FpML-IRD Re: FW: Inverse floater question

[harry.mcallister@xxxxxxxxxxxxxxxxx]

Yuval,

FpML allows fixed and /or floating swapStreams
to be combined freely to create fixed/floating or floating/floating swaps
(even fixed/fixed, if you want), so the floating/inverse use case is supported.
To illustrate the principle, I attach a fictitious example adapted from
the original FpML sample message (and updated to reflect current market
conditions!) - the new message represents a 2Y inverse/floating swap where
party A pays 3.25% - (USD 3M Libor),
party B pays USD 6M Libor.

So to answer your question directly:

Q:        Do I understand correctly that FPML only supports the latter of the two?

A:        No: FpML supports any and all combinations of fixed, floating and/or inverse floating leg (it is the responsibility of the document producer to ensure that the FpML makes sense in business terms).

Best regards,

Harry McAllister
Chair, IRD-WG

Fixed Income Architecture
BNP Paribas
+44 (0)20 7595 3416

Internet  
y.avidor@xxxxxxxxxxxxxxxxxxxx

01/03/2009 10:38

To	Harry MCALLISTER
cc	irdwg@xxxxxxxx, r.rosner@xxxxxxxxxxxxxxxxxxxx, h.mazinter@xxxxxxxxxxxxxxxxxxxx
Subject	FW: Inverse floater question

Hi Harry,
 
Thanks for the quick reply.
Here at SuperDerivatives, we
price two different variations of inverse floater.
The first and most commonly
priced by what I understand from our IR department, is what I described
in the previous email, one leg with a fixed – floating rate, and the other
is floating.
The Second, is what you described,
one leg with a fixed – floating rate, and the other is fixed.
 
Do I understand correctly that
FPML only supports the latter of the two?
 
Sincerely,
 
Yuval Avidor
Integration Developer
SD-Connect
y.avidor@xxxxxxxxxxxxxxxxxxxx
Phone: 972 (3) 6074264
Internal: 4264

---

---

From: Rachel Rosner 
Sent: Friday, February 27, 2009 2:41 PM
To: Yuval Avidor
Cc: Hila Mazinter
Subject: RE: Inverse floater question
 
Hi, 
 
In the pricer the floating
leg can be flipped to a fixed leg, so I assume the product covered by Fpml
is the fixed / inverse type.
The more common use however
is the floating/inverse which I guess is not covered by Fpml.
We can try and send them a
question again or need to think of a way to include the missing data in
the SDML.
 
Regards, 
Cheli.

---

From: Yuval Avidor 
Sent: Thursday, February 26, 2009 7:55 PM
To: Rachel Rosner
Cc: Hila Mazinter
Subject: FW: Inverse floater question
 
Hi Cheli,
 
Below is the answer from Harry
Mcallister from the fpml ir working group, about the Inverse floater question.
See if you can understand what
he means. 
 
It seams to me from his explanation
that there is one leg with a fixed – floating rate, and the other is fixed.
This is not the same behavior
that we have in the pricer, as we have one leg with a fixed – floating
rate, and the other is floating.
 
Sincerely,
 
Yuval Avidor
Integration Developer
SD-Connect
y.avidor@xxxxxxxxxxxxxxxxxxxx
Phone: 972 (3) 6074264
Internal: 4264

---

---

From: harry.mcallister@xxxxxxxxxxxxxxxxx
[mailto:harry.mcallister@xxxxxxxxxxxxxxxxx] 
Sent: Thursday, February 26, 2009 7:21 PM
To: Yuval Avidor
Cc: irdwg@xxxxxxxx; mgratacos@xxxxxxxx
Subject: Re: Inverse floater question
 

Yuval, 

I'm afraid you haven't understood correctly :-(

Party A (the payer on the floating leg) pays 8.5% - USD 3M Libor; party
B pays 4.5% (fixed). The "inverse floating" behaviour of the
trade is described entirely within the floatingRateCalculation component
on the floating leg: 

        <floatingRateCalculation>
                <floatingRateIndex>USD-LIBOR-BBA</floatingRateIndex>
                <indexTenor>
                    
   <periodMultiplier>3</periodMultiplier>
                    
   <period>M</period>
                </indexTenor>
                <floatingRateMultiplierSchedule>
                    
   <initialValue>-1.0</initialValue>
                </floatingRateMultiplierSchedule>
                <spreadSchedule>
                    
   <initialValue>0.085</initialValue>
                </spreadSchedule>
        </floatingRateCalculation>

Note that a multiplier applies to the floating rate (floatingRateMultiplierSchedule/initialValue);
the multiplier value = -1.0 serves to invert the observed rate. Next, a
spread schedule (margin) also applies (spreadSchedule/initialValue).
Typically, the margin would be a small value, of the order of a few basis
points or tens of basis points, however here the value is 0.085 i.e. 8.5%.
So the applied floating rate is computed as -1.0 * (USD 3M Libor) + 8.5%
i.e. 8.5% - (USD 3M Libor).

Please note, brief descriptions of all the FpML sample trades can be found
at : http://www.fpml.org/spec/fpml-4-5-5-tr-1/html/fpml-4-5-examples-frame.html
(although please note, for this example, the libor rate is incorrectly
described as EURIBOR). 

Best regards, 

Harry McAllister 
Chair, IRD-WG 

Fixed Income Architecture 
BNP Paribas 
+44 (0)20 7595 3416

Internet  
y.avidor@xxxxxxxxxxxxxxxxxxxx

26/02/2009 16:38

To	irdwgchair@xxxxxxxx
cc
Subject	Inverse floater question

 

Hi, 
  
I have a question about the representation of an inverse floater swap in
fpml. 
This is what I understand from the example in the Schema
and Example files zip
file, and please correct me if I'm getting
this wrong:
  
I see that there is one swapStream representing the floating leg.
If I understand correctly, the other swapStream, is supposed to represent
a leg of a fixed rate minus a floating index.  What I see is that
this leg only has a fixed rate, and I'm guessing that it is understood
that the index in the other leg (the floating leg), will be subtracted
from this fixed rate. 
  
If this is the case, how would you represent an inverse floater swap that
each one of it's legs is based on a different floating index?
  
  
Thanks in advance, 
  
Yuval Avidor 
Integration Developer 
SD-Connect 
y.avidor@xxxxxxxxxxxxxxxxxxxx
Phone: 972 (3) 6074264 
Internal: 4264

 

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Attachment: ird-ex27a-inverse-floater.inverse-vs-floating.xml
Description: Binary data