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 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 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 's purchase of Reuters on 17 April 2008. Thomson Reuters shares are listed on the

Toronto (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 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 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 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)

PRODUCTS AND SERVICES OFFERED BY THOMSON REUTERS

1. Financial

2. Health care

3. Legal

4. Media

5. Science

6. Tax and Accounting

Financial:

TR provides comprehensive information solutions for financial market professionals.

The financial products and services offered by Thomson Reuters are as follows:

a. Corporate Services: Targeted to Investor Relations, Corporate Communications,

and Business Intelligence functions.

b. Deal Making: Leading provider of products to the world¶s investment banks,

advisory firms, private equity firms, consulting firms and law firms

c. Investment Management & Research: Our products help asset management

professionals track investment ideas, view portfolio performance, optimize risk

d. Wealth Management: Our easy-to-use wealth products let data flow seamlessly

from your back-office to your fingertips e. Commodities & Energy: Specialist news, rich content and market intelligence,

bespoke analytic tools, and order routing abilities via a single desktop solution f. Equities & Derivatives: Solutions deliver a complete and simplified workflow via a

combination of content, transactions and collaboration tools g. Fixed Income: Comprehensive news, prices, market data and tools spanning the

complete trading cycle for the global fixed income markets h. Foreign Exchange & Money Markets: Trade instantly on multiple venues, from a

single platform with real time prices in over 170 currencies, instruments and

derivatives i. Post Trade Services: Post Trade Services enables true straight-through

processing, reducing your costs and operational risk as well as improving

efficiencies j. Back Office & Accounting: Our solutions empower companies to centralize and

optimize their global operations and reduce settlement costs and better manage

risk k. Hedge Fund Solutions: Time-series databases, real-time data, and cross-asset

analytics, provide solutions linking investment decisions to trade execution and

the back-office l. Quantitative Research and Trading: Differentiated content, timely data, analytics

and interoperability critical to the generation of alpha in high frequency trading m. Pricing and Reference Data : Products and services to manage valuation risk

and handle pricing, content and reference data integration, distribution and

management

n. Risk Management: Maximize your investment returns. Monitor your enterprise-

wide and desk-level risk and P&L exposures in real-time. Increase the

operational efficiency of your trading infrastructure to reduce costs and improve

your ROI

o. Individual Traders/Investors: Trading and investment solutions for individual

investors, advisors and small corporations

p. Independent Advisors: Tools and market data solutions for independent financial

advisors

Health care:

Provide Critical information for healthcare delivery and management. TR offer products and services for:

a. Clinical Decision Support solutions: Clinical Decision Support solutions help

pharmacists, nurses, physicians, and public and environmental safety

professionals improve clinical outcomes by reducing medication errors,

enhancing disease and condition management, and improving clinical workflow.

b. Health plans: Discover insight through data-driven innovations for better plan

design, proactive care management, more responsive customer reporting,

transparent provider performance measurement, and pay-for-performance

initiatives ² leading to increased market share

c. Hospitals and Health care providers.

d. Pharmaceuticals: Demonstrating value. Maximizing market uptake. Thomson

Reuters has a proven track record of providing rigorous research, real-world

data, and analytics to support internal marketing and external stakeholder

decision-making. Our solutions address a spectrum of commercialization needs

data, researchers, analysts, and modelers

e. Research: Gain insights into emerging healthcare issues, program effectiveness,

and policy improvement strategies through health services research, tools, and

consulting offered by the Healthcare business of Thomson Reuters

Legal:

TR provides legal, compliance, intellectual property & government solutions. TR offers the following products:

a. Business & Transactional Law: Industry-specific features, financial and regulatory

content, and business law research combine in our suite of tools for business

practitioners

b. Business Intelligence: See the tools that help you learn more about your

customers, competitors and prospects to maintain your organization¶s

competitive edge

c. Client Development & Marketing: Support your firm¶s growth strategy with our

electronic marketing, relationship management, market insight tools and

consulting services

d. Consulting Services: Our industry experts provide renowned insight, expertise

and guidance on a host of issues, including technology, strategy and discovery

e. Intellectual Property: Helping professionals worldwide drive innovation, protect

intellectual assets and create maximum value from their ideas

f. Risk, Fraud & Investigations: Innovative, smart search technologies combine with

our comprehensive databases so that you can be confident in your public records

research

g. Law Firm Operations: Enhance your firm¶s core business competencies and

sharpen your strategic focus with our practice management and operations

applications

h. Legal Education: Stay current on emerging topics and trends with our bar review,

accredited continuing education and other solutions

i. Legal Research: Authoritative content, insightful linking and indexing, and

powerful search technologies provide the insights and answers to complex

issues

j. Litigation: From case evaluation to transcript management, trial and appeals,

we¶ve got all the necessary information and tools in one place

Media:

TR provides indispensable news and information for media and business professionals.

Reuters news is world famous. Some of Reuters news agency products are:

a. Newswires: text newswires provide print, broadcast and online newsrooms with

indispensable source material and ready-to-publish stories in 20 languages

b. Video: Cover world events with dedicated teams around the globe who capture,

edit and deliver top quality video content

c. Pictures: Our award-winning photojournalists distribute up to 1,600 pictures each

day covering news, sports, features, entertainment and business

d. Digital Syndication: Our ready-to-publish online news packages, online videos

and online pictures help your readers be first to receive each day's most

important news

e. Graphics: We provide a visual analysis of top world news events in the form of

news and information graphics, economic and financial charts, along with

graphics on other topics

f. Financial Information: Reuters financial information services are a powerful

source of real-time and historical financial news and data

Science:

In the field of science TR is serving academic, government, corporate and pharma R&D professionals. Some of the products are:

a. Life Sciences: Essential information, expert services and intuitive technology to

support your life sciences discovery and development activities

b. Science products: wide range of science products

c. Scholarly Research, Publishing and Analysis: Whether you are just starting your

academic research, an experienced researcher or teacher, or a librarian or

administrator, we deliver objective content and the tools to support your role in

the research workflow

Tax and Accounting:

TR is a leading provider of solutions for accounting, tax and corporate finance professionals. Tax and Accounting products & services are as follows:

a. For CPA Firms: More than 50,000 tax, accounting and audit professionals rely on

our integrated solutions and the top 100 U.S. CPA firms trust our research and

guidance

b. For Corporations: See why corporate tax, finance, accounting, trust, payroll and

HR professionals choose our integrated workflow solutions and unparalleled

expert guidance

c. For Law Firms: Whether you're responsible for tax, accounting, estate planning

or benefits, join 98 of the top 100 U.S. law firms who depend on guidance from

our experts

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 as not all the spot and cross rates have the corresponding hourly rates.

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 . The ECB publishes a daily set of reference rates for the

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.