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Tuesday, 6 August 2019

CBE to launch interest rate swaps between banks in October

CBE to launch interest rate swaps between banks in October: The Central Bank of Egypt (CBE) is planning to introduce a new mechanism allowing banks to set up overnight indexed swap (OIS) agreements after launching the new no-risk Cairo Overnight Interbank Average (CONIA) in October, CBE Sub Governor Rami Aboul Naga said at a presser yesterday, according to Al Mal. The bank is still waiting for market participants to adjust to the newly-introduced CONIA, which is a fluctuating rate calculated daily as the weighted average rate of unsecured overnight EGP transactions, Aboul Naga said.

What are OIS agreements? Arrangements in which a bank (call it Bank A) is paying interest on a loan based on the benchmark CONIA, and another bank (Bank B) has a separate loan with interest based on a fixed, short-term rate. Under an OIS, the two banks can essentially exchange their interest rate formulas for a specific time period. The banks continue making interest payments as usual, and at the end of the agreed-upon period, whichever bank ends up paying less interest will make up the difference to the other. The agreement would only be feasible if the banks both want the opposite interest payment structure and are unable (or unwilling) to get a new loan or renegotiate the terms of their loans. OIS agreements will come as part of a wider range of new financial instruments planned for the market on the back of the introduction of the benchmark CONIA.

CONIA-based European loans also on the way: “The EBRD is willing to begin offering loans to the Egyptian market on which interest payments will be calculated using the CONIA,” CBE Sub Governor Zakeya Ibrahim also said during the press conference, according to Al Mal. Discussions were held following the launch of the CONIA to begin allowing local banks to offer other CONIA-based banking products, but this requires more awareness within the banking sector of CONIA and method used to determine its daily value, Ibrahim added.

Interest rate benchmark CONIA was launched on Thursday by the Egyptian Money Market Contact Group (MMCG), which brings together the central bank, commercial banks and the European Bank for Reconstruction and Development (EBRD). The benchmark will pave the way for “a broader set of products for financial sector participants.”

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