RE: FpML-Com Reminder: FpML Commodity Working Group call at 3pm LDN / 10 am NY Friday 25th July

["Peera, Ali" <ali.peera@xxxxxx>]

Apologies Piers
I have been called into something else so am not able to join this
meeting.

Regards,
Ali


-----Original Message-----
From: commwg@xxxxxxxx [mailto:commwg@xxxxxxxx] On Behalf Of Piers Evans
Sent: Thursday, July 24, 2008 7:29 PM
To: commwg@xxxxxxxx
Subject: FpML-Com Reminder: FpML Commodity Working Group call at 3pm LDN
/ 10 am NY Friday 25th July

All,

Please note that there is a call tomorrow at the usual time.

AGENDA:

1. Review outstanding actions

2. Review Swap Model - materials 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

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



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