Markit irxx Index Mechanics

Transcription

1 Markit irxx Index Mechanics Wednesday, March 02, 2016 Copyright 2016 Markit Ltd

2 Introduction 3 Index Timeline 4 Index Construction 5 irxx Contract Conventions 6 Trading irxx.em 6 Settling an Index Trade 7 Markit Intrinsic Price Publication 8 Appendix 8 Index Theoretical Present Value (PV) Example 11 Quoting the Index PV 13 Quoting the Index in Rates Format 13 / 2

3 Introduction The Markit Emerging Markit Interest Rate Swap Index (irxx.em) provides market participants the possibility to gain or reduce global EM interest rate exposure by trading one instrument. Constituents are liquid emerging market interest rate derivative contracts made up of interest rate swaps, cross currency swaps and overnight index swaps. A new series of these indices is created every 6 months and market participants will be able to roll into a new series within a 2-week overlap period as set out below. The index offers a streamlined structure with no cash flows while an index series is onthe-run. In addition to the irxx.em index, Markit will launch two theoretical sub-indices representing the low yield (irxx.em.ly) and high yield (irxx.em.hy) interest rate derivative contracts contained within irxx.em. / 3

4 Index Timeline For illustration we assume a theoretical Series 0 was launched in March This example index series, irxx.em.s0 is compiled of 15, 5yr individual forward-starting interest rate swaps with an Annex Date of 26 th February 2015, Inception Date of the 4 th March 2015, Forward Starting Date of 16 th September 2015 and a Final Maturity Date for most constituent contracts of 16 th September Timeline: Annex Date t o Inception Date t o+1w Roll Date t o+2w+1w Fwd Starting Date ~t o+6m+2w+1w Final Maturity Date ~t o+5y+6m+2w+1w Annex Date: The notional exposure in local currency is fixed, so that at the Annex Date which is t 0 the index is equally weighted in USD notional exposure at the Forward Starting Date. All underlying initial swap fixed rates are set for the series, so that the fixed rates on the swap constituents remain unchanged until the Final Maturity Date. Publication date of the index annex which lists the index constituents as determined by the irxx Index Rules with all contract terms including weights and fixed rates. Inception Date: First day of trading on irxx.em.s0. This is two-weeks prior to the 18 th March 2015 Roll Date which is the previous series Forward Starting Date. This is t0+1w or 4 th March 2015 in our example. Roll Date: Previous series Forward Starting Date Forward Starting Date: Date on which the index series physically settles into the underlying swap contracts. This is the 3 rd Wednesday of the roll month which is approximately 6m after the Roll Date which will always be in March or September. Thus 16 th September 2015 in our example which is approximately 6 months after the Roll date or t0+6m+2w+1w. Final Maturity Date: The maturity date of all the underlying swap contracts which is 5 years from the Forward Starting Date for most contracts. This is t0+5y+6m+2w+1w or 16 th September 2020 for irxx.em.s0. The Final Maturity dates will follow the conventions of the underlying constituent swaps and could be different for some contracts. For every 6 month period, a single irxx series will be traded as the on the run except for the 2 week overlap period where 2 series will be on-the-run at the same time. / 4

5 Index Construction irxx.em is a tradable index which physically settles into the underlying swaps, consisting of Interest Rate Swaps (IRS), Cross Currency Swaps (XCCY) and Overnight Indexed Swaps (OIS) at a fixed forward start point. That means irxx.em.s0 as per the above timeline would forward-start on 16 th September 2015 and replicates a basket of IRS, XCCY and OIS swaps, where the swap contracts have a 16 th September 2020 maturity. 1 Prior to the Annex Date, the list of Index Contracts are determined as set out in the irxx Index Rules which are publically available on Markit.com. At the Index Annex Date t 0, the notional of each underlying swap in the series is fixed in local currency terms, so that given the forward FX rates at t 0 each underlying swap is priced to have the same USD swap notional when delivered on the Forward Starting Date. At t 0 all underlying swap fixed rates are fixed for the series, and the fixed rates on the swaps remain unchanged until the Final Maturity Date. The forward rates for the Forward Starting Date as at t 0 are used to fix these fixed rates. These fixed rates being such that the Present Value (PV) of each swap contract is approximately equal to 0 on the Forward Starting Date. As per the example in Appendix Fig.1, we assume that on t 0 the fixed rates on the15, 5-year forward-starting swaps for 16 th September 2015 are set as illustrated in the table for each of the 15 swaps. All of the underlying swaps as shown in the table will use the standard underlying market conventions for each swap as published in the relevant Index Annex. 1 The Final Maturity dates will follow the conventions of the underlying constituent swaps and could be different for some contracts. / 5

6 irxx Contract Conventions Each irxx.em. Series annex will have an initial forward starting index notional exposure of USD10mm per constituent at t 0 (i.e. USD150mm of irxx.em.s0 notional as there are 15 swaps in the index). Given the Forward FX rates, the USD10mm in each swap notional at the forward-start date coverts to the local currency notional at t 0 as illustrated in Appendix Fig.1. The local currency notionals are fixed at t 0 and then remain constant for the life of that irxx.em Series. This does not prevent market participants from trading other notional sizes; a set notional value is published in the Index Annex to show individual contract weights. In other words, at t 0 the underlying swaps are equally weighted in USD terms given current FX Forward rates, but are unlikely to be equally weighted in USD terms at the Forward Starting Date given FX moves. Contract conventions shown in Index Annex - Appendix Fig.1. Trading irxx.em In terms of quoting the product at t 0, market participants could quote this in price terms as Index Future Value (illustrated in Appendix). Alternatively, market participants could quote a single rate (R*as describe later), which would be the yield of a synthetic bond, the appendix outlines possibilities of how quoting conventions could work in practice. To enter a trade, an investor can receive irxx.em rates meaning they enter a contract to receive the fixed leg (and pay floating) on all the underlying swaps at the Forward Starting Date, or they can pay irxx.em rates meaning they pay the fixed legs (and receive floating) on the underlying at the Forward Starting Date. Except for potential initial upfront payments there are no cash flows prior to Index Forward Starting Date. Any prices/rates quoted in the market by market makers could be impacted by the Credit Support Annex (CSA) market participants have in place with the market maker they are entering a trade with. / 6

7 Settling an Index Trade An investor may choose to unwind irxx.em at t 1 at the quoted market level and they would then receive the index FV in USD at the forward date. Alternatively they may opt to roll the product. This involves crystallising the MTM of irxx.em.s0 at the Forwardstarting Date and then initiating a new trade for irxx.em.s1. Further to this an investor may opt to take physical delivery of the product, by doing this the investor will enter into a physical version of irxx.em.s0 which is then the basket of underlying swaps. Things to consider when trading irxx.em: The FV of the swap is paid at the Forward Starting Date, rather than at the unwind date. In practice, the particular CSA an investor has will also impact the FV quotation (and also any potential credit and capital costs). If any disruption event occurs which could prevent settlement of any of the underlying swaps in irxx.em, as set out in the index rules the Index Administrator may republish the Index Annex with the terms of the impacted swap altered or that swap removed. In all case irxx.em will as far as reasonably possible follow the standard market convention for that underlying. If a swap contract is removed a new Version of the index will be published with the naming convention irxx.em.0.2 for example. / 7

8 Markit Intrinsic Price Publication Markit will publish a daily theoretical Index Price and theoretical Index Yield in support of these indices. These levels will be derived from the underlying interest rate swaps as described in this document (Appendix - Index Theoretical Present Value). The swaps will be valued using rates observed at 17:00 London time. The swap valuations will be performed by Markit Portfolio Valuations. The theoretical levels are for investors to ascertain guidance on what the intrinsic value of the index is. Dealers quoted prices could deviate away from this as trade levels are agreed bilaterally. Appendix Fig.1 / 8

9 $ ntnl at fwd-start date, USD/FX fwd-start rate, Local ccy ntnl Fixed rate Floating Rate Country Swap Type Maturity Date Fwd-start Date as at t0 as at t0 at t0 at fwd-start date at fwd-start date India OIS 16-Sep Sep-15 10,000, ,600, % in INR,ACT/365,Semi Annual 1d INR-MIBOR-OIS-COMPOUND., ACT/ACT, Semi-Annual Malaysia IRS 16-Sep Sep-15 10,000, ,300, % in MYR,ACT/365,QTRL 3m MYR-KLIBOR-BNM., ACT/ACT, QTRL China IRS 16-Sep Sep-15 10,000, ,900, % in CNY,ACT/365, QRTL 1w CNY-REPO RATE-CFXS. ACT/ACT, QTRL South Korea IRS 16-Sep Sep-15 10,000, ,653,000, % in KRW,ACT/365,QTRL 3m KRW-CD-KSDA-Bloomberg, ACT/ACT, QTRL Thailand IRS 16-Sep Sep-15 10,000, ,100, % in THB,ACT/365,Semi Annual 6m THB-THBFIX-Reuters, ACT/ACT, Semi-Annual Russia XCCY 16-Sep Sep-15 10,000, ,200, % in RUB,ACT/365, Annual 3m USD-LIBOR-BBA, ACT/360, QTRL South Africa IRS 16-Sep Sep-15 10,000, ,500, % in ZAR,ACT/365,QTRL 3m ZAR-JIBAR-SAFEX, ACT/ACT, QTRL Copyright 2016 Markit Ltd

10 Turkey XCCY 16-Sep Sep-15 10,000, ,900, % in TRY,ACT/360, Annual 3m USD-LIBOR-BBA, ACT/360, QTRL Hungary IRS 16-Sep Sep-15 10,000, ,934,600, % in HUF,ACT/360 Annual 6m HUF-BUBOR-Reuters, ACT/360, Semi- Annual Israel IRS 16-Sep Sep-15 10,000, ,500, % in ILS,ACT/365, Annual 3m ILS-TELBOR01-Reuters, ACT/365, Semi-Annual Poland IRS 16-Sep Sep-15 10,000, ,100, % in PLN,ACT/365, Annual 6m PLN-WIBOR-WIBO., ACT/365, Semi- Annual frequency Brazil OIS 16-Sep Sep-15 5,156, ,514, % in BRL, B/252 1d BRL-CDI-CETIP., BUS/252, Zerocoupon Columbia OIS 16-Sep Sep-15 10,000, ,008,100, %,in COP, ACT/360. QTRL 1d COP-IBR-OIS-COMPOUND., ACT/360, QTRL Mexico IRS 16-Sep Sep-15 10,000, ,100, % in MXN, ACT/360, Weekly Monthly MXN-TIEE-Banxico., ACT/ACT, Monthly Chile OIS 16-Sep Sep-15 10,000, ,357,200, % in CLP, ACT/360, Semi Annual 1d CLP-CLICP-Bloomberg., ACT/360, Semi-Annual / 10

11 Index Theoretical Future Value (FV) Example The Index Theoretical PV is the Mark-to-Market (MTM) of the individual interest rate swaps in spot USD terms. The example below shows series irxx.em.s0 consisting of 15 swaps with maturity September 16th, 2020, and a Forward Starting Date of September 16th, 2015 with an index Notional of USD150mm and an index fixed rate R to of 5.54%. The Index Theoretical Future Value is the USD Index Theoretical Present Value undiscounted in USD terms to the Forward starting date. The below table shows the change in Index Theoretical FV at t 1 due to moves in interest rates and forward FX rates, there is however no carry impact to the Index FV as the swaps are all forward starting. CCY Swap Type $ Notional at Fwd-start date t0 $ FX Fwd-start FX t0 Local CCY Notional t0 Fwd-start date Fixed Rate at t0 Fixed rate at Fwd-start t1 $ MTM Fwd-start swaps t1 Return Fwd-starting swaps t1 INR OIS 10,000, ,600, % 6.88% -14, % MYR IRS 10,000, ,300, % 4.51% 3, % CNY IRS 10,000, ,900, % 2.58% 26, % KRW IRS 10,000, ,653,000, % 1.94% 5, % THB IRS 10,000, ,100, % 2.45% 21, % RUB XCCY 10,000, ,200, % 8.40% -75, ZAR IRS 10,000, ,500, % 8.28% -31, % TRY XCCY 10,000, ,900, % 10.45% -41, % HUF IRS 10,000, ,934,600, % 2.11% % Copyright 2016 Markit Ltd

12 ILS IRS 10,000, ,500, % 1.31% 14, % PLN IRS 10,000, ,100, % 1.87% 45, % BRL OIS 5,156, ,514, % 15.66% -343, % COP OIS 10,000, ,008,100, %, 6.99% 21, % MXN IRS 10,000, ,100, % 5.99% 29, % CLP OIS 10,000, ,357,200, % 4.51% 22, % irxx.e M.S0 150,000, % 5.6% -343, % / 12

13 Quoting the Index FV The Index FV can be quoted in bond price format which for the above example would be: Index FV (in Basis Points) = (-0.25) = Quoting the Index in Rates Format The index can also be quoted in rates format assuming that it is the yield of a synthetic 5Y forward starting bond. At t0, a reference yield rate R to will be fixed for the index as the simple average of the fixed swap rates of the constituents. This rate is used as an input when quoting the index in a yield format as set out below. The simple average rate on the sample basket is 5.54% at t 0, this rate is R to. With following defined terms: R to = Initial Yield of the synthetic bond (This yield can be arbitrary set at any value. We will set it at the simple average rate on the basket at t 0, see before). Yield quoted FV of the basket would be calculated using (as per standard definition of IRR): There is a 1 to 1 relationship between the quoted yield and the Basket FV. This is not the actual par yield but a simplified yield for ease of use. For irxx.em.s0 as per the standard IRR definition using the 5 year Maturity, R to of 5.54% and Basket FV of then on t 1, is equal to 5.59%. Copyright 2016 Markit Ltd