Our financial good deed of the day

So, the earlier discussion of swaps prices showed that peeps here do indeed know their interest rate swaps from their elbows.

So what we have here is a housing charity carrying some £5 million of floating rate debt. They rather think that now might be a good time to swap that into fixed rate debt. For some period. Our man on the case is a beancounter, knows his tax stuff, but isn\’t entirely and completely au fait with the actual details of how all these things work. From the academic side of the profession.*

He\’s just got a feeling that the prices he\’s being shown by the charity\’s bank look high, tens of bps high.

So there are three questions from them:

– is £5 million enough to get a decent rate from a dealer?
– does anyone have contact details for 3 decent dealers who will give us quotes?
– do you know someone who can explain what that quote means for us ignoramuses?

So, anyone any ideas?

* No, obviously it\’s not Ritchie. It\’s only the right wing plutocrats who spend unpaid time trying to house the poor and disabled. The progressive just demand that people be taxed more to do it.

12 comments on “Our financial good deed of the day

  1. In answer:

    5m is too small to trade in the interbank market, but banks would normally be happy to trade that OTC to clients. The bigger issue is that the client would need to have credit lines/CSAs in place to margin the IRS. For a small client with limited capital, this would be hard to achieve.

    The market for 5y GBP IRS is 1.70%/1.75% at the moment. That would trade in decent size – hundreds of millions.

    My guess is that the spread this customer is getting is a lot wider because the bank is having to charge a significant credit spread on the customer as protection. Depending on the customer, this could be a significant charge.

  2. I could probably find someone to tell you the mid-market price of the swap. I doubt I could find anyone who’d want to trade it with the charity. The regulators and lawyers have made it very unattractive to do a single small derivatives trade with a new client.

  3. Thank you all for your suggestions.

    Edward Lud, I’ve been in touch with JC Rathbone, and a very helpful man looked at it for me but could only beat the bank by 5bps.

    At that level it’s better to get the fixed rate deal with the bank; saving £2,500 on £5 million through a separate swaps contract isn’t worth the counterparty risk these days.

    I guess Tyler and PaulB are right – we’re just too small for the more interesting forms of finance.

  4. Why not sell some interest rate deposit futures instead? It’s the practically the same thing – and your bank will use furs to hedge the IRS anyway… Cut out the middle man… Sell 10 lots in each quarterly contract from Mar2012 to Mar 2017

    Problem is you would need to deposit performance margin at your futures clearing broker. For £5mio of 5 years that would be about £80k …..

  5. JT, nice idea, but £80k is about our entire surplus for the year. And that’s only for a 5 year fix; we’d want longer than that.

  6. The actual market in these IRS is likely to be half a bp wide, not 5bp…. So something like 1.715% – 1.71%

    What this quote mean is that if you want to pay fixed, you would lift the offer at 1.715%

    This would mean (for a £ IRS) that you would be paying £5,000,000 * 1.715% / 365 * (6month End date – 6 month Start date) every 6 months. And in return you would receive £5mio * / 365 * day count

  7. Well, if you want to fix for 10 years, sell a gilt future… Do this properly, and you would get a very good rate – very close to mid market.

    When a bank trades a swap > 5 years, they would hedge them against Gilts.

    Hmmm…. But the problem is still the collateral you would have to post with your clearing broker.

    Maybe it’s worth a few phone calls though?

  8. Hmmm.. You would also have to “roll over” the Gilts every 3 months when your position is close to expiry.

    More work, but this way gets you the best price…..

  9. Actually, there is a lot more I can say about this…. It would be better to do via email…. Tim has my email address…

  10. JT, sounds interesting, although I’m out of my depth already.

    Tim, could you put us in touch please?

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