Definition | BMEClearing (2024)

Definition

Interest Rate Swaps (IRS) and Forward Rate Agreements (FRA) are forward contracts in which two counterparties exchange periodically, and for a predefined period of time, flows derived from interest rates, but not the principal or notional amount. One counterparty pays the flow while the other receives it.

The products which BME ClearingSWAPS will accept for clearing are:

Coupon Swaps or Fixed - Floating IRS.

In this IRS, a counterparty will pay or receive an interest flow from a fixed rate, while will receive or pay another flow from a floating rate with a predefined frequency. Both rates, the fixed and the floating, referenced to the 1 month, 3, 6 or12 months Euribor, are applied to a notional amount that is never exchanged.

The counterparty that pays the fixed rate is taken as the IRS buyer, while the IRS seller will be the counterparty that receives this fixed rate.

Example:

Counterparty A pays 1% annually and receives 6 months Euribor semiannually for 5 years on a notional of €1,000,000 to counterparty B.

Basis Swaps or Floating - Floating IRS.

This is an IRS in which one counterparty pays or receives a Floating rate with a reference tenor while receives or pays a floating rate with another reference tenor. Both floating rates are referenced to the 1 month, 3, 6 or12 months Euribor, and are applied to a notional amount that is never exchanged.

Example:

Counterparty A pays 6 months Euribor semiannually and receives 3 months Euribor Quarterly for 5 years on a notional of €1,000,000 to counterparty B.

Overnight Indexed Swaps or OIS.

This kind of IRS is similar to the coupon swap. The difference lies in the Floating rate, which is an overnight compounded rate (EONIA or Euro STR), instead of the EURIBOR.

Therefore a counterparty pays or receives a fixed rate with a frequency and receives or pays the compounded EONIA or EuroSTR at maturity applied to a principal. The counterparty that pays the fixed rate is the OIS buyer and the one that receives the fixed rate is the OIS seller.

Example:

Counterparty A pays 0.25% Fixed, and receives the compounded EONIA or EuroSTR within 6 months, both on a notional of €1,000,000 to counterparty B.

Zero Coupon Swaps.

This is a modification of the Coupon swap where one or both legs of the swap are settled at maturity rather than periodically.

One of the counterparty pays or receives a fixed rate at maturity while receives or pays a Floating one, periodically and referenced to the 1 month, 3, 6 or12 months Euribor, and are applied to a notional amount that is never exchanged.

Example:

Counterparty A pays 1% at maturity and receives 6 months Euribor semiannually for 5 years on a notional of €1,000,000 to counterparty B.

Forward Rate Agreement (FRA)

A counterparty is obliged to lend or to borrow, on a future date, and at a rate defined today, a notional amount for a period of 1, 3, 6 or 12 months. The FRA is so defined by the forward staring time of the notional deposit and its maturity. A 1x4 FRA is a FRA on a deposit referenced to 3 months Euribor (4-1) starting in 1 month time.

Thus, the counterparty that buys the FRA is obliged to borrow a notional deposit. The FRA seller will then be obliged to lend the notional deposit. Both at the rate and date locked today.

Example:

The counterparty A buys a FRA by borrowing a deposit with a notional amount of €1,000,000 for 3 months, but instead of today, into 1 month time at a rate of 1%. Thus, counterparty B sells the FRA, and lends the notional amount of €1,000,000 for 3 months into 1 month time at the rate of 1%.

Features

The generic structure of a swap or a FRA corresponds to one with the following characteristics:

• The notional amount used to calculateinterest flows may remain constant (a bullet swap) or vary according to a predefined schedule or rate over the life of the Swap.

• The fixed rate of the swap or FRA remains constant over the life of the contract.

• The floating rate may incorporate a spread with an either positive or negative value. This could lead to a Euribor Flat, or Euribor plus or minus spread.

• Flows of the floating leg are indexed to Euribor index with tenors of 1 month, 3 months, 6 months and 12 months, and the Overnight index (EONIA or EuroSTR).

• The interest flows are exchanged at regular periods which may or may not coincide in both branches. Flows will be netted in case of payments dates for both legs were the same.

• Effective or value date is usually 2 business days after the trade date with the "modified business day" convention applied in case of non-business day (a weekend or bank holiday). If the effective or value date is greater than those 2 business days, a "Forward Starting Swap" or “delayed starting swap” is negotiated.

• Both legs of the swap are denominated in the same currency. BME Clearingwill only accept for clearing contracts denominated in euros.

• The fixing is "upfront" (at the beginning of the calculation period) and settlement "in arrears" (at the end of the calculation period). BME CLEARING will not accept for clearing contracts with the fixing "in arrears".

• Products cleared at BME CLEARING will not incorporate embedded derivatives products (such as options etc.)

Coding

BME CLEARINGwillnamecontractsto be clearedin theSwaps'Segmentaccording tothe following scheme:

"Product" + "Maturity" + "Floating Reference1" + “Floating Reference2"

Where:

Product Code:3 Letter referring the name of the product according the following table:

Maturity code:2 digit and 1 letter where the digits refer to the maturity and the letter to the term (expressed in days, weeks months or years):

Floating References Code:They refer to the interest rates which are the reference for the floating leg or legs of the product, according to the following table:

Several examples are shown in this table: