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FpML-IM-Custodian Technical Teleconference 2009-05-20 minutes

 
The WG held a conference call on Wed May 20 noon Eastern. 
 
Attendees
Mark Soussan - Western Asset
David Friskics - Western Asset
Robert Stowsky - Progress
Irina Yermakova - ISDA
Marc Gratacos - ISDA
Tom Duffy - Northern
Stephen White - SS
Lucio Iida - BGI
 
Agenda and minutes
  • Discussion of the non-trade contract change business cases provided by David Friskics.
    • David led the discussion on his notes (see attached).
    • Asset-backed securities CDS undergo changes in notional.  Paydowns are reductions of notional that are not accompanied with payments.  Writedowns are also notional reductions, but involve payments for the notional amount written off.
    • We agreed that the effects on ABS CDS contract and data requirements are very similar to credit events on CDS Index contracts.  Factor and factored notional are needed.
    • On the periodic resets on Equity Index TRS, since the increase/decrease in notional are bilaterally-agreed events that are confirmed, we agreed they are traded events.
    •
  • Discussion of the document from Andrew Jacobs of the FpML Modeling Task Force on the ContractAmended and non-trade ContractChanged messages, corresponding cancellations, and equivalent messages in FpML 5.0.
    • We reviewed Andrew's draft ContractAmended and ContractChanged structure diagrams (see attached).
    • ContractAmended is to be used only for bilaterally-agreed amendment to the contract economic terms.  The amendment is subject to a confirmation process just like other traded events.  We noted that at least two parties should be required.  Periodic resets to Equity Index TRS may use this message. 
    • ContractChanged is to be used for non-trade contract change events, the type discussed in the first agenda topic.  We suggested an optional payment be added and that at least two parties be required.  This message can be used to notify credit events on CDS Index and Asset-backed CDS paydown/writedown events.
    • If the messages are approved, we should be very clear about their proper use in all the Market Practices, so that they are not confused with unilateral corrections by the sender.
    • The FpML Coordination Committee rejected adding factor and factored notional to the FpML CDS structures because they could not be known at confirmation time.  A separate message was suggested as an option.  The ContractChanged message would fit this purpose, but would have to be enhanced to include the factor and factored notional.  Lucio to raise in the FpML MTF.
  • AOB
    • We discussed CFDs and how to describe in FpML.  Some institutions have used the equity return structure.  It may be necessary to create a separate, more targeted structure for CFDs since they are much simpler.
    • Marc requested sample CFD confirms.
  • Next meeting June 3, noon Eastern.
Please let me know of any errors or ommissions.
 
Thanks,

Lucio Iida
Principal
Software Engineering Technologist

TEL 415 597 2288
CELL 415 717 9261
FAX 415 618 1667
lucio.iida@xxxxxxxxxxxxxxxxxx

Barclays Global Investors 400 Howard Street San Francisco, CA 94105

 

 
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--- Begin Message ---
Hey Lucio,
 
Here is a brief description of the events we spoke about in last week's meeting:
 
Factor Adjustment of Asset-Backed Underlyers Due to Paydowns/Writedowns
 
ABS/ABX Factor Adjustments
- Factors adjustments are posted monthly as a result of paydowns/writedowns of the underlying asset-backed pools.
 
Paydowns
- When the outstanding loan balance of the underlying asset-backed pools is paid off, the factor of the ABS/ABX swap will decrease
- As a result of the factor decrease, the notional will be decreased (calculated by multiplying the original notional by the factor change)
- There is no cash movement for payments
 
Writedowns
- The outstanding loan balance is written-off (reduction in the recognized value of underlying asset)
- The factor decreases, causing the notional to decrease (calculated by multiplying the original notional by the factor change)
- A cash payment is made to the Buyer of Protection in the amount of the notional value written-off
 
Resets on Equity Total Return Swaps
 
Equity Index Swaps
- Two parties exchange cash flows based on the percentage change in one or more stock indices for a specific period
- Reset dates are agreed upon in the initial contract
 
Reset Dates
- Date in which payments within the swap calculation period become effective
- Equity Payments are calculated by multiplying the change in the index levels between effective/reset dates by the notional amount.
- The price resets to zero, and the notional will increase/decrease by the amount of the gain/loss for the Equity Payment
 
We can discuss these points in greater detail on future calls, but I feel we should focus more on the ABS/ABX adjustments, as the process should be consistent across all parties.
 
Regards,
 
David Friskics
Western Asset Management
626-844-4020
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--- End Message ---

Attachment: Trade & Contract Amendments 2009-05-14.doc
Description: Trade & Contract Amendments 2009-05-14.doc