Markit iboxx Total Return Swaps

Transcription

1 Markit iboxx Total Return Swaps Full First Coupon Trading Convention Copyright 2016 Markit Ltd

2 Introduction 3 iboxx Standardised TRS 3 Introduction of the Full First Coupon 4 Floating Rate Determination 4 Initial Payment Amount and Accrual 5 TRS Trade and Accrued Example 7 / 2

3 Introduction The intention of this document is to provide an outline of how Standardised iboxx Total Return Swaps (TRS) trade under the Full First Coupon methodology. The purpose of the document is purely explanatory and in no way should statements made or examples provided within the document impact or govern trading documentation published by Markit. iboxx Standardised TRS Standardised iboxx TRS offer the possibility to take a synthetic long or short position on iboxx indices. The Index Buyer receives the total return of the index referenced in the trade, which is paid out at maturity. In return the Index Buyer pays the Index Seller the funding cost of 3m Libor flat. The Floating Rate amount is paid on each International Monetary Market Date (IMM), following the IMM credit market convention. For trades exceeding one IMM quarter in duration multiple Floating Rate payments are due. Standardised iboxx TRS trade with set maturity dates which are the business day adjusted IMM dates Mar/Jun/Sep/ Dec 20 th. Contracts are traded with set 3 month maturity intervals. The shortest dated 3 month contract references the next IMM date, which means the 3 month contract always has 3 months or less in maturity. Common maturities that are quoted are 3, 6, 9 and 12 months. Example: On 12 Apr 2016 a market maker sends quotes for the 4 different contracts in the following format: Maturity Date BID/ASK Jun / Sep / Dec / Mar / / 3

4 Introduction of the Full First Coupon Standardised iboxx TRS were launched in 2012, and have since grown rapidly, with 7 dealers quoting, and $5.5BN of average monthly notional being traded. To accommodate the needs of this growing market, on the March 21, 2016 the Full First Coupon trading convention was introduced to allow for increased trade fungibility and simplified coupon processing. The following updated trading documents have been published on the iboxx TRS Website: - Standard Terms Supplement February Confirmation February 2015 Under the Full First Coupon convention all Floating Rate payments made by Index Buyers are for the entire IMM quarter, regardless of when the trade is executed within the initial IMM quarter. In the Initial Calculation Period, meaning the IMM quarter in which the trade is struck, an Initial Payment is made by the Index Seller to the Index Buyer to compensate for the Floating Rate overpayment that the Index Buyer will make at the end of the Initial Period. This initial payment is equal to the accrued from the starting IMM date of the initial quarter through to the Effective Date. As a result, all trades within a given period reference the same Libor rate and pay the same coupon, simplifying the trade process. Floating Rate Determination The Floating Rate for all trades is set at the IMM date that precedes the Trade Date. For long dated trades, meaning trades that exceed one IMM quarter, the Floating Rate resets at each IMM date. The applicable rate for the Floating Leg in each IMM quarter is determined by the index currency on which the TRS is traded. For example, a TRS on iboxx USD Liquid High Yield would be funded with 3 month $Libor. The selection of the applicable rate follows the fixing convention outlined in the 2006 ISDA Definitions for the relevant Floating Rate. Examples: IMM Date Libor Fix Date Index Currency Libor Publication Used as per 2006 Definitions 22-Jun Jun-15 USD IMM Date minus 2 Business Days 22-Jun Jun-15 GBP IMM Date 21-Sep Sep-15 EUR IMM Date minus 2 Business Days / 4

5 Initial Payment Amount and Accrual All Coupon amounts and payment dates are determined by set parameters: Trade Date Date on which trade is agreed Effective Date Trade Date +1 Calendar Day Quarterly IMM Dates Dec/Mar/Jun/Sep 20 th or the following Business Day Day Count Convention ACT/360 for EUR and USD, ACT/365 for GBP Floating Rate Relevant Libor Rate for IMM Quarter (Confirmation is only populated with the Floating Rate for Initial Calculation Period) Initial Payment Date The date on which the Initial Payment Amount is paid 3 Business Days after the Trade Date Final Fixing Date Specified in the trade confirmation, IMM date on which the trade pay-out is determined Index Return Amount Payment Date 3 Business after the Final Fixing Date Floating rate accrued for any IMM period that is not Final period of swap IMM date (inclusively) to next IMM date (exclusively) Floating rate accrued for any IMM period that is Final period of swap IMM date (inclusively) to next IMM date (inclusively) Floating Rate Payer Payment Date for any IMM period that is not Final period of swap IMM Date that brings the relevant IMM Quarter to an end Floating Rate Payer Payment Date for any IMM period that is Final period of swap The Index Return Payment Date which is 3 Business Days after the Final Fixing Date / 5

6 Initial Payment Amount Initial Quarter IMM Date Effective Date Initial Payment Amount = Floating Rate Notional Day Count Convention Index Accrued Where the Floating Rate Payer Payment Date for any IMM period is not the Final period of swap IMM Quarter End Date IMM Quarter Start Date Floating Rate Accrued = Floating Rate Notional Day Count Convention Where the Floating Rate Payer Payment Date for any IMM period is the Final period of swap Floating Rate Accrued = Floating Rate Notional IMM Quarter End Date IMM Quarter Start Date + 1 Day Count Convention / 6

7 TRS Trade and Accrued Example Trade date: 10-Feb-16 Effective date: 11-Feb-16 Index: Markit iboxx USD Liquid HY Currency: USD Notional: $10mm Initial Fixing Amount (Strike): Initial Payment Amount: $8567 Floating rate: 3mLibor USD Scheduled Final Fixing Date: 21-Mar-16 Libor for period: % (17-Dec-15) End of day index level on 21-Mar-16: Cost paid by Index Buyer: $10, 000, 000 = $15, Total Return Leg: $10, 000, 000 ( 1) = $873, / 7

8 Accrual and Initial Payment Amount Examples: Short dated iboxx TRS trade 3 month contract: Index Currency USD Trade Date 01-Apr-16 Final fixing Date 20-Jun-16 Effective Date 02-Apr-16 Initial Payment Date 06-Apr-16 3mUSDLibor(17-Mar-2016) Initial IMM Date % 21-Mar-16 Notional Index Return Amount Payment Date $ Jun-16 Initial Payment Amount Initial Payment Day Count $ Floating Rate Payment Floating Rate Day Count $ Long dated iboxx TRS trade 6 month contract: Index Currency USD Trade Date Effective Date 17-Dec Dec-15 Final fixing Date Initial Payment Date 21-Mar Dec-15 1st 3mUSDLibor(17-Sep-15) Initial IMM Date % 21-Sep-15 2nd 3mUSDLibor(17-Dec-15) 2nd IMM Date % 21-Dec-15 Notional Index Return Amount Payment Date Mar-16 Initial Payment Amount Initial Payment Day Count st Floating Rate Payment 1st Floating Rate Day Count nd Floating Rate Payment 2nd Floating Rate Day Count / 8

9 Short dated iboxx TRS trade 3 month contract executed on expiry date: Index Currency USD Trade Date 21-Mar-16 Final fixing Date Effective Date 22-Mar-16 Initial Payment Date 21-Mar Mar-16 3mUSDLibor(17-DEC-15) IMM Date % 21-Dec-15 Notional Index Return Amount Payment Date Mar-16 Initial Payment Amount Initial Payment Day Count Floating Rate Payment Floating Rate Day Count / 9

10 Contact Details U.S. Shahzeb Rao Nicholas Godec Europe Frans Scheepers, CFA +44 (0) Max Ruscher +44 (0) / 10

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