January 13th, 2011, 11:27 pm
Well you could theoretically justify a lot of things by what the bank could be doing on the other side.Maybe they should look at what your collateral situation is and see they're not getting any funds at FF from you and adjust accordingly.But nobody can realistically view their book with that kind of granularity.Your cashflows come out in the wash with everyone elses and presumably most of their counterparties are CSA so the policy would be to mark against OIS.If they were to change the discount rate on termination there'd be a hole in P&L to be explained.Also, if they are cutting out a swap on the other side they will have to cough up the OIS discounted amount.So charging you the same is appropriate from that point of view.The way I would look at it is that the market rate you see is for CSA counterparties really.If you are not collateralized you're a risky counterparty which means you should also be charged a credit spread.My comment about the can of worms is that potentially banks will start differentiating between customers who post collateral and those who don't.You weren't charged it when the deal was done but the world has changed now.Think about it this way, your position is underwater but you haven't had to post any collateral.So that's a factor in your favour, but by tearing it up you're forfeiting that advantage.An alternative might be to enter into an offsetting swap rather than terminating.The usual caveat is that you'd be posting collateral, but if that doesn't arise it might work out cheaper.Like Martinghoul says there have been a lot of threads on these issues, especially a couple of years ago when it was all up in the air.These are two that spring to mind, but do a search on things like 'basis' and user 'cpulman' and you'll find more.Thread 1Thread 2
Last edited by
TinMan on January 13th, 2011, 11:00 pm, edited 1 time in total.