The feedback I received from my BA team regarding the novation question is as follows:
The example is a fixed-floating interest rate swap. The floating leg is 6-month LIBOR. Typically such transaction settles every 6 month with floating-rate payment on the payment date is calculated using the 6-month LIBOR rate prevailing six month before the payment date. In the example, the first payment date is 23 May 2005 and the floating leg of the first payment has set on the day the contract was entered. 23 May 2005 is the period end date that immediately precedes the novation date, 01 June 2005. Hence the new transaction should commence from 23 May 2005.
I am guessing that an equivalent example in commodity would be a monthly settled swap for Cal '09. The novation date is in the middle of Feb. If FFCP is applicable, the new transaction should start from Feb 01, 2009…something like that.
Rgds
-----Original Message-----
From: commwg@xxxxxxxx [mailto:commwg@xxxxxxxx] On Behalf Of Piers Evans
Sent: Friday, July 18, 2008 5:33 AM
To: commwg@xxxxxxxx
Subject: FpML-Com Reminder: FpML Commodity Working Group call at 3pm LDN / 10 am NY Friday 18th July
All,
Please note that there is a call today at the usual time.
AGENDA:
1. Review outstanding actions
2. Options Discussion Paper (attached)
Dial in details:
US: 1 888 481 3032
UK: 0 800 904 7961
Intl: 1 617 801 9600
Participant Code: 52016709
Note that the minutes to the last call are included below.
Regards,
Piers Evans
*************************************************************
* Present
Hans Ellis, SWIFT (Co-Chair)
Piers Evans, Markit (Co-Chair)
Jared Getz, Glencore
Marc Gratacos, ISDA
Chito Jovellanos, Forward Look
Owen King, Markit
Brian Lynn, GEM
Bulent Ozkan, Triple Point
John Solder, UBS
Peter Stockman, DTCC
Irina Yermakova, ISDA
* Apologies
Alistair Cross, GS
Krishna Devabhaktuni, Citadel
Luis Fierro, DB
Dirk Mattig, RWE
Ali Peera, GS
Richard Rigby, Glencore
Chuck Witter, MS
* Review actions from last meeting 1500 LDN 11th July 2008
>> PE to finalise the swap schema and distribute to the group for
review. Schema to include sample trades based on 3 examples used by previous commodity WG.
PE distributed this and proposed a formal code review once the options discussion paper has been considered and options are integrated into the schema.
>> AC to provide 'tricky' confirmations to aid testing the integrity of
the final model
AC will try to find suitable confirmations that can be distributed. This action will be extended to the rest of the group - please see actions below.
JG agreed to provide example oil confirmations to the group.
>> Group to review Effective Date question in relation to novations
JG said that trades would settle on a monthly basis so the novation of a trade with different calculation period lengths per leg would not result in different effective dates.
Group agreed that effective and termination date made sense at the trade level.
Please also see attached slides which relate to interest rate trades for an example of what was at issue here. Should there be no further comments in the light of these slides, the point will be considered closed.
>> Group to review market disruption model and agree it on next call
No issues were raised with the model. The group will have another chance to comment during the code review.
* Minutes
1. PE went through the business points in the attached email
1.1 Pricing Dates (note the original email referred to Payment Dates -
apologies)
PS suggested that the ability to link absolute pricing dates to a calculation period would probably be required.
PE noted that since this would add significant complexity to the schema it should be modelled only if it was definitely required.
The group would like feedback from other members as to whether this issue requires consideration.
In summary: If a message contains the absolute pricing dates rather than a schedule algorithm, should these be grouped per calculation period as notional steps are? If a lag were applicable and the pricing dates did not align with the calculation periods, would this not be unavoidable?
For example, a "Cal '09" swap with a 3 month lag (starting 01-Jan-2009, ending 31-Dec-2009, pricing as an average of the 3 preceding months'
prices) with monthly calculation periods has the following pricing
dates:
(a) 01-Oct to 10-Oct-2008 (b) 01-Nov to 07-Nov-2008 (c) 01-Dec to
12-Dec-2008
A parametric representation would specify something like "all commodity business days in the first two calendar weeks of each of the three months preceding the calculation period".
However, if the actual dates were listed, it is not explicit which of the periods the dates should apply to. In this case, for example, all the dates would be relevant to the first calculation period and dates
(b) and (c) would also be relevant for the second calculation period.
Is this scenario realistic? If so we will need to provide a mechanism to say which calculation period each pricing date prices for (and it could be more than one).
1.2 Rounding
PE asked whether the rounding model should represent the rounding methodology as well as the precision.
JG noted that even if the methodology were represented in the schema, many systems only support one method of rounding and that it wasn't really appropriate information for a confirmation.
PS agreed that rounding wasn't required for confirmations but noted it would be important for settlement.
JG noted that rounding would typically be on a per-counterpart basis rather than per-trade.
After general discussion, PS agreed to put together a list of rounding methodologies which will be reviewed by the group.
BL said he felt there were two important steps to take when understanding rounding:
1. Go through a confirmation to identify anywhere where rounding could take place - and name them.
2. Investigate what's actually being done in the industry (some of the rounding points identified in 1 may not be relevant).
1.3 FX
PE suggested that the FX averaging methodology should be subject to the same analysis as for rounding.
1.4 Pricing Dates
PE asked whether the group thought the parametric model for pricing dates was flexible enough.
BL stated that he felt it was important to differentiate between frequency and period/interval. In the context of the model, frequency was really being used to represent a time duration over which pricing would take place rather than an actual frequency.
1.5 ISDA Master Agreements coding scheme
PE noted that master agreements were not typically referenced according to their ISDA version (e.g. ISDA 2002) on confirmations and suggested that a generic value should be added to the appropriate coding scheme.
JG agreed that Glencore's systems would not know the master agreement type - the most recent contract date would be recorded and referenced.
JG also said it was important to identify the ISDA definitions in use -
1993 v. 2005. PE agreed to get this added to the relevant FpML scheme.
2. PE explained the DeliveryDateRollConvention issue
The group agreed that the offset would always be of type Scheduled Trading Day.
3. There was no time to go through the options discussion paper. This will be discussed on the next call.
* Decisions
Effective and termination dates will remain at the trade level in the swaps schema.
Market disruption and fallback model will be incorporated into the swaps schema.
Addition of generic value for most recent master agreement to the master-agreement-type coding scheme will be requested of the standards committee. Equally, the group will add the 1993 and 2005 Definitions to the relevant coding scheme.
* Actions
ALL to send in example confirms (especially those covering non-standard
trades) to help test the integrity of the model.
N.B. --> It should be noted that attachments to emails will be publically available on the internet from the fpml.org mailing archive and so disguising the parties involved is advisable.
JG to provide example oil confirmations.
PE to forward PS LEAP rounding slides.
PS to write up the different methodologies for rounding and calculations within the schema.
MG to pass on the request for a generic 'ISDA' value in the master agreement scheme to the standards committee.
* Next meeting 1500 LDN Fri 18th July 2008
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