ReturnLeg's element notional of type ReturnSwapNotional is defined as:

"Specifies the notional of a return type swap.

When used in the equity leg, the definition will
typically combine the actual amount (using the
notional component defined by the FpML industry group)
and the determination method.

When used in the interest leg, the definition will
typically point to the definition of the equity leg."


My problem is in understanding:

" ... combine the actual amount
... and the determination method."

When I look at ReturnSwapNotional I see a "choice" among 4 mutually exclusive alternatives:

1. relativeNotionalAmount
2. relativeDeterminationMethod
3. determinationMethod
4. notionalAmount

It seems to me that the " ... combine the actual amount ... and the determination method" refer to using the 3'rd and 4'th mutually-exclusive elements of ReturnSwapNotional in combination. But, if they are mutually exclusive then they can't be used in combination.

Furthermore, the DeterminationMethodScheme's enumeration seems mostly not-applicable to the task at hand; viz. determining the notional amount. The only case that seems to make any sense at all is the first: "AgreedInitialPrice". If I ignore the incongruity of "...Price" with notional I can imagine that the parties will agree to the initial notional amount specified in the element notionalAmount. This would be a combination of "the actual amount and the determination method".

I suspect that there is something I'm not getting because I'm not familiar with equity swaps. For example, perhaps notionalAmount is specified as 10 million USD and we need a determination method such as ClosingPrice to determine that this swap is to be based on the return of a number of shares determined by 10 million divided by $50/share. However, that doesn't explain the problem of the "choice" specification which makes determinationMethod and notionalAmount mutually exclusive.

Can someone point me to some documentation which explains how to use ReturnSwapNotional? Or, explain to me how this works?

Thanks,
Mark

Hello Mark,

This means for example with forward starting, the deal needs to be updated on/after the strike date to add (Initial Price) and replace with (Equity Notional) numeric values, so you first in the “pre” deal specify method by which the values will be determined :

<returnLeg> …

<strikeDate>
<adjustableDate>
<unadjustedDate>2009-10-09</unadjustedDate>
<dateAdjustments>...
</strikeDate>
...
<initialPrice>
<determinationMethod>AgreedInitialPrice</determinationMethod>
</initialPrice>
…
<notional id="equityNotionalAmount">
<determinationMethod>StrikeDateDetermination</determinationMethod>
</notional>
…
<returnLeg>

and then in the “post” deal (on/after the strike date) replace with actual amount there are two samples for the same deal – pre and post:

<returnLeg> …
<strikeDate>
<adjustableDate>
<unadjustedDate>2009-10-09</unadjustedDate>
<dateAdjustments>...
</strikeDate>
...
<initialPrice>
<determinationMethod>AgreedInitialPrice</determinationMethod>
<netPrice>
<currency>EUR</currency>
<amount>10</amount>
<priceExpression>AbsoluteTerms</priceExpression>
</netPrice>
</initialPrice>
…
<notional id="equityNotionalAmount">
<notionalAmount>
<currency>EUR</currency>
<amount>1000000</amount>
</notionalAmount>
</notional>
…
<returnLeg>



For more information you can take a look at our online documentation (section 10:"Return Swap Product Architecture") and examples (the equity-swap folder has numbers of examples that are utilizing “determinationMethod” with different values; ex18 and 19 demonstrates the above described situation)


Regards,
Irina Yermakova

Thanks Irina,

I found this link:

http://www.fpml.org/spec/fpml-4-4-12-rec-1/html/fpml-4-4-intro.html

However, Return Swaps appeared under the number 9 whereas you referred me to section 10. And, this 4.4 is from 2008; a few years ago.

I couldn't find another reference under "Return Swaps Product Archetecture" that seemed more up-to-date. Could you provide a link to the document I should be reading?

Thanks so much.
Mark

You can find FpML Spec documentation of your FpML version choice on FpML website, under “Specifications” tab
( http://www.fpml.org/spec - it would require you to login to see the FpML specification). There you would have a choice of viewing
- the current major versions of FpML Specifications (click on the left menu - “Current”).
- all FpML major and minor versions and the date of their publication (click on the left menu - “Archived”).

If you have no preferences in FpML versions, I recommend you to look at the latest version.

When you click on one of the versions link, you’d see
1. “Online Documentation:” links. These are the links to view specific
1.1. FpML online documentation (pick a link with the required view, e.g. “Confirmation”). Look for section called " RETURN SWAPS PRODUCT ARCHITECTURE " (in the latest versions, it is under the section 10).
1.2. Schema and Examples - Look at the bottom of the menu for links to “SCHEMA AND EXAMPLES” (in the latest versions, it is under the section 19)
1.2.1. online “Description of Examples”. Look at “Equity Swaps Examples” (in the latest versions, it is under the section 8). Feel free to look though the examples. The examples I described earlier are (in the latest versions, it is under the section 8.16) - Example 15 and 16 - Forward Starting European Interdealer Share Swap Short Form
1.2.2. for download “Schema and Example files” (same as below)

2. “Schema and Examples (download):” links. For each of these views, there are schema files and example (pick a link with the required view e.g. “Confirmation”. Under the Confirmation view directory, you will see Confirmation view set of FpML schema) Plus, each view directory contains subdirectories for each group of FpML examples. The equity-swaps examples, you will find under confirmation/products/equity-swaps directory

Hope it helps.
Irina Yermakova