A template for interest rate swaps with standardised coupons and maturities has been released by the ISDA, in a move that has been widely interpreted as an attempt by the over-the-counter derivatives industry to respond to the threat posed by swap futurisation.
The market-agreed coupon (Mac) interest rate swap product, unveiled at the International Swaps and Derivatives Association's annual meeting in Singapore, will trade in nine tenors ranging from a one-year contract to a 30-year contract. The Mac swaps based on these tenors will trade on International Monetary Market (IMM) dates – the third Wednesday in March, June, September and December – with standard coupons based on the three-month or six-month forward curve, but rounded to the nearest 25 basis-point increment. Sifma and Isda stress that the Mac contract is voluntary and will exist alongside the customised portion of the interest rate swap market.
A big driver of the project was portfolio compression. As it stands, a market participant who executes two customised 10-year interest rate swaps a day apart would have two separate line items to manage. In addition, those swaps would quickly become off-the-run and less liquid, making them more difficult to hedge or unwind over time. In contrast, standardised swaps with fixed maturities and coupons would easily allow users to add to – or subtract from – a single position.
Users of over-the-counter derivatives (OTC) may now use an interest rate swap contract with pre-set terms as the industry lobby group the International Swaps and Derivatives Association (ISDA) seek to standardise the US$379 trillion market.
The standardised terms of the new contracts allow for thousands of trades to be collapsed down to a much smaller number, according to Steve Kennedy, a spokesman for ISDA.
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