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Interest Rate Swaps Conventions Contents July 2011 Interest Rate Swaps Conventions Contents 1. Description ......................................................................................................................................... 2 2. Products ............................................................................................................................................. 2 3. Dealing ............................................................................................................................................... 2 3.1. Methods of Dealing ............................................................................................................. 2 3.2. Electronic Dealing ................................................................................................................ 2 3.3. Business Days ...................................................................................................................... 3 3.4. Standard Transaction Size (market parcel) ........................................................................... 3 3.5. Two Way Pricing .................................................................................................................. 4 3.6. Quotation and Dealing ......................................................................................................... 4 3.7. Other Instrument Conventions ............................................................................................ 4 3.7.1. CPI Linked Swap Conventions (self contained) ....................................................... 4 3.7.2. Standard Interbank CPI Swap Structures ............................................................... 4 3.7.3. Definition of CPI .................................................................................................... 6 3.7.4. Standard Transaction Size (market parcel) ............................................................ 6 3.7.5. Standard Terms .................................................................................................... 6 3.7.6. Right to Break Clauses ........................................................................................... 6 3.8. Basis .................................................................................................................................... 7 3.9. Maturity Conventions .......................................................................................................... 7 3.10. Settlement Rate or Index ..................................................................................................... 7 3.11. Premium Payment Date(s) ................................................................................................... 7 3.12. Expiry Conventions .............................................................................................................. 7 3.13. Broker Conventions ............................................................................................................. 7 3.14. Confidentiality ..................................................................................................................... 8 3.15. Credit .................................................................................................................................. 8 3.16. Exercise of Options .............................................................................................................. 8 3.17. Data Source ......................................................................................................................... 9 3.18. Pricing Formulae .................................................................................................................. 9 4. Confirmations ................................................................................................................................... 11 4.1. Timing ............................................................................................................................... 11 4.2. Confirmation Standards ..................................................................................................... 11 4.3. Transaction Information .................................................................................................... 11 5. Settlements ...................................................................................................................................... 11 5.1. Physical Settlements .......................................................................................................... 11 5.2. Cash Settlements ............................................................................................................... 11 Appendix 1 - Glossary ............................................................................................................................ 12 Appendix 2 - Examples of CPI Linked Swap cash flow calculation ........................................................... 14 Interest Rate Swap Conventions Page | 1 1. Description The swaps market is an integral part of the capital markets. It drives and is driven by international bond issuance by both government and nongovernment entities. Swaps enable borrowers and investors to alter the cash flow characteristics of instruments they use to better suit their individual circumstances. They can also take advantage of any market misalignments to achieve better results than would be possible without the swaps market. 2. Products A swap, as the name implies, is an exchange of financial obligations. It involves two parties contracting to swap their respective interest payment flows or their foreign exchange obligations. A swap works by the dealer being able to value all the cash flows involved in the deal. In a swap the obligations exchanged can be in the same or different currencies and can be at fixed or floating rates of interest. There are many variations on this theme as per Appendix 1. An overnight index swap (OIS) is a fixed for floating interest rate swap having a term of usually between one week and two years. The floating rate is tied to a daily Interbank Overnight Cash reference rate (RBA30) These conventions are specific to Australian Dollar swap products traded between AFMA members, although they are applicable to all counterparties that trade or enter into AUD swap products. Swaps denominated in other currencies would be subject to the specific conventions/rules governing those markets. A set of self contained CPI linked swap conventions are detailed in Section 3.7. For CPI linked swaps conventions not covered conventions are the same as those for other interest rate swaps contained within this set of conventions. 3. Dealing 3.1. Methods of Dealing Direct via telephone or via brokers. 3.2. Electronic Dealing Not applicable. Interest Rate Swap Conventions Page | 2 3.3. Business Days A good business day is defined as any day on which banks in the state of New South Wales (NSW) are generally open for business, or a day other than one on which banks in NSW are obliged or permitted to close, excluding Saturday and Sunday. Essentially, NSW business days are weekdays (Monday to Friday) other than NSW public holidays as gazetted under the NSW State Government’s Banks and Bank Holidays Act 1912. That said Australian OTC Markets generally tend to operate in a reduced capacity on gazetted NSW public holidays that are not similarly gazette in Victoria. 3.4. Standard Transaction Size (market parcel) Unless specified otherwise the following dealing parcels will apply to Australian dollar swaps: Interest Rate Swaps Maturity Notional Principal for Swaps on an Notional Principal for Swaps on an EFP basis Outright basis 1 to 2 years $ 100 million $ 100 million 3 to 5 years $ 50 million $ 50 million 6 to 10 years $ 25 million $ 25 million >10 years $ 25 million 10 year equivalent $ 25 million 10 year equivalent Short Dated Interest Rate Swaps Maturity Notional Principal 1 to 3 months fixed against 1 month floating $ 500 million 4 to 6 months fixed against 1 month floating $ 200 million 7 to 12 months fixed against 1 month floating $ 100 million BAB(Bills)/LIBOR Swaps Maturity Notional Principal 1 to 2 years $ 100 million 3 to 5 years $ 50 million 6 to 10 years $ 25 million >10 years $ 25 million BAB(Bills)/Cash (RBA cash rate) Swaps Maturity Notional Principal 1 to 2 years $ 100 million 3 to 5 years $ 50 million 6 years and beyond. $ 25 million Interest Rate Swap Conventions Page | 3 Single Currency Basis Swaps Maturity Notional Principal 1 to 10 years $ 100 million The minimum market parcel for all swaps in a fly is double the notional of the standard market parcel in the belly of the fly. This also applies to Bills/ Libor and Domestic Basis swaps The minimum market parcel for any spread trade is the “minimum of the minimum”, i.e. in the case of a 3y/6y swap, parcel is $25 million Overnight Index Swaps Maturity Notional Principal 1 to 3 months $ 500 million 4 to 6 months $ 200 million >6 months to 2 years $ 100 million 3 to 5 years $ 50 million 6 years and beyond. $ 25 million For CPI linked swap standard transaction size (market parcel) refer to Section 3.7. There are currently no standard dealing parcels for cross currency swaps. 3.5. Two Way Pricing No specific convention. 3.6. Quotation and Dealing The margin on term basis swaps across all underlying tenor combinations is applied to the shorter leg. 3.7. Other Instrument Conventions 3.7.1. CPI Linked Swap Conventions (self contained) Most conventions for CPI linked swaps are the same as those for standard interest rate swaps
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