Master Confirmations for CDS Indices

Master Confirmations for CDS Indices (Last modified on February 10, 2004.)

This note sketches how Master Confirmations will work for the two major CDS Index families, iBoxx and TRAC-X. It then discusses how this information should be expressed in FpML.

Master Confirmations in TRAC-X In Europe the first time two counterparties trade a particular TRAC-X product they sign a Master Confirmation and a Transaction Supplement. On their 2nd through Nth trade of that TRAC-X product they simply exchange a Transaction Supplement that references a Master Confirmation date. The process is the same in North America except on the initial trade the counterparties sign two Master Confirmation Agreements, one for the buyer and one for the seller.

A TRAC-X product is uniquely identified by three values: index, series, and tenor. Examples of TRAC-X products are TRAC-X EURO 100 SERIES 1 5YR, TRAC-X NA SERIES 2 5YR, and TRAC-X NA SERIES 2 10YR.

Here is a hypothetical sequence of TRAC-X trades between two counterparties:

 March 12th: 1st trade on TRAC-X EURO 100 SERIES 1 5YR. Sign Master Confirmation & Transaction Supplement with a Master Confirmation Date of March 12th.  April 1st: 1st trade on TRAC-X NA SERIES 2 5YR. Sign 2 Master Confirmations & Transaction Supplement with a Master Confirmation Date of April 1st.  April 1st: 1st trade on TRAC-X EURO FINANCIALS SERIES 2 5YR. Sign Master Confirmation & Transaction Supplement with a Master Confirmation Date of April 1st.  April 2nd: 2nd trade on TRAC-X EURO 100 SERIES 1 5YR. Sign Transaction Supplement with Master Confirmation Date of March 12th.  April 3rd: 2nd trade on TRAC-X NA SERIES 2 5YR. Sign Transaction Supplement with Master Confirmation Date of April 1st.  April 5th: 2nd trade on TRAC-X EURO FINANCIALS 10YR. Sign Master Confirmation & Transaction Supplement with a Master Confirmation Date of April 5th.

Master Confirmations in iBoxx An iBoxx product is also uniquely identified by an index, series and tenor. Examples of iBoxx products are: IBOXX EURO DIVERSIFIED SERIES 1 5YR, IBOXX NA CDX SERIES 2 5YR, and IBOXX EURO TMT SERIES 2 10YR.

However, Master Confirmations will work slightly differently in iBoxx. Each iBoxx index is associated with a particular region of the world: Europe, North America, and Emerging Markets. The first time two counterparties trade a particular series in a particular region they will sign a Master Confirmation agreement. This Master Confirmation will be applicable for the 2nd – Nth index trade in that region and series combination.

Here is a hypothetical sequence of iBoxx trades between two counterparties:

 March 12th: 1st trade on IBOXX EURO DIVERSIFIED SERIES 1 5YR. 1st trade on any IBOXX EURO SERIES 1. Sign Master Confirmation & Transaction Supplement with a Master Confirmation Date of March 12th.  April 1st: 1st trade on IBOXX NA CDX SERIES 2 5YR. 1st trade on any IBOXX NA SERIES 2. Sign Master Confirmation & Transaction Supplement with a Master Confirmation Date of April 1st.  April 2nd: 1st trade on IBOXX EURO TMT SERIES 2 5YR. 1st trade on any IBOXX EURO SERIES 2. Sign Master Confirmation & Transaction Supplement with a Master Confirmation Date of April 2nd.  April 3rd: 1st trade on IBOXX EURO FINANCIAL SERIES 2 10YR. Sign Transaction Supplement with Master Confirmation Date of April 2nd.  April 4th: 2nd trade on IBOXX NA CDX SERIES 2 10YR. Sign Transaction Supplement with Master Confirmation Date of April 1st.  April 5th: 2nd trade on IBOXX EURO DIVERSIFIED 10YR. Sign Transaction Supplement with a Master Confirmation Date of March 12th.

What does this imply for the FpML endorsed masterConfirmationType scheme? Given the mechanisms described above, new Master Confirmations for the CDS Indices will be signed between counterparties on a fairly regular basis (every six months?). This is much more frequently than ISDA Master Confirmations for Single Name Credit Default Swaps. Therefore, it probably does not make sense to try to enumerate these in the FpML endorsed scheme.

Since the Master Confirmation Agreement and date is referenced on the Transaction Supplement, we still need a mechanism to unambiguously reference the Master Confirmation in the Transaction Supplement. There are two potential solutions to this problem:

1. Let everybody define his or her own scheme values and leave it at that. 2. Only specify a Master Confirmation Date, the type is actually implied by other information on the Transaction Supplement.

Why would (2) be ok?

With iBoxx it looks as if a combination of index name (which implies the geographic region), series number and Master Confirmation date is enough to unambiguously identify the applicable Master Confirmation. Given our previous conversations, the name and series will be uniquely identified by the information in indexReferenceInformation.

With TRAC-X it looks as if a combination of index name, series number, tenor and Master Confirmation date is enough to unambiguously identify the applicable Master Confirmation. Again, the name and series will be uniquely identified by the indexReferenceInformation. The tenor could be ascertained from the scheduledTerminatonDate element, if one was populated on the TRAC-X transaction supplement. You’ll recall that we’ve made this element optional because its not required on a TRAC-X Transaction Supplement.

If we were to decide that (2) was the right approach we would need to:

1. Make trade/documentation/masterConfirmation/masterConfirmationType an optional element. 2. Determine if we still wanted to make trade/generalTerms/scheduledTerminationDate optional or not.