* Present Krishna Devabhaktuni, Citadel Hans Ellis, SWIFT (Co-Chair) Piers Evans, Markit (Co-Chair) Marc Gratacos, ISDA Owen King, Markit Brian Lynn, GEM Bulent Ozkan, Triple Point John Solder, UBS Chuck Witter, MS Irina Yermakova, ISDA * Apologies Jared Getz, Glencore Peter Stockman, DTCC * Review actions from last meeting 1500 LDN 11th July 2008 >> JG to provide example oil confirmations. A number of participants have supplied sample confirmations. PE will use these to create similar sample trades that disguise the original economics and counterparties. Please could any who have not provided sample confirmation please provide these to PE directly. >> PE to forward PS LEAP rounding slides. Done. >> PS to write up the different methodologies for rounding and calculations within the schema. PS could not join the call, but this is likely to be work for more than just one week. >> MG to pass on the request for a generic 'ISDA' value in the master agreement scheme to the standards committee. PE raised this with the co-ordination group today. There was sympathy to this approach but some concerns were raised about having two ways of expressing something in the same scheme so some further consultation will be required. * Minutes 1. PE revisited the first full period novation question (see attached slides). The group felt that this was not likely in commodities. JS went back to his BA team and got the following answer: "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." >From this, it would appear that the above scenario is unlikely unless both legs of the commodity swap are on different settlement cycles - and the group felt this would not happen. As such, the model of having the Effective / Termination date at the trade level rather than at a leg level appears to be valid. 2. OK presented the commodity option paper. 2.1 GS did not originally submit an options paper. There was a Reuters paper some time ago but this seems out of date. Paper was therefore based on equity options in FpML and the EFET schema. 2.2 OK asked the group if a strip of options was the best way to represent what, in other markets, would be modelled as caps and floors. 2.2.1 Group agreed that strips of options are the correct model in commodities. 2.3 Representation of calculation periods on option strips - should this be parameterised as per swaps? 2.3.1 BL said that it would be best to keep options as similar to swaps as possible and only diverge for option-specific items as was done for interest rate swaptions. 2.3.2 Group agreed to follow the swap model. 2.4 EFET supports capped calls and floored puts - PE to follow up with HB to confirm how this works... is it for physically-settled index trades as in the swap schema? 2.5 Should payers / receivers / straddle swaptions be modelled? 2.5.1 JS said that UBS are trading swaptions currently. However, it is not the top priority in a choice over swaps / options. 2.5.2 Group agreed to press ahead with options and not cover swaptions initially. (Note this reflects the original agreement on scope for this group's work) 2.6 Bermudan options will not be supported at first. 2.7.1 Equity allows the spot price to be captured on an option confirmation. 2.7.1 BO to follow up on why this might be needed in commodities (if at all). Possibly as a first price for an averaging period? 2.7.2 BO will also follow up on whether there are forward-starting options on commodity underlyers (in the sense that the strike is set on the effective date / strike determination date rather than fixed up front). 2.7.3 BO will follow up on asianing in (average strike) options. 2.8 Equity options work such that the number of options is captured and each option has rights over a specific number of shares. 2.8.1 Group agreed that, in the main, this would not apply to commodity options - here you would trade one option with a specific Notional Quantity. 2.8.2 BO suggested that listed options might have a fixed lot size in that what would be being delivered would be a number of futures. 2.8.3 PE pointed out that listed options are out of scope for FpML but that in equity people trade 'exchange look-alike options'. PE also suggested that look-alike could be modelled with one option but with a future underlyer and a set number of openUnits to describe how many futures were being referenced. --> See singleUnderlyer in fpml-asset for how this would look in fpml. 2.8.4 BO to review need for number of options / option entitlement and also the case for supporting exchange look-alike options. 2.9 Should barrier / knock features be included? 2.9.1 BL suggested these are not commonly traded in commodities. Group agreed and these will not be modelled initially. 2.10 Premium model 2.10.1 EFET schema allows for multiple premiums 2.10.2 CW explained that it is possible to have deferred premiums where the premium is paid monthly or at some other frequency throughout the life of a trade. 2.10.3 BO said that a premium payment schedule can be attached to an option. 2.10.4 CW to review how this works - is it simply a fixed split per month or is the number of days taken into account? (e.g. a 12 month strip with per calendar day delivery and deferred payment... is the payment each month simply premium/12 or is it premium/number of days in month ?) 2.11 Are prepayment features in the equity model relevant to commodity options? 2.11.1 Group did not think these were relevant 2.12 Physical settlement 2.12.1 Group agreed that physical settlement was not to be considered at this stage (this is again in line with the group's initial agreement on scope) 2.13 Common Pricing 2.13.1 Group agreed that common pricing would only apply for basket trades which are not in scope at this time. 3. PE thanked all for their time and explained that the next step would be a comprehensive review of the schema to date. Materials will be distributed before the call on the 25th of July. * Decisions Effective and termination dates will remain at the trade level in the swaps schema. Group agreed that strips of options are the correct model in commodities (rather than caps & floors). Group agreed to follow the swap model for calculation periods and, indeed, wherever possible. Group agreed to press ahead with options and not cover swaptions initially. Bermudan options will not be supported at first. Barrier / knock features will not be modelled initially. Group did not think prepayment features from the equity model were relevant Group agreed that physical settlement was not to be considered at this stage. Group agreed that common pricing would only apply for basket trades which are not in scope at this time. * Actions ALL to send in example confirms (especially those covering non-standard trades) to help test the integrity of the model if they have not already done so. 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. PE to follow up with HB to confirm why EFET supports capped calls and floored puts BO to follow up on why this might be needed in commodities (if at all). Possibly as a first price for an averaging period? BO will also follow up on whether there are forward-starting options on commodity underlyers (in the sense that the strike is set on the effective date / strike determination date rather than fixed up front). BO will follow up on asianing in (average strike) options. 2.8.4 BO to review need for number of options / option entitlement and the case for supporting exchange look-alike options. --> See singleUnderlyer in fpml-asset for how this could look in fpml with future as an underlyer and openUnits for the number of futures for listed options look alikes. CW to review how deferred premiums work - is it simply a fixed split per month or is the number of days taken into account? (e.g. a 12 month strip with per calendar day delivery and deferred payment... is the payment each month simply premium/12 or is it premium/number of days in month ?) Would a full premium payment schedule ever be required? * Next meeting 1500 LDN Fri 25th July 2008 The content of this e-mail is confidential and may be privileged. It may be read, copied and used only by the intended recipient and may not be disclosed, copied or distributed. If you received this email in error, please contact the sender immediately by return e-mail or by telephoning +44 20 7260 2000, delete it and do not disclose its contents to any person. You should take full responsibility for checking this email for viruses. Markit reserves the right to monitor all e-mail communications through its network. 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Attachment:
Full First Calculation Period Novation Example.ppt
Description: Full First Calculation Period Novation Example.ppt