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March 5, 2013

Big Bang for IRS? Standardised Coupons Coming?

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


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