Hi,When buying an OIS Discounted 3m10Y Payer Swaption with physical delivery ? and the swaptions is in the money at expiry ? will the counterparty and me enter into a 5Y swap valued with an OIS Discount Curve ? or is it still an underlying IBOR swap?Thanks,Scalper

QuoteOriginally posted by: ScalperHi,When buying an OIS Discounted 3m10Y Payer Swaption with physical delivery ? and the swaptions is in the money at expiry ? will the counterparty and me enter into a 5Y swap valued with an OIS Discount Curve ? or is it still an underlying IBOR swap?Thanks,ScalperYou do not agree in case of physical delivery how to value the delivered swap. In particular its up to both sides to value it. Only on the collateral procedure they must get together again. Wether or nor this means OIS Discounting depends on the 2 partysA CCP for example might decide to clear the swap future style. Then you are "forced" to hit their price. And if they do for example OIS Discounting with lets say monoton convex interpolation it is advised to do the same. Just to hit their quote. You cannot dispute it like in a collateral agreement.

For a physically-settled swaptions, you should agree the clearing procedure for the underlying when you do the original trade. The clearing procedure will determine the discounting methodology. Moreover, given the new regulations, in the main ccies you likely won't have a choice in the matter.

QuoteOriginally posted by: MartinghoulFor a physically-settled swaptions, you should agree the clearing procedure for the underlying when you do the original trade. The clearing procedure will determine the discounting methodology. Moreover, given the new regulations, in the main ccies you likely won't have a choice in the matter.Agree Martinghoul,Emir is slower then Dodd - Frank. So for a while still bilateral collateral instead of clearing in the EUR. Also there seem to be quite a number of exceptions from clearing obligation. It suffices when the swap is not "very plain Vanilla". Then you are back to the old collateral valuation procedures i think. Or is there anything new?

QuoteOriginally posted by: berndLQuoteOriginally posted by: MartinghoulFor a physically-settled swaptions, you should agree the clearing procedure for the underlying when you do the original trade. The clearing procedure will determine the discounting methodology. Moreover, given the new regulations, in the main ccies you likely won't have a choice in the matter.Agree Martinghoul,Emir is slower then Dodd - Frank. So for a while still bilateral collateral instead of clearing in the EUR. Also there seem to be quite a number of exceptions from clearing obligation. It suffices when the swap is not "very plain Vanilla". Then you are back to the old collateral valuation procedures i think. Or is there anything new?Well, I am not sure I have ever encountered swaptions on non-vanilla underlying swaps. On central clearing, it is mandatory for EUR, at least in my context.

Thanks for the answers,So when I theoretical price the swaptions before the trade and If I compare the broker prices published in Reuters and Bloomberg:1. If the Swaption trade will be cleared ? then I should value it with an underlying swap with OIS discounting2. If the Swaption trade is agreed with the counterpart not to be cleared - then I use an underlying swap valued with the old traditional way without OIS discountingAgree?Thanks, Scalper

QuoteOriginally posted by: ScalperThanks for the answers,So when I theoretical price the swaptions before the trade and If I compare the broker prices published in Reuters and Bloomberg:1. If the Swaption trade will be cleared ? then I should value it with an underlying swap with OIS discounting2. If the Swaption trade is agreed with the counterpart not to be cleared - then I use an underlying swap valued with the old traditional way without OIS discountingAgree?Thanks, ScalperWell,as far as i am concerned:If you have a swaption where your swap will be cleared at a ccp that uses OIS Discounting then yes you use OIS discounting. If your counterparty is JPM, GS and you are under a CSA then probably you would also do OIS Discounting. As they to my knowledge do it. But you could in this case start a despute if for example you think the swap payments shouldnt be discounted at all (would be great to see the result anyway). An argument in Favour or this would be if you have a matching swap at a CCP (i think i saw such a thing at the CME) where they do future style margening. All in all in most cases you will do OIS Discounting just to arrive at the correct mark for the collateralized swap. I just wanted to say that you have to take care where you are clearing and how your pul builds up. This determines the discounting you choose.

QuoteOriginally posted by: ScalperThanks for the answers,So when I theoretical price the swaptions before the trade and If I compare the broker prices published in Reuters and Bloomberg:1. If the Swaption trade will be cleared ? then I should value it with an underlying swap with OIS discounting2. If the Swaption trade is agreed with the counterpart not to be cleared - then I use an underlying swap valued with the old traditional way without OIS discountingAgree?Thanks, ScalperIt's not the swaption trade clearing that matters. Assuming you trade w/forward premium, which is very much a convention in mkts where it matters, it's the clearing of the underlying swap that you should care about. Also, for 2 you value the underlying swap whichever way it should be valued, depending on the actual arrangements. Most of the time, it will still be OIS discounting, but there may be some quirks, such as x-ccy basis, to take into account.

Thanks for answer - and I realize I wrote wrong... of course I mean the underlying swap itself and thanks for pointing out.SO:If the Swaption trade will be agreed with the counterparty to be exercised into::1. ? a physical swap which will BE cleared, then I should value it with an underlying swap with OIS discounting.2. ? a physical swap which will NOT be cleared, then I should use an underlying swap valued with the old traditional way without OIS discountingNow agree? Thanks,Scalper

QuoteOriginally posted by: ScalperThanks for answer - and I realize I wrote wrong... of course I mean the underlying swap itself and thanks for pointing out.SO:If the Swaption trade will be agreed with the counterparty to be exercised into::1. ? a physical swap which will BE cleared, then I should value it with an underlying swap with OIS discounting.2. ? a physical swap which will NOT be cleared, then I should use an underlying swap valued with the old traditional way without OIS discountingNow agree? Thanks,ScalperNot entirely... When you say "a physical swap which will NOT be cleared", you're being very vague. The point I was trying to make previously is that it's entirely possible - in fact, even likely - that in case 2, the underlying swap needs to be valued using OIS discounting. The methodology you use for 2 is dependent on the specifics of the swap trade in question and the nature of your arrangements with the counterparty.