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equanimity
Topic Author
Posts: 16
Joined: April 30th, 2013, 2:54 am

Conventions in EUR and GBP Interest Rate Swaps

April 21st, 2017, 1:35 am

A few questions about EUR- and GBP-denominated interest rate swaps:

1) Is it the market convention to trade GBP-denominated interest rate swaps with an Act/365 day count basis?  Are there any other day count bases that are commonly traded in GBP?

2) Let's assume a GBP-denominated 5-year interest rate swap has a fixed rate that pays annually on an Act/365 basis.  Would this be referred to by the brokers as "5-year annual money in Sterling" (i.e. money market)?

3) Is it common to trade EUR- and GBP-denominated interest rate swaps with a fixed leg that pays on a monthly or quarterly basis (or only semi-annual and annual)?

Thanks in advance! 
 
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mtsm
Posts: 326
Joined: July 28th, 2010, 1:40 pm

Re: Conventions in EUR and GBP Interest Rate Swaps

April 25th, 2017, 1:24 pm

1. In the UK and most (?) of the Commonwealth it's a Act365 money market basis (on the floating side). Yes other day counts are used, but the money market basis is as you say.

2. Dunno, but probably. You have to be a bit careful with jargon. Not all of it extends beyond the desk or business using it. I have had funny discussions with veteran traders, who have held a single job at a single firm and who believe that the jargon they use is universal. It's often just not the case and it's actually not that important. Most brokers will clarify everything in plain English to draft term sheets.

3.  Somewhat I'd say and it comes and goes in my experience. But I am not a EUR/GBP basis trader. I'd say quarterly is more common than monthly. I am aware of annual, too. I think that in these markets there isn't much of a basis swap market, hence the IBOR basis is articulated via swap markets. The thing with a lot of fixed income stuff is liquidity. Often times I imagine that there is an OK liquid 6m floating market and then the other floating tenors are practically of 'quote' quality, but not necessarily of 'trade' quality.

Always happy to be told wrong on anything I say.
 
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Martinghoul
Posts: 3200
Joined: July 18th, 2006, 5:49 am

Re: Conventions in EUR and GBP Interest Rate Swaps

April 25th, 2017, 3:18 pm

I concur with mtsm on 1 and 2.

On 3, it's not common to use other frequencies on the fixed leg for tenors over 1y.  For 1y, conventions are rather confusing and unclear, so people do annual, semi and quartlerly.  I haven't ever seen a vanilla IRS with a monthly frequency fixed leg.
 
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overkill112358
Posts: 29
Joined: August 18th, 2012, 4:32 pm

Re: Conventions in EUR and GBP Interest Rate Swaps

April 25th, 2017, 9:32 pm

GBP Market conventions for swaps and cash settled swaptions are:
0b settlement
1y tenor: annual fixed payment vs quarterly 3m libor floating payments
2y+ tenor: semi annual fixed payments vs semi annual 6m libor floating payments.
Basis ACT365 in both cases for both fixed and floating legs.

EUR Market conventions for swaps and cash settled swaptions are:
2b settlement
1y tenor: annual fixed payment vs quarterly 3m libor floating payments
2y+ tenor: annual fixed payments vs semi annual 6m libor floating payments.
Fixed leg basis 30/360. Floating leg basis ACT/360.
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