Once more on the MNB's interest rate swaps

HUNGARY - In Brief 25 Jan 2018 by Istvan Racz

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Well, seems one can never be entirely up to date. Just as we were writing our previous note on the new interest rate swaps (MIRS) yesterday, the MNB put out a statement to announce an amendment of the rules. The amendment has to do with the with the sales procedure, and it came despite the fact that so far there has been one auction only, the one held on January 18. The new rule is that rather than setting a minimum fixed rate for the auction, the MNB will from next time (February 1) onwards set a uniform fixed rate, and the auction will be transformed into a fixed rate tender, using the MNB's terminology. Given the fixed rate set for the whole tender, the MNB will then apply a rationing technique, by allocating the swaps to banks in proportion to their balance sheet totals.Now, what this change should do in terms of pricing is obviously to result in lower fixed rates. Last time, the MNB set minimum rates of 0.46% for 5 years and 1.17% for 10 years. But due to high demand, the actual average rates came out at 0.76% for 5 years (range 0.72-0.79%) and 1.46% (1.41-1.55%) for 10 years. I.e. should the MNB set the same rates next time, the average fixed rates would come out 29-30 bps lower than last time.We actually expect this to happen, i.e. that the MNB will not change its starting conditions regarding prices and quantities, but it will want to actually get through with the pricing they are putting forward.