You are on page 1of 21

ISDA: Introduction to. Operations Training

Rate Sets & Settlements

Presented by:

Michael Pesce Merrill Lynch Capital Services, Inc. June 20,200

Definition of a Swap Process & Control Cycle Trade Details of a Swap Swap Calculation Reset Process Types of Resets Payment Process

Swap Definition

A contractual agreement between two or more parties to exchange sets of cash flows over a period of time.

Processing & Control Cycle

n

Credit / Price Risk Limit

n

Trade Capture

IE

Rate Sets

  • 11 Cash Settlement

(0

c2

Proof & Verification

V

I

P&L / Valuation

s

ISDA Documentation

ID

b

Reconciliation of P&L & Cash post Value date

I

,I'

Details of a Swap -+d,hgehm

I Notional

I

u

  • 2. Reference Index Rate

    • - LIBOR (London Inter Bank Offer Rate)

    • - Spreads

  • 3. Coupon Period

    • - Monthly, Quarterly, Semi-annually, Annually

  • 4. Day Count Fraction (underlying asset)

    • - Underlying Asset

    • - 301360

  • Actua1/360

    a

    Swap Flow

    a

    Interest rate swaps SCIRS (Single Currency Interest Rate Swap):

    Party A has an initial position in a fixed rate debt instrument. Party B has an initial position in a floating rate obligation.

    Party

    A

    4

    Fixed: 7%

    Floating: UBOR

    b

    Party

    B

    Components Needed for a Swap Calculation:

    CCIRS (Cross Currency Interest Rate Swap.) -

    #

    L&-$?#&

    -&+#7

    @+

    Party A & B exchange Notional for initial and final periods.

    Party A pays fixed USD coupon payments.

    Party B pays floating (index LIBOR) GBP coupon payments.

    Party

    A

    4

    Fixed: 7% US Dollar Payments

    b

    Party

    B

    Floatino: LIBOR GBP Pavments

    USD Rate Reset Process:

    Client Services approve rates in Rates Database

    Is the deal paying that

    Manual

    Process

    Settlement System sends rate type request to Rates Database

    Client services

    approves rate

    resets in

    Settlement

    System

    Rates Database will download rates four times daily to Settlement System

    Client Services creates a payment notice

    Client Services faxes payment notice to Client

    Client Services calls client to confirm

    I Once settlement I is confirmed payment is

    Types of Rate Resets

    Vanilla Rate Resets

    Averaging

    3. Compounding

    Vanilla Rate Reset

    Rate Types: 6 %&@@

    Advance +set

    two days before period start date.

    Arrears e set two days before payment date.

    Averaging Rate Reset Types Rate Type:

    Averaging 0 takes average of daily rate within period.

    Types of Averaging Indexes:

    Federal Funds Rate, Prime, T-Bill ........

    Types of Averaging Calculations:

    • - Weighted Average Method

    • - Unweighted Average Method

    • - Rate Cut-off

    0

    a

    Averaging Calculations

    • 1. Weighted Average Method

    /

    PQ

    The arithmetic mean of the ~elevantRates in effect for each day in that Calculation Period or Compounding Period calculated by multiplying each Relevant Rate by the number of days such Relevant Rate is in effect, determining the sum of such products and dividing such sum by the number of days in the Calculation Period or Compounding Period.

    a

    Compounding Monthly Pays Quarterly

    Variation:

    Compounding before rate spread

    Compound takes place on Notional + Interest before adding the spread to the base rate.

    Compounding after rate spread

    Compounding takes place on Notional + Interest after adding the spread to the base rate.

    Flat Compounding

    Calculates the interest of the flat Notional after adding the spread'to the base rate.

    Payment Process

    Trade Capture

    Front Ofice Valuation system

    Back Office Settlement System

    Payment Process, cont ..

    Back Office Settlement System

    Client service check ISDA documentation, check with the traders involved , agree with Counterparty who must change the details of the payment.

    w

    Payment

    notices

    Disagree

    Confirm with

    counterparty

    I

    Agree

    Agreed with C/P

    t-

    Client Service specialists make a note of time and individual settlement confirmed with.

    Specialist approve payments in Back Office CASH settlement system

    ; Manager approves flows

    SUMMARY

    Definition of a Swap Process & Control Cycle Trade Details of a Swap Swap Calculation Reset Process Types of Resets Payment Process