're on a multi-contributor platform, he adds. In this case, the prices would be dictated by Barclays Capital.

The new products extend Barclays Capital's global investable swap index coverage to the EM space with the aim of achieving maximum transparency of pricing for investors, says the UK bank.

Each index systematically tracks the return of a nominal par coupon interest rate swap of a specific tenor, rebalancing to par every month end. Core spot indices covering the 1-year to 10-year tenor range are supplemented with 1-year forward 1-year indices for each market. The excess return of each index is driven by the net present value of each underlying swap and this is marked-to-market using transparent and publicly available swap rate data.

Out of the core spot indices, the 1-year, 2-year, 3-year, 4-year, 5-year, 7-year, 10-year and 1-year forward 1-year indices are fully investable. A 20-year tradable index for Singapore dollar is also available and similar long-dated indices are planned for the other markets.

Barclays Capital will provide data, analytics and support for the index family via web-based and other e-commerce protocols. The indices are available on Barclays Capital's index website and via Barclays Capital Live, as well as on Bloomberg.

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