Turkey abuzz with talk of swaps revolution as new gauge debuts
June 22 2019 11:34 PM
Employees work in their booths at the Borsa Istanbul stock exchange in Istanbul (file). The Istanbul exchange started publishing quotes for the Turkish lira overnight reference rate, or TLREF, on Monday.

Bloomberg /Istanbul

Speculation is building in Turkey that a new lira reference rate introduced this week will help resuscitate the nation’s struggling market for interest-rate swaps.
The Istanbul exchange started publishing quotes for the Turkish lira overnight reference rate, or TLREF, on Monday. The fixing is calculated using a weighted-average of repo transactions, which are short-term borrowings secured by government securities.
If it blossoms into a reliable gauge of local borrowing costs, the benchmark could help build a substitute to the more dominant cross-currency swaps – instruments that allow investors to price, trade and hedge interest-rates in Turkey, but which have one leg denominated in dollars.
“The ultimate aim is to form an interest-rate swap market in Turkish lira,” said Evren Kirikoglu, an independent market strategist in Istanbul. “What’s necessary, however, is for the rate to be calculated fairly and openly,” and for there to be “significant market volume.”
That’s because traders will use it to take bets on the direction of interest rates, exchanging fixed payments with floating-rate ones and vice versa. So far, the lack of trading liquidity in the existing gauge, the Turkish lira libor rate, has crippled this market.
In a release last week, the Borsa Istanbul said the new fixing was created to meet demand for an underlying benchmark for financial products and contracts. But sceptics say headwinds remain for its wholesale adoption as a benchmark for interest-rate swaps.
As of June 7, Turkish residents held $185b of hard currency, making up just over half of total bank deposits. That means lenders looking to fund mortgages and loans in Turkish lira need to swap these short-term foreign-exchange liabilities into long-term local-currency assets.
“In the Turkish case, cross-currency swaps have been more appealing to banks,” said Inan Demir, an economist at Nomura Plc in London. “Now that deposit dollarisation is more pronounced and FX loan growth is much more limited, I think they’d still need cross-currency swaps rather than IRS.”

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