8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 1/32
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 2/32
Overview
Definitions & Benchmarks
Overnight Indexed SwapsUses & Opportunities
Linkages between markets
Interest Rate- market views
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 3/32
IRS- Definition
Exchange of cash flows (Risks)•Notional Principal
•Prescribed dates•Prescribed computation method
FIXED and FLOATING rates of interest.•Floating based on a market benchmark.
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 4/32
IRS- Floating Benchmarks
Independent & Transparent
Dependable (Past & Future)Examples
–Overnight MIBOR (Mumbai Inter-Bank Offer Rate)
–Commercial Paper Rates
–Prime Lending Rates –T-Bill Yields (14 , 91, 182 and 365 days )
–Forex Swap Rates (Premia)
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 5/32
Daily MIBOR linked IRS = OIS
IRS- Floating Benchmarks
PLR
Bank Specific
2-way Quotes not available
T-Bill Yields
Daily Quotes not available
Cut-off yields not independent
Forex Swap Rates
Possible- non MMkt.
No source at present
CP Rates
Benchmark not available
Corporate Specific
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 6/32
Overnight Indexed Swap (OIS)
Floating leg based on MIBOR•Daily overnight rate reference
•Compounded daily/ accrued over holidays•NSE/ Reuters (26-32 bank’s average)
Other market conventions•Pre-defined notional principal.
•Normal FRA / IRS terminology –Pay/ buy an OIS = pay fixed receive floating
–Receive/ sell an OIS = receive fixed pay floating
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 7/32
Overnight Indexed Swap (OIS)
Corporate Citibank
FIXED CASHFLOW- Cfix
FLOATING CASHFLOW- Cfloat
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 8/32
Fixed Coupon is calculated as follows -
Cfix = P x Rfix x d
basis
Cfix = Fixed Coupon
P = Notional Principal
Rfix = Agreed Fixed Interest Rated = Length of Coupon Period in days
basis = Applicable day basis (e.g. 365)
OIS - Mechanics
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 9/32
Floating Coupon is calculated as follows -
Cfloat = P x Rfloat x d
basis
Cfloat = Floating Coupon
P = Notional principalRfloat = Compounded Floating Interest Rate (see next slide)
d = Length of Coupon Period in days
basis = Applicable day basis (e.g. 365)
OIS - Mechanics
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 10/32
Floating Rate is calculated as follows -
d business
Rfloat = ( [ 1 + ri x d i ] - 1 ) basisi=1 basis d total
Rfloat = Floating Rate
r i = MIBOR Rate for the ith business day
d i = Number of days the ith MIBOR rate applies
d business = Number of business days in the coupon period
d total = Total no. of calendar days in the coupon period
basis = Applicable day basis (e.g. 365)
OIS - Mechanics
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 11/32
IRS- RBI Guidelines
FRA/ IRS allowed for hedging rupee balancesheet exposures.
Banks to exercise due diligence•Certificates that transaction for hedging balance
sheet exposures (w.r.t. size and tenor)
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 12/32
IRS- Benefits
„Essentially divorces liquidity managementfrom interest rate risk management.‟
Simple to use
Minimal credit risk
No ballooning of balance sheet
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 13/32
IRS- Opportunities
Better interest rate risk management•Diversification of risk
• Implement interest rate views
Access to cheaper funding•Comparative Advantages
Good Cash/ Liquidity Management Tool•Monthly collections vs quarterly interest payments
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 14/32
IRS- Structures
Hedge increases- go fixed•Hardening rates: Fix future CP issue/ rollover costs
•Convert floating WCDL into fixed rate
Reduce costs- go floating•Softening rates: Raise term funds but pay MIBOR
•Receive fixed against existing fixed rate loans
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 15/32
Example I - Comparative Advantage
Funding at lower MIBOR spreads than before
AAA issues 1yr fixed at 11.10%
OIS AAA receives Fixed 10.00%
AAA pays MIBOR
Net impact is 1 year funds @ MIBOR + 110BPs
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 16/32
Example II - Lending at Call
Placement of deposits at call-linked rates
ABC buys 180 day T-Bills 9.8%
OIS ABC pays fixed 9.5%
ABC receives MIBOR
Net impact is 180 day return @ MIBOR + 30BPs
Has effectively lent in the call market
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 17/32
Example III - Hedging future CP Rates
Locking in future funding costs
ABC has Rs.100mio CP maturing in 3 months
FRA (or IRS) for 3v6 at 10.8%
Unwind FRA at time of rollover
Net impact is CP funding rate @ 10.8%
Profit/ loss on unwind will offset rate received
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 18/32
IRS- Current scenario
Flurry of OIS deals on Day 1
Corporates - Main receivers of fixed rates
Limited inter-bank deals• ISDA documentation
•Not represented fully by all foreign banks & PDs
•Absence of nationalised banks
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 19/32
IRS- Future Scenario
More volumes
Longer tenors
Other new benchmarks•MIBOR, but not overnight based
•Other index based
Banks end up being “Payers of fixed rates”
Keen interest by nationalised banks
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 20/32
IRS- Issues
Illiquidity in the secondary corporate bonds
T Bill reference rate yet to evolve despiteexistence of a T Bill auction calendar
Expected time for development of a term moneymarket
Accounting/tax for IRS/FRAs (Hedge vs MTM)
Basis risk
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 21/32
Linkages between markets
Call Money vs Forward Premium•Arbitrage potential
• Immediate response across curve
IRS vs CCY swaps (Premia) vs T-Bills•Accessible by the main banks
•Different considerations
•Other markets more liquid/ less bid-offer
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 22/32
Linkages between markets
Tenor $LIBOR
Fwd.Premia
SwapCurve
IRSCurve
T- BillYield
6 mth 5.90 4.90 10.80 9.50 9.70
12 mth 6.10 5.00 11.10 10.0 10.2
Call Money rate was 10.12 (as on Aug 16’99)
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 23/32
Linkage between markets
IRS = Call - 62 bps•Reflecting 6 month expectations
T Bill = IRS + 20bps•Reflecting funding risk
Swap = Tbill + 110bps
•Swap= Libor + Premium•Reflecting short term reaction
IRS cannot be more than Swap
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 24/32
Continuing discontinuities
High bid-offer spreads in IRS•Lack of efficiency
•Fewer aggressive banks/ Docs/ Credit issues•Logistical/ internal limitations
Cash vs. IRS•Liquidity fears (50bps)
•LAF- guarantees liquidity, start made (like FED)
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 25/32
Continuing discontinuities
TBIlls vs Fwds•FCNR USD funds with few banks
•surplus INR other banks•Switching difficult from both sides
•Difficult to short GOI securities- 1way
•15% rule for longer tenors
•Short end is relatively integrated
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 26/32
Interest Rates - so far
•Shocks in Jan/ Aug’98
• Interest rates lower across the board in 1999
•Successfully survived a major event risk- Kargil•Historically low inflation
• Increasing liquidity, longer tenors in bonds
RBI approach
•Openness - e.g. Feedback on Policy• IRS- hedging mechanism
•Public statements on objectives
•Corridor of interest rates.
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 27/32
Interest Rate- Trends
1%
3%
5%
7%
9%
11%
13%
15%
17%
J - 9 6
O - 9 6
J - 9 7
A - 9 7
J - 9 7
O - 9 7
J - 9 8
A - 9 8
J - 9 8
O - 9 8
J - 9 9
A - 9 9
1mth
3mth
6mth
12mth
24mth
60mth
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 28/32
Interest rates - Sovereign
Surplus liquidity, low inflation
Banks•Evaporating fears of liquidity crisis
–shocks still there (12/08)
•Surplus SLR due to lack of alternatives
Government•FY99-00 Govt. net borrowing target (78% done)
•Long tenor based rally - high duration
•Oct. Credit policy, higher fiscal needs- Kashmir
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 29/32
Interest rates- Corporate
Limited Supply, growing demand
Mutual Funds•Tax anomaly driving the industry•Flush with liquidity - funds seek yields
Compression in Corporate spread over GOI
•Compression to shift to longer tenor/ Tier II namesTrend to reverse (Q3‟00) after a few shocks •Spike in GOI yields/ Ill-liquidity/ Credit deterioration
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 30/32
Interest rates - prognosis
Likely to trend lower• Inflation yet to hit bottom(Nov)
•Higher Real yields•No signs of credit pickup
Expansionary Credit policy•Bank rate/ Repo/ CRR cut; Deposit rates/ PLR sticky
•Accommodate govt. borrowing targets
No $/ INR shocks/ Political uncertainties
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 31/32
Rupee Interest Rate Derivatives and Citibank
Trading expertise. Experienced team
Ability to offer low bid-offer quotes
Risk management systems in place
Exposure to IRS products in Emerging Markets
Huge corporate reach- Can match requirements
8/3/2019 Rupee Int Rest Swap City Bank
http://slidepdf.com/reader/full/rupee-int-rest-swap-city-bank 32/32
•Although the information contained herein is believed to be reliable,
Citibank makes no representation as to the accuracy or completeness of
any information contained herein or otherwise provided by Citibank.
•The ultimate decision to proceed with any transaction rests solely with
the customer. Citibank N.A. is not acting as your advisor. Therefore,prior to entering into any proposed transaction, you should determine
the economic risks and merits, as well as the legal, tax and accounting
characterizations and consequences of the transaction, and that you are
able to assume these RISKS.
•The contents of this presentation are proprietary in nature, and may
not disseminated in whole or in part without Citibank's written
consent.
Disclaimer