June 14, 2013

More Fixing Drama | The Race to Replace CHF TOIS

The race is on to find a suitable replacement for the CHF TOIS fixing by 01 September, 2013. Back in February 2013, ACI Suisse published the responses to their questionnaire on the framework and procedures for setting the CHF TOIS fixing. This fixing is used to determine the floating-rate cash flow payments for CHF-denominated OIS swaps, according to the methodology outlined here (reprinted by LCH.Clearnet from the 2006 ISDA definitions). Some of the responses are very interesting indeed. There appears to be a consensus that the tomorrow/next market (T/N) fixing market is far less liquid than the overnight fixing market. However, the response from Zürcher Kantonalbank (ZKB) goes as far as to suggest that this market hardly exists at all:

The use of an unsecured lending rate as a floating reference rate for CHF TOIS is in our opinion no longer appropriate. Since the start of the financial crisis in 2007 the unsecured interbank market does hardly exist [sic] anymore. A large part of our CHF interbank short term funding is done via the Eurex Repo platform. Furthermore, new equity capital regulation are distorting the pricing between secured and unsecured loans. Another weakness of the current fixing procedure is that the quotations provided by the reference banks are not based on real transactions and binding prices. As a matter of fact, the quotations are purely indicative prices based on a trader’s own discretion and are not applied when a reference bank is asked for a real quotation.

Yesterday, an ACI press release announced that their fixing panel will decline to only 6 member banks by the end of August 2013. Due to a failure to reach an agreement, all 6 daily contributions would be removed by the data scrubbing process resulting in no fixing being published!!! Therefore it will not be possible to publish a CHF TOIS rate by 01 September, 2013. Some institutions may see this as an inevitable result of the unsecured T/N market being so illiquid; others may see the it as a ridiculous example of how an inertia for changing simple rules can lead to complete paralysis. In any case, a solution needs to be agreed upon urgently. It has been widely suggested that the Swiss Average Rate Overnight (SARON) is used as an alternative for TOIS. If this is the proposed solution, then there will be two significant consequences:

  • Legacy CHF TOIS swap contracts will need to be either (i) settled out of at fair value or (ii) amended (on mutual agreement) to reflect the new floating index for the remainder of the contracts' lives.
  • A switch from a CHF TOIS to a CHF SARON discounting curve may significantly affect the value of all CHF derivatives, if the basis between these two curves is significant. Financial institutions are best advised to perform an impact-analysis on the value of their portfolios in order to be as ahead-of-the-curve (no pun intended) as possible.

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