Swap Package Transactions

CFTC Technology Advisory Committee

February 10, 2014
Swap Package Transactions

 Definition

 Examples

 Economic Benefits

 Representative Analysis of Transaction Costs

 Select Items to Address

 Recommendations

February 10, 2014 2

Table of Contents
Definition

 Package transactions involve the simultaneous pricing and execution of 

two or more component instruments

 Combination of “buys” and “sells” (or “payers” and “receivers”)

 Reasonable and quantifiable degree of correlation between the 

components

 Risk of the offsetting components is approximately equivalent

February 10, 2014 3
Examples

 Swap Curve: Package of two swaps of differing tenors

 Swap Butterfly: Package of three swaps of differing tenors

 Unwind / Offset packages: Portfolio of swaps of differing tenors

 Swap Spreads: Government bonds vs. swaps typically within similar tenors

 MBS Basis: TBAs (Agency MBS) vs. swap spreads

 Invoice Spreads: Treasury-note or Treasury-bond futures vs. swaps

 Cash / Futures Basis: Eurodollar futures bundles vs. swaps

 Delta-Neutral Option Packages: Caps, floors, or swaptions vs. swaps

February 10, 2014 4
Economic Benefits

 Tighter bid-offer spread

Package has lower market risk than each outright, directional leg

 Single vs. multiple bid-offer spreads

Separate execution requires paying the bid-offer on each leg

 More efficient risk transfer and hedging

Only net risk is exchanged, rather than outright risk on each leg

 Elimination of “legging risk”

Risk that the market moves between the execution of each leg

February 10, 2014 5
Execution as Two Separate Legs

 Pay 4.15 bps vs. mid of 3.75 bps

 Effective price = 0.4 bps

 x $90,000 (DV01 per $100mm notional on a 10Y swap spread)

 Transaction Cost = ~$36,000

Execution as a Package

 Pay 3.875 bps vs. mid of 3.75bps

 Effective price = 0.125 bps

 x $90,000 (DV01 per $100mm notional on a 10Y swap spread)

 Transaction Cost = ~$11,250

Representative Analysis of Transaction Costs

6

Swap Spread (Swap vs. Treasury)

February 10, 2014

Market pricing (as observed the morning of November 20, 2013)
Execution as Two Separate Legs

 Pay 132 bps vs. mid of 131.55 bps

 Effective price = 0.45 bps

 x $50,000 (DV01 per $100mm notional on a 5Y swap curve)

 Transaction Cost = ~$22,500

Execution as a Package

 Pay 131.7 bps vs. mid of 131.55 bps

 Effective price = 0.15 bps

 x $50,000 (DV01 per $100mm notional on a 5Y swap curve)

 Transaction Cost = ~$7,500

Representative Analysis of Transaction Costs

7

Swap Curve (Swap vs. Swap)

February 10, 2014

Market pricing (as observed the morning of November 20, 2013)
Select Items to Address

 Multi-swap package transactions

Communication protocol and credit limit checking of net risk

 Swap spreads

Guaranteeing settlement of the US Treasury leg

 Invoice spreads

Separate regulatory regime for swaps and futures

 “EFRP” model for swaps

Transferability of the futures market’s solution for package transactions

February 10, 2014 8
Recommendations

 Do No Harm – As a threshold matter, avoid breaking up the simultaneous 

pricing and execution of package transactions

 Identify Issues & Solutions – For example:

For Multi-Swap Package Transactions...

Collaborative industry enhancements to the execution-to-clearing workflow 

that support these package transactions

For Swap vs. Non-Swap Package Transactions...

Development of execution paradigms / protocols that are viable for these 

package transactions (including an “EFRP” style process for swaps)

 Provide Time to Implement Solutions for Package Transactions

February 10, 2014 9