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BerndSchmitz
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Joined: August 16th, 2011, 9:48 am

EOM rule subtleties in the swap market

January 30th, 2019, 8:01 am

I have a rather detailled question about the end-of-month rule convention in the swap market. Assume today I trade a GBP-Libor1M swap with 13M maturity. This gives the 29/02/2020 as maturity - adjusted to 28/02 as the 29/02 is not a good busday. From what I know this triggers the eom rule as the (unadjusted) maturity is the last day in the month. However, this would imply that I get a first period of 1d going from today to tomorrow (31/01/2019).

It sounds a bit odd to me that this should be the standard swap for the given parameters. I can also make the example a bit more realistic. If I had asked a broker for a GBP-Libor6M swap with 18M maturity on 29/08/2018. Would I really get a swap with a first period from 29/08/18 to 31/08/18?

Thanks,
Bernd
 
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mtsm
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Joined: July 28th, 2010, 1:40 pm

Re: EOM rule subtleties in the swap market

February 3rd, 2019, 2:18 am

I assume you care about the 1M floating leg?

Start with 1/30/2019, which being a good business day is the swap effective date. Add 13M unadjusted, which takes you to 2/29/2020. Now backwards roll out an unadjusted swap schedule assuming end-of-month roll. That gives you 13 periods. Finally adjust the dates. You are not going to get a 1D front stub if your software is written correctly.
 
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BerndSchmitz
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Joined: August 16th, 2011, 9:48 am

Re: EOM rule subtleties in the swap market

February 6th, 2019, 9:02 am

But rolling backwards from 02/29/2020 with eom gives me the follwoing unadjusted dates:

02/29/2020, 01/31/2020, ..., 02/28/2019, 01/31/2019

01/31/2019 is a good busday so it's not affected by any date adjustment. Therefore, I still think that you are left with a 1d period from 01/30/2019 to 01/31/2019.

Do you not agree?
 
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mtsm
Posts: 352
Joined: July 28th, 2010, 1:40 pm

Re: EOM rule subtleties in the swap market

February 7th, 2019, 3:31 am

No I think you are right actually. I was just checking in Bloomberg for you and fonud empirically that there any short front stub less than 7 days gets folded into the first coupon period. I then found that this is what opengamma strata call smart_initial. Have a look http://strata.opengamma.io/apidocs/com/ ... ntion.html.

It's kind of a corner case and I am not sure how much time is fruitful to spend on. What I can tell you is that in banks such subtleties are typically explicitly handled. Suppose someone does transact such a swap and suppose the software doesn't handle the case correctly based on the generic rule you are trying to discover for yourself. Then the way around this is to agree with your counterparty. Then often times the schedule software will allow you to specify the swap schedule using 4 dates instead of just 2, meaning that you can specify front and back stubs if needed, with a regular schedule in between and a roll date. Alternatively worst comes to worst, the full schedule is specified explicitly. See, I know I am not answering your question, but the point is that it may be possible to explicitly construct a rule that covers all corner cases for all times: past, present and future. But in the absence of the formulation of a generic rule everybody agrees on, it might be that individual implementations do not agree on such corner cases and then it is important to be able to specify the required schedule using slightly more explicit parameters as I describe above. It's to some extent a futile enterprise to try and capture every case, knowing that some cases may not even be unambiguously resolved using what is believed to be the rule to be applied. 
 
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Pat
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Joined: September 30th, 2001, 2:08 am

Re: EOM rule subtleties in the swap market

March 27th, 2019, 11:41 pm

Isn't this why most (all?) confirms list all the theoretical dates plus the business day rules plus the holiday centers ...  so that regardless of system quirks, and whether country X creates extra holidays, we have an unambiguous, legally enforceable contract?
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