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Interest Rate Swaps / Swaptions Retail
- Thread starter rosy
- Start date
just curious...do you think the majority of the retail market is sophisticated enough to use the swap market considering that that swaps are mainly used to hedge mortgage products or by corporations using to arb the cash market and create synthetic structures to lower their cost of capital?
Quote from ronaldtompkins:
just curious...do you think the majority of the retail market is sophisticated enough to use the swap market considering that that swaps are mainly used to hedge mortgage products or by corporations using to arb the cash market and create synthetic structures to lower their cost of capital?
I agree with this somewhat. I don't think that the complexity alone is justification for a product not to exist, but I really wonder how much interest retail-traded swaps would garner.
Also, when you say that corporations use swaps to arb the cash market and lower their cost of capital, isn't the purpose a little simpler than that? Currency swaps and interest rate swaps exist for very specific reasons.
corporations use swaps to achieve synthetic funding rates that are not available in the cash market. I.E. issue variable rate bonds and swap desired portion back to a fixed rate that provides a cost of capital that is less than a traditional fixed rate bond issuance. Or vice-versa with fixed rate bonds swapping back to floating and not have support costs associated with floaters.
Quote from ronaldtompkins:
corporations use swaps to achieve synthetic funding rates that are not available in the cash market. I.E. issue variable rate bonds and swap desired portion back to a fixed rate that provides a cost of capital that is less than a traditional fixed rate bond issuance. Or vice-versa with fixed rate bonds swapping back to floating and not have support costs associated with floaters.
I don't have any real world experience with using swaps, but from a textbook perspective I don't think that you have explained this correctly. Currency swaps exist for the purpose of assuring certainty of future cashflows, interest rate swaps exist due to inequities in obtaining financing (comparative advantage), as well as the goal of matching type of debt with type of inflows.
Quote from ronaldtompkins:
I.E. issue variable rate bonds and swap desired portion back to a fixed rate that provides a cost of capital that is less than a traditional fixed rate bond issuance.
So you are saying that the party on the other side of the swap is willing to pay a fixed rate that is below market while receiving a variable rate?
No, they don't pay a below market rate. They are two different markets with two different yields.
Quote from rosy:
has anyone heard if there is progress in to opening up the OTC ir swap/swaption market for retail accounts. Much like how fx spot was opened up over the last several years.
Vanilla Interest rate swaps are already traded electronically between pre-approved counterparties.
In order for this market to become accessible to smaller counterparties (I'm reluctant to use the word "retail") we would need central clearing or we would need OTC counterparties to offer the product on a daily MTM basis of a Constant Maturity Swap rather than accruals of a fixed maturity swap. Then there would be no need to worry about periodic resets or credit risk beyond the daily fluctuations.
Another way would be to transact forward starting swaps ("IMM") and MTM daily as we do for futures. They would then be cash settled at the start date. Again, no need to worry about accruals or odd maturity dates.
A much better solution would be to have liquid futures contracts -but without institutional support these have never been a success.
However it is structured, it would need to be in a way so that it could be done without having to put in place the standard ISDA master agreement.
Dealer
[former IRS, caps/floors and swaptions trader, 1989-1997]
Where can we get daily CMS (Constant Maturity Swap) rate data?
Quote from dealer:
In order for this market to become accessible to smaller counterparties (I'm reluctant to use the word "retail") we would need central clearing or we would need OTC counterparties to offer the product on a daily MTM basis of a Constant Maturity Swap rather than accruals of a fixed maturity swap. Then there would be no need to worry about periodic resets or credit risk beyond the daily fluctuations.
[former IRS, caps/floors and swaptions trader, 1989-1997]
No... Why would you want it open anyway?Quote from rosy:
has anyone heard if there is progress in to opening up the OTC ir swap/swaption market for retail accounts. Much like how fx spot was opened up over the last several years.
Try the daily Fed H.15 release...Quote from xiangfin:
Where can we get daily CMS (Constant Maturity Swap) rate data?