We are working on an internal project to support IR Swaps with a cancellable provision.
Based on the attached email, it is the second variety we are looking to implement.
One schema issue we have come across, related to the type of trades we currently book, is that we need to model the cancellation effective date BDC at the leg level and not at the deal level. We currently store the unadjusted dates in the relevantUnderlyingDate element (of type AdjustableOrRelativeDates), which is under the relevant exercise type in the cancellation provision.
The annotation for this field is:
"The day on the underlying set by the exercise of an option. What this date is depends on the option (e.g. in a swaption it is the effective date, in an extendible/cancellable provision it is the termination date)."
Within this element we have adjustableDates which can be modified according to a trade level BDC.
The issue we have is that the period end BDC's on the swap may not match the cancellation effective date BDC's:
i.e.
It is possible to have the following:
PAY Period End BDC: FOLLOWING
REC Period End BDC: FOLLOWING
PAY Cancellation Effective Date BDC: FOLLOWING
REC Cancellation Effective Date BDC: Unadjusted (NONE)
There could be variations on this theme.
Do you know of any way we can support this without a schema change?
One possible solution could be to do the following (make the dateAdjustments unbounded):
It would mean changing the AdjustableOrRelativeDates type, but it would be backwardly compatible. We could also look to have an id/h-ref link into the swapStream if the period end and cancellation BDC's match.
I also got the following explanation "snippet" from our drafting team as to why we need to book trades that require this level of flexibility:
"…..if the option buyer exercises their right to cancel on April 9, 2007 (which happens to be Easter Monday) then fixed rate payer accrues payments till 9-Apr but the float rate payer accrues payments up until the following day, 10-April. These accrued payments will have to be exchanged at the end (confirm doesn't explicitly say this but apparently that's what happens.) And that's why it's important to state the adjustment and Business Day Convention for the Effective Date of Cancellation. Most of the time, this adjustment and BDC coincide with that of the Payments adjustment and BDC but there is always a possibility that traders could agree to something different upfront….."
Although not defined within the ISDA template, we believe that this could well be an industry wide requirement. And as mentioned above we do see trades like this.
Any insight you could provide on this would be much appreciated!
Thanks
Jamie
Attachment:
RE FpML-IRD Swap Cancellable and Extendable modifications.oft
Description: RE FpML-IRD Swap Cancellable and Extendable modifications.oft