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rmax
Posts: 6080
Joined: December 8th, 2005, 9:31 am

Re: Swaption settlement trend

February 28th, 2018, 2:07 pm

Hi,

I know this is a very old thread but I didn't want to create a new one. From july onwards the market standard settlement type for EUR swaptions shifts from cash IRR to collateralised cash price. With the latter I haven't had any experience yet. I was just wondering how the curves for the collateralised cash price settlement calculation are determined. I guess the curves itself are not fixed but only the quotes used to bootstrap them. Is that correct? Given that everybody uses a slightly different curve building technique this would imply that the swaption buyer and seller are usually in disagreement on the settlement amount. Is this what one typically sees in the USD market (where collateralised cash Price is already market standard)?

Thanks,
Bernd
There was an article on this recently in Risk and was discussing this very issue. There was an industry board convened. I'm not sure if they reached a conclusion.
 
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BerndSchmitz
Posts: 242
Joined: August 16th, 2011, 9:48 am

Re: Swaption settlement trend

February 28th, 2018, 5:10 pm

Yeah, buit it doesn't say anything about the details of the EONIA curve to be used.

BTW I'm confused now. Is the Standard in the USD market collateralized cash price or physical settlement?
 
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DavidJN
Posts: 1738
Joined: July 14th, 2002, 3:00 am

Re: Swaption settlement trend

March 1st, 2018, 9:59 am

It is indeed refreshing to see a thread that has not yet been hijacked into irrelevant humour by the usual suspects.

From BNY Mellon's "Cleared Swap Handbook": 

"– Centrally cleared OTC derivative contracts are valued by the CCPs independently using an auction process in which its members participate." 

This suggests a form of consensus pricing. Having said this, there are mechanisms to deal with collateral disputes.
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Re: Swaption settlement trend

March 1st, 2018, 11:06 am

Yeah, buit it doesn't say anything about the details of the EONIA curve to be used.

BTW I'm confused now. Is the Standard in the USD market collateralized cash price or physical settlement?
Last time I checked, physical was still the convention in USD...
As to the details of the EONIA curve used to discount, I am yet to run into significant disputes with counterparties about the cash settlement amounts in EUR and GBP.  Not sure whether that's because everyone still uses the IRR method.
 
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BerndSchmitz
Posts: 242
Joined: August 16th, 2011, 9:48 am

Re: Swaption settlement trend

March 1st, 2018, 4:22 pm

Yeah, buit it doesn't say anything about the details of the EONIA curve to be used.

BTW I'm confused now. Is the Standard in the USD market collateralized cash price or physical settlement?
Last time I checked, physical was still the convention in USD...
As to the details of the EONIA curve used to discount, I am yet to run into significant disputes with counterparties about the cash settlement amounts in EUR and GBP.  Not sure whether that's because everyone still uses the IRR method.
Yes, this is because everybody is still using the IRR method.

But you all seem to agree my view that not the curve is fixed but only the input/quotes for the curve bootstrap opening the door for (minor) model disputes, correct? 
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Re: Swaption settlement trend

March 1st, 2018, 9:13 pm

Yes, since there isn't a realistic way the curve can be "fixed"...
 
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BerndSchmitz
Posts: 242
Joined: August 16th, 2011, 9:48 am

Re: Swaption settlement trend

March 2nd, 2018, 3:14 pm

Why not (at leat in theory). A broker could apply some consensus (i.e. probably not too fancy) bootstrapping procedure with a fixed interpolation method and populate the corresponding vector of dates and DFs on some Reuters page. Together with an extrapolation method the curve would be 100% fixed
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Re: Swaption settlement trend

March 5th, 2018, 11:35 am

Why not (at leat in theory). A broker could apply some consensus (i.e. probably not too fancy) bootstrapping procedure with a fixed interpolation method and populate the corresponding vector of dates and DFs on some Reuters page. Together with an extrapolation method the curve would be 100% fixed
There's quite a lot of consensus required for such a procedure.
 
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agnoatto
Posts: 25
Joined: November 23rd, 2011, 8:12 am

Re: Swaption settlement trend

July 2nd, 2018, 11:54 am

Hi,

I have found the following link:
https://quant.stackexchange.com/questio ... -swaptions

The post says "The Euro swaption market is changing from cash to physical settlement quotation in July 2018". Is the information above accurate? No access to Risk, sorry.

So essentially, we are back to the old good Swap annuity measure and the arsenal of stuff developed for cash-settled pricing is still useful for CMSs right?

Thank you and best regards,
Alessandro
Prof Alessandro Gnoatto, PhD
Department of Economics
University of Verona
Via Cantarane 24 - 37129 Verona - Italy
37129, Verona, Italy
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Re: Swaption settlement trend

July 2nd, 2018, 9:05 pm

Hi,

I have found the following link:
https://quant.stackexchange.com/questio ... -swaptions

The post says "The Euro swaption market is changing from cash to physical settlement quotation in July 2018". Is the information above accurate? No access to Risk, sorry.

So essentially, we are back to the old good Swap annuity measure and the arsenal of stuff developed for cash-settled pricing is still useful for CMSs right?

Thank you and best regards,
Alessandro
Yeah, we appear to have gone full circle in the world of swaptions, really...  A few full circles, even.
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