A new instrument for business: hedging interest rate risks in lending pegged to the discount rate

A new instrument for business has appeared on the Ukrainian financial market – hedging of interest rate risks in lending pegged to the discount rate (interest rate SWAP), according to Maksym Tsymbal, Deputy Chairman of the Management Board at Pivdenny Bank during the annual Ukrainian CFO Forum.

“An interest rate swap is a derivative financial instrument in the form of a contract between two parties that on certain dates one party pays the other party the difference between the interest accrued on the notional amount of the fixed and floating rate swap. A fixed rate is the subject of an agreement between the parties – the "bank" and the "client". The floating rate determines the value of money in the market and is set by the UONIA index (indicator of the value of hryvnia resources in the one-day market (overnight). This index is calculated by the regulator daily and shows the value of resources in the interbank market for one day,” said Maksym Tsymbal.

The essence of the transaction is that the client fixes the value of conditionally attracted resources in the bank, for example, at 7.5 %. All settlements between the bank and the client are based on a comparison of the fixed rate and the interbank lending index (UONIA). If UONIA is below a fixed rate – the client pays the difference to the bank, if UONIA is above a fixed rate – the bank pays the difference to the client.

“In general, in the market, according to our estimates, from 10 % to 20 % of the loan portfolio in the national currency are pegged to the discount rate. The formula of such pricing consists of two components: the discount rate + the bank's margin (the market has a stable margin of 6 %). The bank's margin can be reviewed once a year. As for the discount rate, it is revised depending on macroeconomic factors. In this formula, the discount rate is a “dark horse”. At the same time, it is now at historic lows, and pricing looks very attractive. If your formula approach to pricing and the loan rate is defined as the "discount rate plus bank margin", then adding a product such as an interest rate swap in total will provide you with a relatively constant level of loan costs throughout the term of the contract. Now the terms for such hedging of interest rate risks on the market are up to 4 years,” explained the Deputy Chairman of the Management Board at Pivdenny Bank.

The Ukrainian CFO Forum is one of the main financial events held annually and brings together the leaders of large companies to discuss current issues in the Ukrainian financial sector and find effective solutions.