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  • Swaps

    • CA-9.7.6

      Swaps are treated as two notional positions in government securities with the relevant maturities:

      (a) Interest rate swaps are decomposed into two legs, and each leg is allocated to the maturity band equating to the time remaining to repricing or maturity. For example, an interest rate swap in which a conventional bank licensee is receiving floating rate interest and paying fixed is treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed rate instrument of maturity equivalent to the residual life of the swap;
      (b) For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the interest rate component must be slotted into the appropriate repricing or maturity category, with the equity component being included in the equity risk measurement framework as described in Chapter CA-10;
      (c) For cross currency swaps, the separate legs are included in the interest rate risk measurement for the currencies concerned, as having a fixed/floating leg in each currency. Alternatively, the two parts of a currency swap transaction are split into forward foreign exchange contracts and treated accordingly;
      (d) Where a swap has a deferred start, and one or both legs have been fixed, then the fixed leg(s) is sub-divided into the time to the commencement of the leg and the actual swap leg with fixed or floating rate. A swap is deemed to have a deferred start when the commencement of the interest rate calculation periods is more than two business days from the transaction date, and one or both legs have been fixed at the time of the commitment. However, when a swap has a deferred start and neither leg has been fixed, there is no interest rate exposure, albeit there is counterparty exposure; and
      (e) Where a swap has a different structure from those discussed above, it may be necessary to adjust the underlying notional principal amount, or the notional maturity of one or both legs of the transaction.
      January 2015

    • CA-9.7.7

      Conventional bank licensees with large swap books may use alternative formulae for these swaps to calculate the positions to be included in the maturity or duration ladder. One method would be to first convert the cash flows required by the swap into their present values. For this purpose, each cash flow must be discounted using the zero coupon yields, and a single net figure for the present value of the cash flows entered into the appropriate time-band using procedures that apply to zero or low coupon (less than 3%) instruments. An alternative method is to calculate the sensitivity of the net present value implied by the change in yield used in the duration method (as set out in Section CA-9.5), and allocate these sensitivities into the appropriate time-bands.

      January 2015

    • CA-9.7.8

      Conventional bank licensees which propose to use the approaches described in Paragraph CA-9.7.7, or any other similar alternative formulae, must obtain the prior written approval of the CBB.

      January 2015

    • CA-9.7.9

      The CBB will consider the following factors before approving any alternative methods for calculating the swap positions:

      (a) Whether the systems proposed to be used are accurate;
      (b) Whether the positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and are entered into the appropriate time-bands; and
      (c) Whether the positions are denominated in the same currency.
      January 2015