Cornell_Swap_Teach_In_9-21_v1

Economic only long financing fees as agreed as agreed

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Economic only Long Financing Fees As agreed As agreed( * full notional) Short Financing Fees As agreed As agreed Settlement Standard Reset date Commissions Negotiated - dependent on volume Negotiated - dependent on volume Resets Daily (except for CFL) Monthly/Quarterly/Bullet Rehypothecation Yes, if there is a debit balance Always Voting Rights Client DB Insolvency Depends upon rehypothecation Collateral + mark to market gains Balance Sheet Yes Yes
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2 Financing Options for Clients •An important difference to highlight between PB & Swap is that long financing is paid on the full notional of the swap, whereas in PB the long financing is paid on the actual debit balance. Scenario 1 – Swap Long $100mn of GE on Swap Client would pay L+50 on $100mn notional of GE Client posts 20% collateral( cash, pb equity, or treasuries) Earn interest (Fed Funds) on their collateral •Scenario 2 – PB Long $100mn of GE in PB Client is posting $20mn in margin and therefore running a debit of $80mn, so client pays DB debit financing of L+50 on $80mn. Do not earn interest on their margin, which goes to reducing the loan principal
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2 Table of Contents I. Introduction to Swaps and Mechanics I. Reasons for trading on swap I. Trade examples
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2 Balance Sheet Impact of Swap Long Portfolio Swap The hedge of long swaps are extremely balance sheet intensive because our swaps desk needs to buy the underlying instrument of the swap and that asset then sits on DB’s balance sheet. In order to remain balance sheet neutral and still produce positive P&L DB can go out to another broker dealer and sell our hedge to them and strike a similar swap we have on with clients to effectively be balance sheet neutral and still assist clients with their long exposure needs. With Illiquid assets this type of balance sheet reducing trade is not likely, thus these assets “dead end” on DB’s balance sheet. Thus DB is funding these trades via unsecured funding, which is more expensive and as a result, these trades are more expensive for our clients. Additionally, we can be compensated for the balance sheet usage of the hedge by allowing our securities lending desk to use the inventory for borrow requests. However, this still does not reduce the balance sheet. Client Broker Libor + Spread Hedge Libor Flat Performance Market Hedge Performance
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2 Balance Sheet Impact of Swap Short Swap •The borrow of a clients short swap exposure creates a receivable on the balance sheet because we post collateral to the lender and this will be canceled out when a client closes out their short position and the collateral is returned. •In order to minimize the balance sheet impact of a short swap, we can use long inventory to cover/facilitate a clients borrow request to pair down the balance sheet exposure.
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2 Swap Variations TRIPs Total Return Investment Partnership Swap , an over-the-counter derivative contract between DB & client Fund Appreciation at Maturity LIBOR + spread Client Fund Depreciation at Maturity
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