NASDAQ OMX Swedish STIBOR-FRA

Transcription

1 NASDAQ OMX Swedish STIBOR-FRA NASDAQ OMX STOCKHOLM OFFERS CLEARING OF 3-MONTH STIBOR-FRA CONTRACTS The STIBOR-FRA contract constitutes a valuable tool in management of Swedish short-term interest rate risk. Contract base is 3-month STIBOR. The contract has standardized expiration days, i.e. IMM days. This means that liquidity is concentrated to a limited number of contracts, which benefits trading. The STIBOR-FRA contract is the most liquid short term instrument in the Nordic fixed income market. During the past years the volume of cleared contracts has increased rapidly. Committed market makers quote indicative prices for all 12 outstanding contracts. Facts about OMX 3-month STIBOR-FRA (FRA) Contract type Contract base Contract base size Trading Tick size Price Expiration months Expiration settlement day Expiration day/final day of trading Expiration fix Periodic settlement Offsetting Series term Forward contract with cash settlement of the difference between a fixed rate, agreed by the parties, and the reference rate 3-month Stockholm Inter Bank Offered Rate, STIBOR Nominal value of SEK 1,000,000 Trades in FRA contracts will be reached through bilateral negotiations between buyers and sellers, and reported to NASDAQ OMX for central counterparty clearing Price expressed as simple interest rate with an act/360 day March, June, September and December The third Wednesday of the expiration month Two bank days prior to the expiration settlement day Fixing of 3 month STIBOR is established at expiration day at CET Cash settlement of the difference between the trade price and the monthly fix takes place at the last bank day of each calendar month No offsetting Thirty-six months

2 Market model and central counterparty clearing STIBOR-FRA contracts are traded in the current market structure for Swedish interest rate derivatives. Trades in FRA forwards are reached through bilateral negotiations between buyers and sellers, and reported to NASDAQ OMX for central counterparty clearing. The stock exchange has agreements with a number of market committed banks, according to which two-way indicative prices are quoted within the exchange s trading system in accordance with standard market practices in the Swedish interest-rate market. The market committed banks also support trading in the contracts, which occur outside the exchange system. Contract settlement takes place through a bilateral negotiation between buyer and seller. Following settlement, the transaction is reported to NASDAQ OMX Stockholm for clearing. Novation, meaning when the exchange substitutes existing contracts with two new ones, in relation to the buyer and seller takes place when the settlement is matched and collateral has been placed. Subsequently, there is no counterparty relationship between the buyer and seller; instead both parties have the exchange as counterparty. Contract base and settlement principles The contract base is a fictitious three month loan of SEK 1,000,000, which extends between two consecutive IMM dates, meaning between the third Wednesday in the months of March, June, September and December. Accordingly, the underlying duration can vary between series with different expiration months. Normally the period is 91 days, but may be longer or shorter. There is no delivery of the underlying loan amount. Only a cash amount corresponding to the interest rate difference between agreed interest rate and the fixing rate will be paid. Accordingly, the contract can be considered a CFD, contract for difference. The buyer of the contract is a fictitious borrower who assumes the obligation to pay the difference between the agreed interest rate and the fixing rate to the seller on condition that the agreed interest rate is higher. If the agreed interest rate is lower than the fixing rate, the buyer is paid the interest rate amount by the seller. In practice, no payment takes place between the buyer and seller when the contract is cleared; instead, each party receives/pays from/to the exchange (the clearing house). Settlement and offsetting All purchased and sold contracts are not off settable against each other. This means that no net position is held against the clearing house. Periodical settlement takes place on the last calendar day each month and cash settlement of the profit/loss is settled on the monthly cash settlement day. Name standard Contracts are listed by the short name FRA followed by the expiration year and a letter designation for the expiration month. Expiration month name March June September December O R U X

3 NASDAQ OMX STIBOR fixing On a daily basis, NASDAQ OMX Stockholm obtains indicative mid-values for 3-month STIBOR interest rates and distributes a fixing rate at 11:05 a.m. When calculating a fixing rate, the highest and lowest values are disregarded, while the remaining values are used to calculate an average rate. Final settlement of the contract is performed against the 3-month STIBOR fixing rate published by NASDAQ OMX Stockholm on the expiration day. Example of contracts with end month in June 2010, FRA10R Contract name FRA10R Expiration day June 14, 2010 Expiration fix June 14, 2010 Final settlement day June 16, 2010 The following is assumed: On March 4 1,500 STIBOR FRA forward contracts representing a nominal amount of SEK 1,500 million at a transaction yield of percent are sold. The contracts mature on the expiration day on June 14, and are based on a fictitious loan of three months, in this case 91 days for the period June 16 until September 15. Due to the fact that Nasdaq OMX employs monthly cash settlement for STIBOR-FRA forwards, the position is marked to market on the final business day of each month. In this example monthly mark to market occurs on March 31, April 30, and May 31. Monthly cash settlement for the period ending March 31 In connection with the first monthly cash settlement on March 31, the fixing yield is determined to be percent. Thereafter, the forwards position is valued based on the difference between the transaction yield of percent, and the fixing yield of percent. The difference reflects the accumulated loss for the position. On the following business day, April 1, the settlement amount is determined by discounting the calculated loss for the number of days between the settlement day for monthly cash settlement and the final settlement day for the contract, i.e. between April 7 and June 16. The discount rate used in the calculation is the STIBOR rate for the same period, in our example percent.

4 Accumulated profit or loss = 1,500,000, / = 94,342 94,342 Discounted settlement amount = = 94, Market value of 1,500 STIBOR-FRA contracts at the April fixing yield of 1,885% Accumulated profit/loss from the transaction day -94,342 Adjustment for previous periodic settlements 0 Accumulated profit/loss for the position during the settlement period -94,342 Discounted settlement amount -94,250 Monthly cash settlement for the period ending April 30 At the second periodic settlement on April 30, a fixing yield is calculated and the fix is determined to be percent. Just as with the March periodic settlement, the market value of the STIBOR-FRA position is calculated by taking the difference between the transaction yield, percent, and the fixing yield for April, percent. The difference of SEK 264,128 represents the accumulated loss for the position from the transaction date. Since the accumulated loss was partially realized in connection with the March periodic settlement, the amount realized (SEK 94,342) must be deducted during the April settlement. On the following business day, May 3, an adjustment for the settlement period is made by discounting the accumulated loss of SEK 169,786 for the time period between the settlement day for monthly cash settlement and the final settlement day for the contract, i.e. between May 5 and June 16. The discount rate used in the calculation is the May 3 STIBOR rate for the same period, percent, which results in the amount of SEK 169,659 to be realized. The settlement amount is settled two business days later on May Accumulated profit or loss = 1,500,000, / = 264, ,786 Discounted settlement amount = = 169, Market value of 1,500 STIBOR-FRA contracts at the April fixing yield of 1.930% Accumulated profit/loss from the transaction day -264,128 Adjustment for previous periodic settlements 94,342 Accumulated profit/loss for the position during the settlement period -169,786 Discounted settlement amount -169,659

5 Monthly cash settlement for the period ending May 31 In the same fashion monthly settlement is calculated and carried out at month end May. The fixing yield is percent, and the discount rate is percent, resulting in the discounted settlement amount of 301,803 settled on June 3. Expiration on June 14 At 11:05 a.m. on the expiration day for the June STIBOR-FRA contract, the fix is determined to be percent. The fixing yield is equal to 3 months STIBOR. This fix is the yield the final cash settlement will be based on. On the final settlement day, June 16, the settlement amount is calculated by taking the difference between the transaction yield, percent, and the fixing yield for expiration, percent. The difference of SEK 226,470 represents the accumulated profit for the position from the sale date. Since the accumulated profit has been partially realized in connection with earlier periodic settlements, the amount realized during the previous periodic settlement, SEK 37,740, must be deducted. This results in an amount of SEK 188,729 to be received on the final settlement day, June 16. Market value of 1,500 STIBOR-FRA contracts at expiration fixing yield of 1.800% Accumulated profit/loss from the transaction day 226,470 Adjustment for previous periodic settlements -37,740 Accumulated profit/loss for the position during the settlement period 188,729