TITLE OF THE STUDY
The title of the study is ³A study on FIMMFX instruments and the process of
Investigating & Validating them at HMD Department, Thomson Reuters Bangalore´
OBJECTIVES OF THE STUDY
The objectives of the study are as follows:-
1. To understand the basic operations at FIMMFX pricing team HMD department
2. To know the various instruments handled by FIMMFX team HMD department
3. To know and understand how the prices of different instruments are validated.
4. To understand the flow of prices to different products.
5. To learn and understand the process of solving queries if clients suspect the
prices.
SCOPE OF THE STUDY
y Operations related to Historical pricing of all instruments related to Fixed Income,
Money Market and foreign Exchange.
y Operations inside Numeric data architecture
y End of the day trading prices
y Indicative prices for all instruments and not traded prices except if the prices are
from the stock exchanges.
OUT OF SCOPE
y Non-historical prices like real time prices.
y Bonds (RICs) not available in NDA
LIMITATIONS y Numeric data architecture (NDA) is very vast like an ocean; hence all features of
NDA cannot be covered. It will take minimum of 5 years to know the entire
features of NDA. y Not getting access to all the processes carried out at FIMMFX pricing team. y The entire process is limited only to Thomson Reuters Company. y The scope of the study is mainly concern for the fulfillment of academic purpose
and as per company permissions. y Most of the data are highly confidential.
COMPANY PROFILE
Thomson Reuters is an information company created by the Thomson Corporation's purchase of Reuters on 17 April 2008. Thomson Reuters shares are listed on the
Toronto Stock Exchange (TSX: TRI) and the New York Stock Exchange (NYSE: TRI).
Thomson Reuters is headquartered in Midtown Manhattan, New York City, USA. The
Woodbridge Company, a holding company for the Thomson family of Canada, owns
53% of the group which operates in 100 countries, and has over 55,000 employees.
The Thomson Corporation
The Company was founded by Roy Thomson in 1934 in Ontario as the publisher of The
Timmins Daily Press. In 1953 Thomson acquired the Scotsman newspaper and moved to Scotland the following year. He consolidated his media position in Scotland in 1957 when he won the franchise for Scottish Television. In 1959 he bought the Kemsley
Group giving him control of the Sunday Times. He separately acquired the Times in
1967. He moved into the airline business in 1965, when he acquired Britannia Airways and into oil and gas exploration in 1971 when he participated in a consortium to exploit reserves in the North Sea. In the 1970s, following the death of Lord Thomson, the
Company withdrew from media selling the Times, the Sunday Times and Scottish
Television and instead moved into publishing, buying Sweet & Maxwell in 1987. In
1989, Thomson Newspapers was merged with The Thomson Corporation. In 1996 The
Thomson Corporation effectively doubled its size and ensured future profitability by purchasing West Publishing, a purveyor of legal research and solutions including
Westlaw
Reuters
The Company was founded by Paul Julius Reuter in 1851 in London as a business transmitting stock market quotations. Reuter set up his "Submarine Telegraph" office in
October 1851 and negotiated a contract with the London Stock Exchange to provide stock prices from the continental exchanges in return for access to London prices, which he then supplied to stockbrokers in Paris in France In 1865, Reuters was the first organization to report the assassination of Abraham Lincoln in London. The company was involved in developing the use of radio in 1923. It was acquired by the British
National & Provincial Press in 1941 and first listed on the London Stock Exchange in
1984. Reuters began to grow rapidly in the 1980s, widening the range of its business products and expanding its global reporting network for media, financial and economic services: key product launches included Equities 2000 (1987), Dealing 2000±2 (1992),
Business Briefing (1994), Reuters Television for the financial markets (1994), 3000
Series (1996) and the Reuters 3000 Xtra service (1999).
Post acquisition
The Thomson Corporation acquired Reuters Group PLC to form Thomson Reuters on
April 17, 2008. Thomson Reuters operated under a dual-listed company (³DLC´) structure and had two parent companies, both of which were publicly listed ² Thomson
Reuters Corporation and Thomson Reuters PLC. In 2009 it unified its dual listed company structure and stopped its listing on the London Stock Exchange and
NASDAQ. It is now listed only as Thomson Reuters Corporation on the New York Stock
Exchange and Toronto Stock Exchange (symbol: TRI).
Thomson Reuters brands include Sweet & Maxwell in the UK and West Publishing in
North America. Reuters and Westlaw are global brands.
Company Operations
The chief executive officer of the combined company is Tom Glocers, who was the chief executive of Reuters, and the chairman is David Thomson, who was the chairman of
Thomson.
The Company is organized into two divisions:
y Markets Division: formed from integrating Thomson Financial with Reuters.
o Sales & Trading
o Enterprise
o Investment & Advisory
o Media
y Professional Division:
o Legal ± formerly North American Legal and Legal & Regulatory; primarily
West, makers of Westlaw.
o Healthcare & Science ± formerly Thomson Healthcare and Thomson
Scientific
o Tax & Accounting ± formerly Thomson Tax & Accounting
Thomson Reuters shares are listed on the Toronto Stock Exchange (TSX: TRI) and the
New York Stock Exchange (NYSE: TRI).
ORGANIZATIONAL CHART OF THOMSON REUTERS
SOME OF THE DEPARTMENTS UNDER ENTERPRISE:
1. HISTORICAL MARKET DATA 2. FUNDAMENTALS 3. PERMISSIONING 4. ESTIMATES 5. MONEY REFERENCE 6. MONEY REAL TIME
ORGANIZATIONAL CHART OF HISTORICAL MARKET DATA (HMD) DEPARTMENT, BANGALORE
(FIMMFX PRICING TEAM)
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combination of content, transactions and collaboration tools g. Fixed Income: Comprehensive news, prices, market data and tools spanning the
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FIXED INCOME PRICING RULES
RULE 1: BID < ASK
The bid price must always be less than the ask price, so you always buy something for less than you sell it.
A bond trader will buy from you at the lowest price and then sell at the higher, making a profit.
RULE 2: BONDS PRICE IN PERCENTAGES.
Remember that bonds price in %
So you must remember if you see a price of 100 this represents 100% of its value and it not £100 or £100 or 100 yen.
A bond has a Nominal Value eg £1000. Another name for Nominal Value is Par Value.
This is the amount that the bond issuer promises to repay at maturity.
RULE 3: Yields (bonds have yields)
This is the yield: - The annual rate of return on an investment, expressed as a percentage.
The Yield combines both the return the investor gets from the coupon payments and possible gains in the bond price.
There are many different types of yield that are used by Thomson Reuters clients and many are calculated by us for clients.
RULE 4: Prices and Yields have an inverse relationship
The inverse relationship between price and yield is a fundament pricing rule and will constantly help you looking at data and queries.
Price rises and the yield falls and vice versa.
RULE 5: Higher risk to the investor the higher the yield.
The greater the chances the investor will not get his money back the more return he will want for taking this risk.
Corporate bonds will have a higher yield that most government bonds. The lower the credit rating the higher the yield should be.
RULE 6: Longer the term the higher the yield
If you lent someone money for a week you would only ask for a small return. But if you lend them the money for 10 years, you are taking much more risk that you won¶t get the money back, so as compensation, you charge a higher return.
RULE 7: Different Yield levels for different countries
We have now seen that countries themselves have different rates and risks based on the strength of their economies and the political stability.
This is important as you need to consider the country and market you are dealing with
when looking at data to decide if the values are correct.
RULE 8: Government bonds used as market benchmarks
When companies like IBM or BMW or General Electric issue a bond they use the
government yield as the minimum return they need to offer to the market and then add a
few basis points. A basis point is a hundredth. The company wants to pay the minimum
amount of interest to investors, so will go as low as it can.
Lower the yield is, the lower the cost of the borrowing to the company.
FX AND MONEY MARKETS
The FX market is Foreign Exchange; you may also hear it called forex. The forex market is the single largest financial market in the world. At its most basic, the market is concerned with exchanging one currency for another but a range of derivatives have been developed over time
Why do people exchange currencies?
y Import / Export businesses
y Travel or holidays
y Repatriating profits or payroll for multinational companies
y Hedging risk
y Speculation/Investment
The market is mostly traded Over the Counter (OTC). Whereas a stock exchange has limited trading hours, the FX markets can operate 24 hours and are truly global. The majority of trading is done from Monday to Friday but Middle Eastern Gulf countries can trade on a Saturday or Sunday so there is almost always a market open in the world!
FACTORS AFFECTING FOREIGN EXCHANGE PRICES
What specific factors would come under Economic?
y Interest Rates
y Supply and Demand for capital
y Purchasing Power Parity (PPP)
y Economic conditions ± Inflation rates, unemployment rates, balance of payments
and rates of taxation
What specific factors would come under Political?
y Type of government in power
y The market regulation by government agencies
y Government intervention in buying or selling currencies to affect the exchange
rates
What specific factors would come under Market sentiment?
y The market sometimes moves the way people want it to move mainly through
rumor, this usually only has a short term impact
y Technical Analysis ± if there are any strong trends or signals then these will tend
to have an impact on the market
y If a large trade goes through on a platform such as D3000 or EBS then this can
have a ripple effect.
What specific factors would come under Environmental or seasonal?
y Weather disasters, Earthquakes and flood damage
y In France and Germany there are traditional summer month when large
numbers of holiday makers travel abroad requiring substantial amounts of
currencies
y Multinational corporations convert dividends and interest payments into their
local currency before the financial year ends.
An exchange rate always quoted as the price of one currency in terms of another.
Currency quotations consist of a base and a quote currency ± the convention when writing a currency pair exchange rate quotation is to put the base currency first and the quote currency second.
Figure - Currency quotation
DIRECT QUOTATION
One unit of foreign currency can be exchanged for a variable amount of domestic currency.
Example: USD/CHF = 1.2670
INDIRECT QUOTATION
One unit of domestic currency can be exchanged for a variable amount of foreign currency.
Example: EUR/USD = 1.2542$
Most currencies are quoted directly, which currency is quoted first is normally the currency which has historically been the strongest or if the country was a colony or protectorate of the United Kingdom and used Sterling as the unit of account.
The vast majority of trading is done with the US Dollar as the base or quote currency.
This is because the US Dollar is the most liquid and convertible currency in the world, and is used as a reserve currency in many countries.
SPOT RATES
Direct Rates: The majority of the spots are contributed directly i.e. it indicates how much of the currency it takes to buy 1 US dollar. For example it takes 1.2 Canadian Dollars to buy 1 US Dollar.
Indirect Rates: There are some spot rates that are contributed indirectly (Euro Dollar,
British Pound, Australian Dollar, New Zealand Dollar) i.e. it indicates the amount of the
currency it would get with 1 US dollar. Ex: British Pound spot rate is indirectly quoted; it gives you the amount of US dollar to get 1 British Pound.
The convention when writing a currency pair exchange rate quotation, is to put the base
currency first and the quote currency second. For example:
(Base currency) USD / CHF (quote currency)
(Base currency) GBP / USD (quote currency)
CROSS RATES
Direct Cross: Rates are when both the currency pairs have the base quote as the US
dollar. Ex: CADJPY= Canadian Dollar/Japanese Yen Cross Rate
Currency Pairs Bid Ask
USD/Currency 1 B1 A1
USD/Currency 2 B2 A2 Ex: Calculate CADJPY= Cross rates Bid Ask
Currency 1/Currency 2 B2/A1 A2/B1
Currency 2/Currency 1 B1/A2 A1/B2
USDCAD 1.2339/1.2344
USDJPY 104.65 / 104.70
Bid for CADJPY= Bid2/ Ask1 104.65 / 1.2344=84.77
Ask for CADJPY= Ask2/ Bid1 104.7 / 1.2339 = 84.85
Indirect Cross:
Rates are when one of the currency pairs (EUR, GBP, AUD, and NZD) where the base quote is not US Dollar.
EURJPY= Euro Dollar/Japanese Yen Cross Rate
Currency Pairs Bid Ask
Currency 1/USD B1 A1
USD/Currency 2 B2 A2 Cross Rates Bid Ask
Currency 1/Currency 2 B1*B2 A1*A2
Ex: Calculate EURJPY=
EUR= 1.3255/1.3260
JPY= 104.65 / 104.70
Bid for EURJPY= Bid1*Bid2 1.3255 * 104.65=138.7135
Ask for EURJPY= Ask1*Ask2 1.3260 * 104.70=138.8322
COMPOSITE CROSS AND CALCULATED CROSS RATES
Composite Cross Rates are Super RICs with global contributions.
RIC structure: ISO Code =. Example: EURJPY=, AUDJPY=
Reuters Calculated Cross rates represent cross rates for which pricing is calculated from the underlying super RICs such as Spots.
RIC structure: ISO code=R. Example: EURJPY=R, GBPCHF=R
HOURLY SPOT & CROSS RATES
In addition to cross and spot rates, Reuters also has FX Hourly rates on IDN. This data is snapped hourly from FX Super RICs (AUD=, EURJPY=) every hour. The first hour is
00H; the second hour is 01H and so on.
The RIC structure is RIC + 00H =, for example "AUD03H=, EURJPY12H=" .The snap time (FID 5 on IDN) is in GMT on the IDN display. And the time column will be local time from you pc clock. The high (high bid) and low (low ask) values will be showing the range at that trading hour immediately before the snap. You can use the available hourly rates from the speed guide
DELAYED RATES AND DEALING RATES
Delayed RICs: RICs, which have a delayed data by 2min or 10 min sent out by the
Reuters IDN system from the underlying super RICs. These RICs receive tick contributions every 2 or 10 minutes instead of all ticks.
RIC Structure= ISO = S (2 min Delayed) EUR=S
ISO code = X (10 min Delayed) EUR=X
Dealing Rates:
Reuters FX dealing system (Dealing 2000 or 3000) through which bank dealers
trade currency.
RIC structure ISO code= D1 or D2 or D3 Ex: EUR=D3
EBS Dealing Rates- Dealing rates provided by Electronic Brokerage System
RIC Structure: ISO Code=EBS Ex: EUR=EBS
FORWARD RATES
Forward Rates: The forward rate is the rate, which appears in contracts to exchange
one currency for another N days in advance of the actual transaction. It is distinguished
from the spot rate, which is the rate used in agreements to exchange one currency for
another immediately. No currency changes hand between the parties in a forward
contract at the time it is signed; the currency is exchanged at the maturity date of the
contract N days in the future. Ex: Canadian Dollar 1 Month Forward Rate
A forward currency will be traded at Premium and Discount
If the interest rate of the base currency is higher than the quote currency, the base
currency is said to trade at a discount in the forward market. The forward points are deducted from the spot price.
If the interest rate of the base currency is lower than the quote currency, the base currency is said to trade at a premium in the forward market. The forward points are added to the spot price
These prices are not speculation on where a currency pair¶s price will be in the future!
The prices are derived purely from interest rate differences between the two currencies
SpeedGuide:0#FORWARD
RIC Structure: Currency code+Delivery Period= Ex: CAD1M=
Tenors or Delivery Periods:
ON ± Overnight
TN- Tomorrow next
SN- Spot Next
SW Spot week
1M- One Month
2M- Two Month
3M- Three Month
6M- Six Month
9M- Nine Month
1Y- One Year
2Y- Two Year
DEPOSITS
What are the money markets?
Money is effectively rented in a process of borrowing and lending. A deposit is
effectively a wholesale loan, it is an agreement between two banks to borrow or lend
money. The sums of money are normally over £100,000 or local equivalent. Placers or
lenders deposit their money with banks and receive interest on their capital whereas
takers or borrowers borrow funds on which they pay interest.
Money Markets are concerned with short term loans in which financial institutions
borrow and lend money for periods overnight to one year, although this can be longer in
some currencies. There are also derivatives based on interest rates which we will look
at later, these can have maturities up to 50 years in the future.
Deposits are unsecured. For this reason, the price you pay and the amount you can
borrow depends on your institution¶s credit rating. Like the FX market, the deposit
market is over-the-counter and business is still mainly conducted via telephone. Money
Brokers still play a very active role, the penetration of electronic systems is much lower
in the deposit market because so much depends on credit ratings.
Like the FX markets, Deposits are normally quoted as a bid/ask price. For example:
Bid/Ask
GBP 1MD 5.07/ 5.13
The prices are quoted as borrow/lend. The bid price is the interest rate at which that bank is prepared to borrow money and the ask price is the interest rate at which that bank is prepared to lend money. In London, the bid/ask may be quoted the other way round so if the figure on the left is higher then they are quoting ask/bid or lend/borrow.
Occasionally, you may see prices quoted as fractions. For example:
Bid/Ask
GBP 1MD 5 1/4 / 5 5/8
Which means 5.25% / 5.63%? Prices are usually quoted to two decimal places.
Deposits are usually fixed term and non negotiable. This means that once a deposit is made, i.e. once a bank lends money to another, they don¶t normally have the right to call the money back before the agreed maturity. Interest is usually paid at maturity, along with repayment of the principal but it might be paid annually if the deposit is for longer than a year.
Speed Guide: 0#DEPO
RIC Structure: Currency code Delivery Period= Ex: CAD1MD=
MAJOR FIXINGS
In this module we are going to look at some of the major interest rate and currency fixings as it is important to understand what they are and how the markets make use of them.
An IBOR (Interbank Offer Rate) is a benchmark calculated from the Interest Rate at which Banks can borrow funds in marketable sizes from other banks in the interbank market.
Let¶s focus on LIBOR before looking at other IBORs
London Inter Bank Offer Rate is the most widely used short term interest rate globally. It is the reference rate used in the United States, Canada, Switzerland and of course the
UK. They represent an average of what interest rate banks are willing to lend at.
It is used as the basis for settlement of interest rate contracts on many of the world's major futures and options exchanges (including LIFFE, Deutsche Term Börse, Chicago
Mercantile Exchange, Chicago Board of Trade, SIMEX and TIFFE) and is used for most
Over the Counter (OTC) and lending transactions.
HOW IS BBA LIBOR PRODUCED AND PUBLISHED?
The British Bankers' Association (BBA), advised by senior market practitioners, maintains a reference panel of between 8 and 16 contributor banks.
The aim is to produce a reference panel of banks which reflects the balance of the market - by country and by type of institution.
Individual banks are selected within this guiding principle on the basis of reputation, scale of market activity and perceived expertise in the currency concerned.
BBA Libor is compiled each London Business day by the London Fixings Support Team in Ex-Reuters and is broadcast through a number of international distribution networks including EX-Thomson Financial and Bloomberg.
BBA LIBOR fixings are provided in ten international currencies:
Pound Sterling
US Dollar
Japanese Yen
Swiss Franc
Canadian Dollar
Australian Dollar
Euro
Danish Krone
New Zealend Dollar
Swedish Krona
BBA Libor rates are fixed for each currency in 15 maturities up to 12 months.
10 REASONS WHY THE BBA LIBOR STANDARD IS IMPORTANT?
1. it is long established
2. it offers the largest range of international rates
3. it is a truly international reference rate
4. it has a wide commercial use
5. it enjoys wide international dissemination
6. its mechanism is transparent
7. of the credibility of providing a robust settlement rate
8. of the credit quality of panel banks
9. the banks represented on the panels are active in the cash markets
10. BBA Libor's London base is significant: well over 20% of all international banks
lending and more than 30% of all foreign exchange transactions take place
through the offices of banks in London.
EURIBOR
Unlike Euro BBA Libor, EURIBOR, the fixing which has been established by the
European Banking Federation applies a concept of country quota.
Each in-country has at least one bank represented on the Panel and smaller countries will rotate membership of the Panel amongst their leading commercial banks every 6 months.
EURIBOR has a panel of 48 reference banks from in zone countries as well as international banks. Bank of Tokyo-Mitsubishi, Chase, Citibank, JP Morgan Bank of
America and UBS have been selected to represent international banks.
The EURIBOR benchmark is vested with the same degree of authority and worldwide acceptance as the existing BBA LIBOR fixing series. It is fixed each day at 11:00 CET by the London Fixings Support team in Reuters and broadcast internationally through a range of distributors.
There are also other interest rate fixings for different countries, most countries have them. These can be found from the FIXINGS Speedguide (demonstrate this in Kobra)
Because the mechanism of fixing it, and the prices used, is transparent an IBOR provides a powerful way of settling contracts. They are widely disseminated and so are indisputable. For this reason Interest Rate derivatives such as FRAs and Swaps nearly always use a benchmark fixing for settlement.
There are also commercial products which use fixings, for example a corporation might be able to borrow floating rate fund from his bank pegged above a fixing like LIBOR. It is possible for consumers in the UK to buy mortgages based on LIBOR.
The current Benchmark interbank rates are also used for pricing bonds, floating rate bonds will normally pay some premium over an IBOR fixing to keep them competitive.
Fixed coupon bonds will often be priced against the long term expectations for LIBOR.
CURRENCY FIXINGS
Now let¶s look at currency fixings. As well as interbank borrowing and lending rates, there are also exchange rate benchmarks used widely in the market. One of the most prominent in Europe are the reference exchange rates published by the European
Central Bank on
Euro against various currencies. These are mid rates, averages of buy and sell rates, reported to the ECB by various national banks from in and outside the Euro zone daily and published by about 2:30 CET.
Most central banks in the world publish their own fixings as well. The exchange rate fixings are often used for settlement of currency derivatives. Also the middle or back office of a bank will use them to ³mark to market´ their position at the end of the day to calculate each trader¶s profit or loss.
Another prominent set of FX fixings are the WM Company/Reuters fixings. WM
Company take FX prices from Reuters, validate them, and republish them as benchmark fixings. The main fixing is at 4 PM UK time, and they publish additional hourly fixings throughout the day. These are used in a similar way to central bank fixings, but cover a much wider range of currencies than any other provider.
ISDA SWAP FIXINGS
The ISDA Swap fixings are benchmarks based on Interest Rate Swap settlement rates.
We will look swaps in a later module. These are reference rates calculated for US
Dollar, Euro, Sterling, Yen, Swissy, Hong Kong Dollar and Canadian Dollar. They are
fixed from a panel of banks for each currency using very similar methodology to the
LIBOR fixing. Banks are selected by ISDA (International Swaps and Derivatives
Association) on the basis of their expertise in the market and Reuters calculate
distribute the fixing on their behalf. The fixing is used by swap dealers to price swaps, and to mark their position to market to calculate profit and loss statistics. The fixings
are Reuters exclusive.
BBA VOLATILITY FIXINGS
The BBAVOLFIX is a fixing on over the counter FX option trading. This is calculated by
Reuters from a range of panel banks at 4 PM every day. The fixing is also used by
option dealers to mark to market at the end of the day and in pricing subsequent
options. The fixings are Reuters exclusive.
FORWARD RATE AGREEMENTS (FRAS)
FRA¶s first came about in 1983 and are one of the most widely used of the OTC Money
Market derivatives. They are used by market players to lock in short-term borrowing and lending rates. They work almost as an insurance policy on IBOR fixings.
A Forward Rate Agreement is a contract between two parties which fixes the rate of interest that will apply to a notional future loan or deposit for which the following have been agreed:
y The amount and its currency
y A future date for the loan/deposit to be drawn/placed
y The term.
Example
UK car manufacturer has to pay £5Million for new machinery in 3 month. The corporate
Treasurer is given the instruction and decides to borrow £5Million in 3 months for 6 months
Today 3 6 months Required loan months
Taking GBP as an example, the current 3M LIBOR is about 4.80% (rounded to 2 D.P)
This is where the FRA comes in. The treasurer can buy a 3X6 FRA starting in 3 months
and ending in 6 months. The current rate is around 4.9%. This means that after 3
months the FRA begins with a locked in price of 4.9%. The treasurer still has to borrow
at current market rates but one of the following will happen:
Scenario 1:
Interest rates have risen. The current 3M LIBOR is now 5.10%. The treasurer borrows
6 million at this rate, but the seller of the FRA has to pay excess over 4.9% to the
treasurer at the settlement date (0.2% of the £5 million in this case)
Scenario 2:
Interest Rates have fallen. The current 3M LIBOR is now 4.6%. The treasurer can
borrow at this price but because he has a FRA contract he must pay the difference to
the seller of the FRA (0.3% of the £5 million in this case)
Key points for a FRA:
OTC
No exchange of Principal (off balance sheet)
Forward-Forward Interest Rates
Contracts are named like 3 x 6 : Starting in 3 Months, Ending in 6 Months
Used primarily for Hedging
Interest is Settled at Beginning of FRA period
Contact is unbreakable. Standard conditions are set by the British Bankers
Association but others may be used.
There is a low credit risk hence very tight spreads and large contract sizes
available.
MARKET PRICING OF FRAS
The FRA is quoted as a two-way price with bid/offer or borrow and lend prices in the same way as for Money Market deposit rates.
The first period refers to the starting month from today, the second period refers to the expiry from today, e.g. 3x6 (meaning the contract starts in three months and runs for three months). The following table explains the term of the FRA instrument ± start and end date for loan.
INTEREST RATE SWAPS
IRS:
An arrangement between two parties to exchange two different schedules of cash flows for a fixed amount of time. The simplest is called a ³Plain Vanilla IRS´ and exchanges a series of cash flows based on a floating rate and a series based on a fixed rate. They can be thought of as a strip of FRAs.
These are an Over the Counter interest rate derivative which can be used to convert a fixed rate payment into a floating rate payment over long periods of time, up to 50 years in some markets. They allow parties access to interest rates which may be better than they could normally receive. The first IRS was set up between IBM and the World Bank in 1981, and once this example was shown to work many multinational corporations started adopting them.
A typical swap would be set up as follows:
1. XYZ, a triple A rated company can borrow fixed rate funds at a low fixed rate.
They need to borrow $50 million over 5 years and have issued a 6% fixed rate
bond to do this but would like to use a floating rate to capitalise on any drops in
interest rates.
2. ABC, a company with a credit rating of BBB, also needs to borrow $50 million for
5 years. Due to their lower credit rating they cannot obtain a cheap fixed rate
loan cheaper than 7.0% so they take out a floating rate loan at LIBOR plus 1%.
They would prefer to switch this to a fixed rate so they can predict future
payments.
ABC and XYZ arrange an interest rate swap to capitalize on their situations which operates as follows:
y XYZ pay ABC their floating rate payments of LIBOR + 1%
y ABC pay XYZ a fixed rate of 6.75% LIBOR + 1%
6.75% Fixed Rate
XYZ Corp. ABC Plc.
6% Fixed Rate LIBOR + 1%
Bondholders Lending Bank
XYZ Corp receives the payments to cover its bond while paying out LIBOR + 1%. ABC
Plc receives the floating rate payments to cover its floating loan, and pays a fixed rate of
6.75% to XYZ Corp. It has therefore met its objective of obtaining a fixed rate loan but
for 0.25% cheaper than its bank offered. Many banks are now active in the market, both
as market makers to provide a service and to speculate in the hope of making profits.
KEY POINTS OF AN IRS
y Standard, or Vanilla, swap contracts involve exchanging fixed rate payments for
floating rate payments
y Like a FRA, there is no exchange of principal. The two parties must first borrow
their funds elsewhere.
y The fixed rate payer is the buyer of the swap or the provider of floating rate
funds
y The fixed rate receiver is the seller of the swap, or the provider of fixed rate
funds
y The two interest rates are called the fixed leg and the floating leg
y The floating rate used is normally a benchmark such as LIBOR
y The fixed rate is usually derived from the long term treasury bond market.
y Although the two payments may be calculated on different bases, e.g. 3 Month
Libor versus an annual fixed rate, they payments are normally synchronized and
so only the net value is exchanged ± again like a FRA
y Ric Structure
Currency code+ semi annual (SB) or Annual (AB)+ Months+ Basis+Delivery Period
FIXED INCOME SECONDARY ID CODES
Common Code ± Assign by Euroclear. 9 digits ± all numeric.
Eg 017710788, 013904308
Wert ± short for µWertpapierkennnummer¶± The local German code assigned by
WertpapierMitteilungen ± a German organisation. Six digit code. Used to be wholly
numeric but is now Alphanumeric.
Eg 113527, BWB011
ISMA ± International Securities Market Association. 6 Digit numeric code assigned by
ISMA. Sequential 392311, 508228
Sedol ± Assigned by London Stock Exchange. Now alphanumeric ± was numeric.
¶Stock Exchange Daily Official Listing code¶
Eg 7250198, 2732033
Valoren ± Assigned by the Swiss Stock Exchange (virtual exchange, located mainly in
Zurich). Currently 7 digits, numeric.
2019255, 1238558
CUSIP ± Committee of Uniform Security Identification Procedures. An American
alphanumeric code consisting of a 4 digit issuer code and 3 digit issue code.
Eg 912828DC1, 345397TZ6
ISIN ± International Securities Identification Number. 12 digits. Assigned by Euroclear and the main code for nearly all markets.
The first two letters are a country code. The rest of the code is based on a local code, like Common Code, Wert or Cusip. The last digit is a check digit generated using a formula.
Eg XS0139043086, US345397TZ65
Zpage/ Zcode ± Zcodes are internal Reuters codes used for Eurobonds and Swiss foreign bonds. They were historically used as a mini-product on IDN where clients could view a small number of basic T&Cs for a bond. All this information is now available on the Superric, but the Zcodes still exist to link to the superric and to link real- time contributor pricing to a bond.
Eg Z6RK, ZH79
FIXED INCOME RICS
y RIC ± Reuters Instrument Code
y Rics needed for Realtime and Historical Pricing
FI RIC RULES
Start with the 2 letter country code of the issuer DE
Then have a local code like wert 123456
Then they all have an ³=´ =
Then most have a Ric suffix (Contributor Code) ABNL
Eg DE123456=ABNL
RIC TYPES
Exchange Ric ± contains prices from a stock exchange. Contributor Code ending is 1,
2 or 3 letters long, eg LU, F, SG, N
Eg XS0104599401=PA, CH1238558=S
Contributor RIC ± contains pricing from a contributor like JP Morgan London. Always ends in 4-letter Contributor Code, eg JPML.
Eg XS010459940=BARL, US912828DG21=DRKW
SuperRIC ± the main RIC for a bond and the RIC that nearly all other RICs for the bond will be based on. Ends in an = sign, ie has no Contributor Code ending.
On IDN it will show the last three prices from all the contributors for this bond and other data like coupon and maturity date.
Eg ES00001288=, XS013904308=
Chain RIC ± has syntax 0#superRIC.
On IDN it contains a list of all the contributors for that bond. The last price from any contributor flows onto the superric.
Eg 0#XS013904308=, 0#ES00001288=
RR RIC ± this is called a constituent ric for a government benchmark yield curve. It allows there to be one continuous Ric for a term to maturity as the underlying bonds change.
JP5YT=RR, US10YT=RR
RTR RIC ± is not a ric we snap pricing off, instead it¶s more like a mini-product that
shows clients the core Terms and Conditions of a bond and also the last 3 prices from
ISMA all in one view. RTR Rics only exist for Eurobonds and some European Foreign
bonds.
XS013904308=RTR, US011391176=RTR
CF RIC ± exists for Eurobonds and Treasury Benchmarks and contains the closing and/or intra-day fixes of prices yields and other pricing facts.
=QQ RIC ± Set up by Debt Product. Needed for setup of superric on IDN and to set up tolerances on IDN. No pricing snapped.
=RRPS ± Reuters Pricing Service. Prices generated by the Reuters Pricing Service from calculations and contacting dealers
Yield curve checks
If there is a FI Query and we can replicate this is in NDA, then follow the steps below to determine the issue.
If Missing Composite pricing, check if:
1) Any of the Contributor contributed data on the day in question
2) The TAG setup is correct LF and PU= Y TAG set up is correct.
3) Bond has EJV Asset ID in NDA, PID+PSC combination is not excluded from
Composites, Composite Flag is Y, How Priced tool and also check to see if the prices are not in the 120028/120029 exceptions.
4) Continue with Contributor/ Exchange Missing Data investigations.
If Suspect Composite pricing:
Follow the Composite Correction procedure to resolve the query
If Missing Analytics data:
1) Check if there is a Preferred Composite?
2) If yes, check if the Complex Floater CS field is Y/N in the Interest Definition screen on
EJV. Contact the T & C's team to check if the flag is correct. If not, contact SMA or specialist.
3) Continue with Missing Composite data investigations.
If Suspect Analytics data:
Check with the T & C's team if the Terms and Conditions are correct. If yes contact
SMA or specialist. If no, correct T&C.
Are the Composite Prices and Calculated Yield Values missing on the Underlying
RIC?
Check if super RIC and all contributor RIC¶s are correctly linked to the issue asset
and the DPS.
We can get the list of RIC¶s for that bond from:
1. Chain the super RIC and
2. Issue to quote and Quote to issue OD report and
3. search function on Xtra using any issue level ID and
4. RIC contains search on the RIC syntax got from all 3 methods above.
Check that super RIC in PHE and confirm if both composite and analytics are missing
on that date and previous trading dates. If the Composite prices exist then go to step 2.
If CPL/CPT/CPN values are missing follow the below steps:
If contributor RIC¶s are not tagged: - Using RT chain function and issue to quote OD, search function in 3000 Xtra and the RIC contains search get the list of Contributor
RIC¶s from the Underlying RIC. Using the RIC to TAG OD report we can determine if all the Contributor RIC¶s are stored in the respective Contributor Tags.
If they are not tagged tag them if they should be tagged and source history for these using RDTH and real time speed list from IDN.
If contributor RIC¶s are tagged: - Check the tag set up.
Check in PHE if there is data for analytics. If there is no data check if the NO CALC flag is set as yes or no in EJV. If there is no analytics data, then check in the XFI OD report and check if XFI is getting analytics data or not, if not, check with the developers and if
XFI is getting analytics data and NDA is not, then check if the super RIC is linked to the correct DPS or not.
We should also check the DBS TS FF Exceptions OD report and check if this bond is there in the list of FF exceptions and resolve accordingly.
Multiple RIC issue
Most common problem is that the RIC and the DPS are on 2 different NDA ID¶s and we
need to refresh the bonds and get that corrected.
Check in the DPS to RIC and RIC to DPS OD report if the RIC is linked to the DPS or not and if not contact the T¶s and C¶s and get this corrected or do it yourself out of market hours:
1) Delete both the RIC's from EJV
2) Wait to end date in NDA
3) Then add the correct Underlying RIC first and then the other RIC in to EJV and wait for that to NULL End date in NDA and then add the second super RIC to EJV and reupload the analytics and composite data to NDA on the correct super RIC from the
DPS.
Multiple AGI ID Issue:
This can be determined in the RIC to pricing OD report and if this is the issue this should be cleared in the Remapping application.
If the Composite Prices and Calculated Yield Values missing on the =RR RIC but are available on the Underlying RIC?
The denorm process in this case is not happening correctly. Check the mappings in the curve maps screens or the Benchmarks to super RIC mappings OD report and if the mappings are correct, contact the T¶s and C¶s team who did the mappings and check with them.
If there are no mappings or the correct facts are missing they should add them.
If mappings are there correctly, but still data is not feeding the =RR RIC, there could be a wrong AGI ID mapping by the T & C¶s Analyst. The AGI ID of the =RR RIC and the super RIC should be the same.
Are the analytics values missing on the BMK= RIC but are available on the
Underlying and =RR RIC¶s?
Check the mappings for the BMK= RIC in the curve maps screens or in the OD report and check if the mappings exist and are set for the correct fact. If the mappings are correct, then check if the AGI ID¶s of the BMK= RIC and the =RR RIC¶s are correct.
If it's correct and still data is not flowing, we should request for a delete and re-add of mappings.