News: Big Bang for IRS? Standardised Coupons Coming?

05 March 2013 | Bill Hodgson

Like the "big bang" for CDS which moved them to standard coupons, "The nonbinding proposal would see some of Wall Street's biggest customers trade interest-rate swaps on the same payment dates and coupons, rendering the contracts more like futures that trade on exchanges." The underlying purpose I believe would be to develop a market for swaps which could more easily be traded in and out of - the only way to net an IRS is to collapse multiple trades which are economically identical (same price, coupon dates and other terms) into one replacement trade with the net notional. This move would seek to define IR Swaps which would have pre-defined fixed rates, and standard coupon dates, which would make netting much easier. For instance a 'standard' IRS might have a 2.5% coupon and start on the 1st of the month in each quarter. Entering into an IR Swap at 2.5% when the market is above or below that rate would require a one off fee payment at inception to adjust for the difference between the standard coupon and the market price. Starting a swap on a non-standard trade date would require a stub period until the start of the standard regular period coupon dates. No market infrastructure change would be required to support this move, as (I believe) CCPs supporting IR Swaps will allow stub periods already, and the settlement of an up-front fee has been designed into their service, one way or another. PIMCO, SIFMA and Blackrock are amongst the firms driving discussions, the full article is via the link below but requires subscription. http://www.efinancialnews.com/story/2013-02-15/pimco-blackrock-push-streamline-swaps


This new approach would create a third class of "semi rigid" IRS products, retaining useful features of the OTC market and bringing convenience to the buy-side. Given that CME and Eris have put their products out there, we shall have to wait and see the verdict from the market.

Reblogged this on Carl A R Weir's Blog.

I don't have an efinancialnews subscription, Bill, so I couldn't read the article, but your summary got me thinking - if there's to be a move towards standardised swaps then why not go the whole way and make them futures? That way participants would benefit from the less onerous regulations and lower margins... There does seem to be a lot of interest (pardon the pun) in the Eris Exchange contracts.

A few buy side firms that trade swaps as if they were fixed maturity date fixed coupon bonds already. In effect they end up with an offmarket spread on the LIBOR leg and in effect reduce or increase the notional on the original position. Not sure what underlies this approach (detailed hedging needs? systems or process limitations? habitual behavior from bonds world?) It would be good to know as that may give a clue on specific hedging needs for standard date swaps or is this the pursuit of more liquidity through standardization.