+A.cBBA 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. c
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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.
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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 <ECBREF=>. 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.
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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.
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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.
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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 ? 0c c 6 is a contract between two parties which fixes the rate of interest that will apply to a *cF c* c c0 for which the following have been 6 0:
The amount and its currency
A future date for the loan/deposit to be drawn/placed The term.
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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
Taking GBP as an example, the current 3M LIBOR is about 4.80% (rounded to 2 D.P)
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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:
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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)
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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)c
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.
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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.
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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:
XYZ pay ABC their floating rate payments of LIBOR + 1% ABC pay XYZ a fixed rate of 6.75%
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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.
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Standard, or Vanilla, swap contracts involve exchanging fixed rate payments for floating rate paymentsc
Like a FRA, there is no exchange of principal. The two parties must first borrow their funds elsewhere.c
The fixed rate 3 is the 13 of the swap or the provider of floating rate fundsc
The fixed rate 2 c is thec ** c of the swap, or the provider of fixed rate fundsc
The two interest rates are called the F 90c*6 and the F* 6c*6c The floating rate used is normally a benchmark such as LIBORc
The fixed rate is usually derived from the long term treasury bond market.c
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 FRAc
Ric Structure c
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c 0 ± Assign by Euroclear. 9 digits ± all numeric.
Eg 017710788, 013904308
> c Gc c F c H> 7 I± 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
± International Securities Market Association. 6 Digit numeric code assigned by ISMA. Sequential 392311, 508228
0* ± Assigned by London Stock Exchange. Now alphanumeric ± was numeric. ¶Stock Exchange Daily Official Listing code¶
Eg 7250198, 2732033
* ± Assigned by the Swiss Stock Exchange (virtual exchange, located mainly in Zurich). Currently 7 digits, numeric.
2019255, 1238558
± Committee of Uniform Security Identification Procedures. An American alphanumeric code consisting of a 4 digit issuer code and 3 digit issue code.
± 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
# 6:c # 0 ± 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
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RIC ± Reuters Instrument Code
Rics needed for Realtime and Historical Pricing c cc
Start with the 2 letter country code of the issuer DEc
Then have a local code like wert 123456 Then they all have an ³=´ =
Eg DE123456=ABNL
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9 6c ± 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
1 c ± contains pricing from a contributor like JP Morgan London. Always ends in 4-letter Contributor Code, eg JPML.
Eg XS010459940=BARL, US912828DG21=DRKW
c± 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=
c c± 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.
c ± 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
c ± 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
c ± exists for Eurobonds and Treasury Benchmarks and contains the closing and/or intra-day fixes of prices yields and other pricing facts.
;88c ± Set up by Debt Product. Needed for setup of superric on IDN and to set up tolerances on IDN. No pricing snapped.
; ± Reuters Pricing Service. Prices generated by the Reuters Pricing Service from calculations and contacting dealers
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If there is a FI Query and we can replicate this is in NDA, then follow the steps below to determine the issue.
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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.
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Follow the Composite Correction procedure to resolve the query
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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.
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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.
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7c Fc c c 0c **c 1 c Ic c *3c* 70ccc c c 0cc .cc
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. c
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:
Fc 1 c Ic cc 660$cJcUsing 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 Fc3c*0c1c 660 and source history for these using RDTH and real time speed list from IDN.
Fc 1 c Ic c 660$cJcCheck 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.
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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.
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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.
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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.
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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.