Post on 15-Jul-2020
Derivatives. Done. Right.
Strictly Confidential – For Discussion & General Information Purposes Only 2015 Derivative Path, Inc. All Rights Reserved.
Presented to:
Western Independent Bankers2015 Education Summit and ExpoSeptember 21-23, 2015, San Diego, CA
Contents
Derivatives Historical Timeline 3
Introduction: Derivatives 101 11
Market Update 18
Hedging Strategies for 2015 and Beyond 25
Hedging Ideas 29
Dodd-Frank Considerations 35
Risk Management/Credit Exposure 43
Concluding Remarks 48
Company Information 51
Derivatives Historical Timeline
Not Just a Modern Phenomenon
Renaissance Europe
1540 – Royal decree in Antwerp makes contracts
for future delivery transferable to third
parties. Merchants start to trade contracts for differences, similar to cash-settled futures.
Early 1600s – Tulip-mania in Amsterdam:
asset price bubble arises about newly introduced Tulips. Speculators play
on contracts for differences and options.
1700s – Commodity traders buy and sell forwards on London’s
Royal Exchange.
4
Early Futures Markets
1848 – Creation of the Chicago Board
of Trade. Grain Traders create “to-arrive” contracts to lock in price,
which are standardized around 1865.
1874 – Chicago Produce Exchange is
formed, becomes Chicago Mercantile Exchange in 1919,
and by 1925 modern futures
contracts are traded through
clearinghouses.
1922 –First US effort to regulate futures
with Grain
Futures Act.
1936 –Commodity Exchange Authority
established. Options of
futures banned.
1955 – Two onion traders corner
the onion futures on CME. Onion Futures Act is
passed, and still to this day, bans
futures on onions.
5
Early Innovation
1971 – Breakdown of Bretton Woods
system: US currency is taken off gold
standard. Currency futures take off.
1972 – CME creates International
Monetary Market, which allowed
currency future trading.
1973 – Creation of Chicago Board
Options Exchange. Publication of famed Black-Sholes options
pricing model. Derivative industry
sees explosive growth.
1974 – Congress creates US
Commodity Futures Trading Commission
(CFTC), replaces Commodity
Exchange Authority.
6
Swap Era
1981 – IBM and World Bank arrange
the world’s first swap, swapping USD debt payments for Swiss franc and
deutsche mark debt payments.
1982 – CME creates Eurodollar contract, now most actively
traded future contract of all. First
index future contracts are also
launched.
1994 – Invention of the modern Credit Default Swap by JP Morgan to protect
the $5 billion loan to Exxon given for
Exxon Valdez spill damages.
Simultaneously, Orange County
declares bankruptcy.
1995 – Barings Bank (est 1762 London) loses $1.8 B and
collapses due to the futures trading
losses of a single trader, Nick Leeson. Gibson Greetings
posts $20 mm loss due to derivatives
trading, sues Bankers Trust.
7
Early 2000s
1999 – Congress repeals Glass-Steagall:
commercial banks become more involved
with derivatives.
2000 – Congress passes Commodity Futures Modernization Act,
which exempts Credit Default Swaps and
other OTC derivatives from regulation.
Early 2000s – Sub-prime lending takes off, as do derivatives based on sub-prime CDOs and
MBS.
8
Financial Crisis
2008 – Lehman Brothers collapses on a tangled web of
declining portfolio value, counterparty confidence, and
available liquidity.
2008 – Liquidity crisis at AIG, as AIG fails to post collateral on
hundreds of billions of dollars of Credit Default Swaps on
declining Collateralized Debt Obligations. Government bailout
ensues.
9
Dodd-Frank
July 21, 2010 – Dodd-Frank Wall Street Reform and Consumer
Protection Act signed into
law.
August 13 2012 – Under Dodd-Frank,
CFTC publishes
“Final Rule” defining swaps in the Federal
Register.
October 12 2012 – Key elements of Dodd-Frank begin to take
effect, including new eligibility requirements.
December 31 2012 –Swap Dealers and Major
Swap Participants (Category 1) must report credit and interest rate swaps to Swap Data
Repositories, and comply with Internal and
External CFTC Business Conduct Rules.
10
Introduction: Derivatives 101
Why Banks Use Interest Rate Hedging Products?
To mitigate specific risks to the balance sheet.
Reduce asset or liability sensitivity
Manage interest rate risk and spread compression
Manage basis risk
Support loan structures that banks may not want on their balance sheet
Interest rate hedging products can be applied to most instruments on either side
of the balance sheet.
Effective hedging strategies do NOT mean being 100% risk neutral – can be used
to selectively exploit market opportunities, prepare for business cycle changes, etc.
(e.g. enhance asset sensitivity in current environment).
12
Why Banks Use Interest Rate Hedging Products?
To increase competitiveness –facilitating customer swap transaction offering
Help clients better manage interest rate risk
Provide clients more rate protection flexibility and economic upside
Better compete on loan terms/structures without accepting unwanted balance
sheet risk
Better able to enforce loan cost of funds pricing risk
Increase revenue opportunities
Interest rate hedges are effective tools for Banks to mitigate interest rate risk exposure and protect their Net Interest Margin (NIM) and earnings. As separate contracts, hedges allow Banks to tailor ALM solutions independent
from sources and uses of funds decisions.
13
Swap Description
An Interest Rate Swap is a contract between two parties (your bank and your
borrower or your bank and a swap dealer) to exchange interest payments based
on a notional principal schedule over a defined time period.
In plain terms it’s a financial contract that converts exposure from floating to fixed
rates or vice versa.
Allows companies to manage risk associated with individual loans or portfolio
balance sheet risks.
Swaps typically do not require upfront premiums or upfront cost.
Structured where the transaction costs are embedded in the rate or spread in
the transaction.
Swaps are separate contracts from the underlying exposure a counterparty is
trying to hedge (e.g. a borrower looking to hedge their floating rate loan).
14
Cash flowsAggregate Payments Over 10
Years
Fixed Payer Floating Payer
PV of Fixed Leg PV of Floating Leg
Based on today’s forward curve, the fixed leg of the swap is equal to the floating leg of the swap on a present value basis. This is the break-even swap rate.
Market Expectation
of future LIBOR
Fixed Rate
How Are Swaps Prices Determined?
15
Cap Description
An Interest Rate Cap is an agreement where one counterparty agrees to
compensate the other counterparty for the difference between a floating-rate index
and a specified strike rate should the floating-rate reset above the strike rate. In
exchange for this protection, the counterparty is required to pay an upfront
premium.
A cap is completely customizable for tenor, frequency, floating-rate index, notional
schedule (bullet, amortizing, accreting, etc.), and the strike rate.
Caps are used to limit interest expense associated with floating-rate exposures
(revolver, term loan, floating rate FHLB Advances etc.) and are typically used when
the user prefers to insure against higher rates versus locking-in a fixed rate
through a swap.
16
How Are Cap Prices Determined?
Like swaps, an option is worth the present value
of its expected future value.
Unlike swaps, option prices include a charge for
volatility (uncertainty).
This is because option buyers don’t accept the
same risks that forward buyers do.
Thus, an option premium equals the intrinsic
value (if any) plus a charge for volatility.
There are essentially five factors affecting option
prices (expectations of future values):
Interest (growth) rate
Time to Expiration
Volatility - price dispersion, or uncertainty
Price of Underlying Asset
Strike Rate
Value
Strike Spot Price (on Settle Date)
17
Market Update
18
Market Update Summary
After more than 5 years of a 0-0.25% rate policy, there is general market
consensus that “when” not “if” is the central question around future FOMC
increases in short term U.S. interest rates.
Historically, market rates have tended to move in anticipation of, rather than
coincidentally to or after, actual Fed rate increases.
Driven in part by international and technical market factors extraneous to U.S.
economic fundamentals, long term U.S. interest rates have recently been held
in check, reversing the trend higher we saw from April to June.
Corporate long term new debt issuance is currently running well above typical
issuance volumes as opportunistic, low coupon long term rates are being locked
in.
19
Market Update
The US economy continues to make
strides towards the Fed’s mandate of
“maximum employment. We’ve had
consistent monthly job gains of
200K+ until the August dip, and the
unemployment rate currently sits at
5.1%, a 7-year low.
It is worth noting the historically low labor
force participation rate, which measures
those who have stopped looking for jobs
Manufacturing and housing have both rebounded nicely after
slow starts to the year, when West Coast Port issues disrupted
production and the dollar was on a rapid incline. The most
recent reading of the ISM manufacturing index declined to
51.1, but it remained above 50, signaling an expansion.
20
Market Update
Wage growth remains a headwind. While average
hourly earnings increased 0.2% in July and 0.3% in
August, they are now up just 2.2% over the past year,
in line with the pace of growth we’ve seen since the
financial crisis.c
Significant headwinds remain internationally,
primarily out of China. A recent private
survey showed China’s factory sector declined
at its fastest pace since March 2009, the
depths of the global financial crisis.
China’s perceived slow growth outlook has
dragged down commodity prices and global
stock markets, as investors fear slowing
demand from the world’s second largest
economy.
21
Market Update
22
The Bloomberg chart as of 9/17/2015 above shows the probability of move for every Fed meeting
through November 02, 2016. There is a 46.6% probability of a move by December 2015 and if
they move - a 93% probability that the target is between 25 bps and 50 bps and only a 7%
probability of it being between 50 and 100 bps.
Similarly, there is a 90.3% probability that the Fed would have made its first move by September
2016 and a given a move by September 2016, a 63.5% probability that the Target rate would be
between 0.5% to 1.75%.
Market Update
Markets tend to anticipate the Fed’s rate
actions before they are formally
announced. At the beginning of the last
rate cycle, 3ML started to increase about 3
months prior to the June 2004 FOMC
meeting. LIBOR increased ~50 bps before
the first hike was announced, and then
proceeded to move ahead of the official
Fed Funds shifts.
5-Year swap rates also
increased about 3 months
prior to the June 2004 FOMC
meeting, spiking about 150
bps before leveling off.
23
Market Update
24
LIBOR is starting to move!
Term swap rates not so much.
Hedging Strategies for 2015 and Beyond
Thoughts on Bank Balance Sheets
Community and Regional banks are often market takers of both assets and
liabilities in their local markets.
Customers typically demand the opposite of what banks really want to offer.
Bank balance sheets are inherently negatively convex.
Most bank CFOs struggle to find acceptable yields in today’s environment.
The short end of the curve has dropped to historic lows and expected to stay
there for the next several months.
26
Thoughts on Bank Balance Sheets
Banks looking to enhance yield on their investments have to go pretty far out
the curve.
Extending duration on investments creates duration risk in today’s rate
environment.
Combining Swaps with longer duration securities can offer a NIM enhancement
strategy to banks and mitigate any future loss of value, due to rising rates, in a
bank’s investment portfolio.
By using different derivative structures, a financial institution can take
advantage of curve shape and add risk reducing caps or swaps in its risk
management strategy.
27
Hedging Both Sides of your Balance Sheet
Assets
Individual loans
Loan portfolios
Individual securities
Fed Funds lending
Floating rate loans w/ floors
Liabilities
FHLB advances
Fed Funds facilities
Brokered CD issuance
Money market accounts
Trust Preferred securities
Other long term debt
Common Hedged Items Common Hedging Strategies
Both sides of a Bank balance sheet lend themselves to rate hedging products.
To mitigate risk against rising rates:
Pay Fixed Swaps
Interest Rate Collars
Purchased Options:
• Interest Rate Caps, Corridors
• Payer Swaptions
To mitigate risk against falling rates:
Receive Fixed Swaps
Reverse Interest Rate Collars
Purchased Options:
• Interest Rate Floors
• Receiver Swaptions
Other hedging strategies:
Basis swaps
Pre-Issuance hedges
Reset risk (FRAs, swaps)
27
Hedging Ideas
How A Spot Starting Swap Works Against An FHLB Advance The analysis is based on a bank borrowing $10 million from FHLB in a 3 month LIBOR floating rate
advance and executing a spot starting swap that begins immediately and matures in 10 years.
During the 10 year period, the bank would simply pay the FHLB a floating rate of interest equal to
3mL + 0.13%. In addition, you execute a swap with a dealer separate from your FHLB advance.
The swap would effectively fix the all-in interest rate on the advance.
FHLB
Swap Fixed Rate (2.37%)
3-Month LIBOR3ML (0.23% today)
+ 0.13%
Interest Rate Swap FHLB Advance
Dealer Your Bank
Sample Payment Exchanges
if 3 month LIBOR is +
Net Swap Payment /
Paid (Received) = Fixed Swap Rate +
FHLB Spread =
All-in Fixed Rate
0.00% + 2.37% = 2.37% + 0.13% = 2.50%
0.23% + 2.14% = 2.37% + 0.13% = 2.50%
1.23% + 1.14% = 2.37% + 0.13% = 2.50%
2.23% + 0.14% = 2.37% + 0.13% = 2.50%
3.33% + -0.96% = 2.37% + 0.13% = 2.50%
4.33% + -1.96% = 2.37% + 0.13% = 2.50%
5.33% + -2.96% = 2.37% + 0.13% = 2.50%
0.23% today
29
Portfolio Caps
Hedging with Interest Rate Caps
3mths 6mths 9mths 1yr 15mths 18mths
2.00%
LIBOR
Client gets paid only when LIBOR is above 2.00%
Upfront Premium
Cap
XYZBank
DealerBank
30
Cap payout
Cap payout
Portfolio Caps
Interest rate caps have become attractive
hedging tools as portfolio managers look to
protect unrealized gains from rises in rates
without giving up attractive yields on the
existing portfolio.
A cap has an asymmetric payoff profile,
where a purchaser pays a premium in
exchange for payment if rates move a pre-
determined amount in one direction. A cap
is a type of option contract, and can be
viewed as a form of insurance policy.
A cap is paid for upfront and then pays an
amount as a percentage of notional when
the interest rate rises above the strike rate
(set at time of purchase).
Principal is never exchanged and the
amount of interest calculated is based on a
notional amount over a specified term.
31
Value Drivers of Option Contracts
Option Value = f (Intrinsic, Time to Expiry,Implied Volatility)Discounted to Today
Option Value Sensitivities
Parameter Shift
Option Value
Time to Expiry
Increases Increases
Volatility Increases Increases
Moneyness/Intrinsic Value
Further-in-the-money
Increases
Discount Rate
Increases Decreases
Hedging Commercial Loans with Back-to-Back Swaps
Back-to-back swaps (as well as hedging individual fixed rate loans) allow banks
to be competitive in market by making longer-term lending commitments to
borrowers but retaining floating rate assets on their balance sheet.
The Bank issues a floating rate loan to the Borrower and executes hedge
documentation with the Borrower.
Credit agreement is drafted in a swap friendly manner. This language typically
includes securing hedge exposure with the debt on a pari passu basis.
The Bank executes an interest rate swap with their End-User, then in turn
executes an offsetting market hedge with the Swap Dealer.
32
Floating Rate Loan Libor + 3.00%
Interest Rate Swap 5.07%
Libor + 3.00%
5.07%
Libor + 3.00% Interest Rate Swap
Your BankBorrower(s) Dealer Bank
Hedging Commercial Loans with Back-to-Back Swaps
The trade details are typically identical to the loan: notional amortization,
maturity, floating rate index, reset fixing days, and payment frequency.
The interest rate risk is mitigated by the Swap Dealer; the default risk of the
End-User is retained by the Bank.
If you mark up the 25 due in 10 amortizing 5.07% rate above, it creates an
opportunity for your bank to earn a fee income.
33
Floating Rate Loan Libor + 3.00%
Interest Rate Swap 5.07%
Libor + 3.00%
5.07%
Libor + 3.00% Interest Rate Swap
Your BankBorrower(s) Dealer Bank
Dodd-Frank Considerations
Dodd-Frank Title VII (OTC Derivatives Reform)
Hundreds of banks around the country help their customers hedge loans by
entering into interest rate derivatives. These derivatives are executed bi-
laterally over-the-counter (OTC) (i.e., one counterparty faces another
counterparty directly – not through a clearing entity like LCH or via an
exchange like CME).
Historically, such OTC derivatives have been subject to broad bank regulator
oversight, but Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act changes that, to provide specific regulatory oversight for the
derivative industry activities.
Under Title VII, all derivatives — hedges executed by both financial and non-
financial end users — are subject to regulatory oversight and new
requirements.
35
Dodd-Frank Title VII (OTC Derivatives Reform)
As a result of these new regulatory changes, multiple business functions are
impacted, including treasury, compliance, risk, legal, operations and technology
in order to handle existing derivative positions and to enter into new derivative
transactions.
The Commodity Futures Trading Commission (CFTC), the agency selected by
congress to regulate interest rate, commodity and select foreign exchange and
credit derivatives, has broad enforcement authority and may impose stiff civil
and criminal penalties for non-compliance with the new, sometimes complex,
regulations.
36
What is Changing for Financial Institutions?
The derivatives business for banks, post Dodd-Frank, has undergone significant
change. Not all community and regional banks are fully focused on the changes
yet or are getting properly prepared to meet the challenge.
Community banks may not have the infrastructure or the personnel in place to
effectively manage the business once all the Dodd-Frank changes are in full
effect.
Swap dealers may not be positioned to provide many of the support systems
necessary to assist community banks run an effective derivatives business in
this new regulatory environment.
The changes needing to be addressed include business conduct rules, end user
eligibility, new counterparty and product identifiers, potential clearing /
exchange requirements, along with recordkeeping, record retention and trade
reporting requirements. Even swaps for bank asset-liability management not
involving bank end user clients are impacted.
37
Some Key Aspects of Dodd Frank
Swap Data Reporting: Any financial institution who enters into a swap with its end
user clients is responsible for reporting this swap activity to a Swap Data Repository
(“SDR”). As of July 1, 2013, such reporting must happen within 48 hours of entering
into a new transaction. The rule also requires reporting of a specific set of swap data
at the creation of the swap, ongoing reporting during the life of the swap, and also
defines specific historical swap reporting requirements as well.
Eligible Contract Participant: The Dodd-Frank Act makes it unlawful for a person that
is not an Eligible Contract Participant (‘‘ECP’’) to enter into a swap. In addition, the
Dodd-Frank Act makes it unlawful for a financial institution to enter into an interest
rate swap with or for a person that is not an ECP. Financial Institutions may rely on
the written representations of counterparties in the absence of red flags.
Recordkeeping and Record Retention: The Dodd-Frank Act calls for swap parties to
keep records relating to swaps throughout the existence of each swap and for 5 years
following final termination or expiration of the swap (and for transactional records to
be “readily accessible” throughout the term of the swap and 2 years following; non-
transactional records must be accessible during the first 2 years of the retention
period).
38
Some Key Aspects of Dodd Frank
Scenario Analysis: While this element of the external business conduct rules is
not required of financial institutions that are not registered as a Swap Dealer or
Major Swap Participant, Scenario Analysis must be made available by Swap
Dealers and Major Swap Participants to their end-user derivative counterparties.
In general, Scenario Analysis is an expression of potential losses to the fair
value of the swap in severe market/rate shocks. Notwithstanding the lack of
regulatory requirement, we believe making Scenario Analysis information
available to your swap clients is a best practice that should be instituted by any
financial institution offering swaps.
Credit Exposure in a Derivative: Section 610 of the Dodd-Frank Act expands
the definition of “loans and extensions of credit” to include credit exposures
arising from derivative and securities financing transactions. To reduce the
burden of these new credit exposure calculations, particularly for smaller and
mid-size banks and savings associations, the rule permits, in certain
circumstances, the use of look-up tables for measuring the exposures for each
transaction type.
39
Important Program Considerations
40
Com
pliance
The Dodd-Frank Act makes it unlawful for a person that is not an Eligible Contract Participant (‘‘ECP’’) to enter into a swap. Proper documentation must be signed before entering into a swap with a commercial borrower of your Bank. Your Bank is also required to report its commercial borrower trades to a Swap Data Repository within 48 hours of transacting.
Mark
eting
Your Bank will need to ensure that clients understand how an interest rate derivative transaction works and what some of the risks are. One of the important considerations of such marketing effort should be to provide client a Scenario Analysis. In general, Scenario Analysis is an expression of potential losses to the fair value of the swap in severe market/rate shocks over the life of the swap.
Cre
dit
Exposure
When a bank enters derivative contract with a client, it takes on credit risk. This risk is that a counterparty will default when it had a net remaining obligation to the bank on remaining payments. The OCC has defined two methods for regional and community financial institutions to calculate such exposure. Your Bank must choose one of these methods to calculate the credit exposure for any derivative transaction and obtain approval for it when underwriting the loan, as well as stay within legal lending limits per 610/611.
Tra
de
Execution
Executing a back to back swap for a client involves a simultaneous execution of two trades. One with the swap dealer of your Bank and the other with the client of your Bank. Both the dealer and the client enter into an oral contract with your Bank which is documented through a trade confirmation immediately following the oral agreement.
Tra
de
Serv
icin
g
Once the trade is in place and confirmed through a written trade confirmation, the trade will need to be operationally serviced throughout its life. Some aspects of servicing involve reporting to a Swap Data Repository, sending monthly payment notices to your Bank’s clients and providing mark-to-market statements, if requested, to the clients as well.
Who is an ECP?
41
No
Yes
Is the counterparty an individual?
Does the individual have discretionary investments in
excess of $5 MM?
Does the entity have total assets in excess of $10 MM
Does the entity have a new worth exceeding $1 MM and is entering into the transaction to manage an asset/liability?
Do all the owners qualify as ECPs?
Does the entity have a corporate guarantor with
assets in excess of $10 MM?
Counterparty qualifies as an ECP.
Does the cumulative net worth of the entity and all of the owners
exceed $1 MM?
Counterparty does not qualify as an ECP and CANNOT enter into a
swap.
Is the individual entering into the transaction to manage an
asset or liability?
Does the individual have discretionary investments in
excess of $10 MM?
No
No No
No
Yes
Yes Yes
Yes
YesNo
No
No
No Yes
Yes
Risk Management/Credit Exposure
Background on Credit Exposure
To reduce the burden of these new credit exposure calculations, particularly for
smaller and mid-size banks and savings associations, the rule permits, in certain
circumstances, the use of look-up tables for measuring the exposures for each
transaction type.
This method permits institutions to adopt compliance alternatives that fit their
size and risk management requirements, consistent with “safety and soundness
and the goals of the statute," according to the OCC.
The rule permits banks to choose from three alternative methods for calculating
“credit exposure” arising from derivative transactions. These methods are
described in detail on the following slides.
43
Defining Derivative Credit Exposure
“Credit exposure” from a derivative transaction is viewed as the sum of the current
credit exposure plus potential future exposure (PFE).
The interim final rule defines “current credit exposure” as the mark-to-market (MTM) of
the transaction.
PFE recognizes that the MTM may increase over time due to changes in market factors.
The PFE + the current MTM is the anticipated maximum potential exposure (“MPE”).
OCC Acceptable Exposure Calculation Methods
Method 1: Internal Model Method
Method 2: Constant Maturity Method
Method 3: Current Exposure Method
44
Method 2: Conversion Factor Matrix Method
This method is available for all banks. Under this method, credit exposure will be a fixed
amount during the life of the swap transaction equal to the notional amount of the
derivative transaction multiplied by the conversion factor set forth in a look-up table
(“Conversion Factor Matrix”).
This approach is considered significantly less burdensome than the Internal Model
Method because institutions would not have to establish statistical simulations of
future PFE calculations, nor measure actual MTM.
The conversion factor matrix method does not seem to take netting or collateral into
account.
45
Original MaturityConversion Factor for
Interest Rate Derivatives
1 year or less 0.015
Over 1 to 3 years 0.030
Over 3 to 5 years 0.060
Over 5 to 10 years 0.120
Over ten years 0.300
Credit Exposure = Notional amount x Conversion FactorExposure for a $10mm, 10-year transaction = $10mm x 12% = $1,200,000
Method 3: Current Exposure Method
This method is available for all banks. Under this method, the measurement of the
credit exposure incorporates both the current MTM and a set additional exposure amount
for the transaction’s remaining maturity.
Credit exposure is measured by adding the current MTM of the transaction to the product
of the notional amount of the transaction, a fixed multiplier based on remaining maturity,
and PFE.
As the remaining maturity of the derivative transaction decreases, the credit exposure
under this method also decreases.
46
Credit Exposure = Current credit exposure + PFE ORCurrent MTM + (Notional Amount x Conversion Factor)$10mm, 10-year Swap, with MTM of $0 Initial Exposure = $0+ (.015 x $10mm) =$150,000 or 1.5% of notional
Remaining MaturityConversion Factor for Interest Rate
Derivatives
1 year or less 0 (0%)
Over 1 to 5 years 0.005 (0.5%)
Over 5 years 0.015 (1.5%)
Concluding Remarks
Use of Derivatives by Banks in the U.S.
Derivative Use By Banks: $2bln to $20bln in Assets as of March 31, 2015
49
78% of medium-size banks
around the U.S. use some form
of interest rate derivatives to
either help their customers
hedge loans or to manage the
risk on their own bank’s balance
sheets. This percentage has
risen steadily since the financial
crisis.
Source: FDIC Call Report Data, March 31, 2015
Focusing on the Future
Back to back swap activity has picked up in anticipation of Fed move.
Demand for long-term fixed rate loans from commercial borrowers is a great reason to consider
using a similar program for your bank.
Banks remain focused on the liability side of the balance sheet (i.e. banks
paying fixed, purchasing caps, etc.).
As the Fed begins its tightening cycle, banks will need to recalibrate their expectations in
regards to the endless supply of deposits available in their local markets. We recommend
focusing on your future funding needs today and employing appropriate strategies to address
any vulnerabilities.
We’ve seen banks hedging future Federal Home Loan Bank borrowings by
paying fixed on forward-starting transactions (along with the hedging of other
wholesale funding options).
We have also seen some amount of cap buying to hedge against future rising
rates.
49
Company Information
Who is DerivativePath, Inc?
We provide a game-changing OTC derivative trading platform coupled with a
veteran team of sales, trading, compliance, and technology professionals to assist
financial institutions in executing and managing their derivative transactions.
The team is comprised of derivative industry leaders who have worked for some of the world’s
largest capital market firms such as Wells Fargo (and predecessors Wachovia and First Union), ABN
AMRO, Societe Generale, and Bank of America.
On the sales and compliance front, our team has been a strong contributor to and led derivative
sales and compliance efforts for major banks. The team has also helped establish new derivatives
back-to-back hedging programs for numerous small and medium-sized financial institution clients.
On the technology front, our team possesses industry leading expertise. Our team is headed by a
former Head of Technology at Wells Fargo Securities. In addition, the team comprises senior leaders
with backgrounds in rates and commodities trading and risk, as well as application development.
We have developed a state of the art derivative trading platform, DerivativeEDGE, which we make
available to all of our clients. This platform helps us automate key aspects of our clients’ trading
operations and the tasks necessary from a trade servicing standpoint as well. The platform provides
a regional/community bank the confidence to operate a hedging program vis-à-vis the requirements
of its regulators/auditors.
52
Cloud-based and cost effective.
Track and fulfill Dodd-Frank pre-trade
compliance requirements with ease, and
use a workflow engine tailored to your
own firm’s approved procedures to
manage all of your post-trade
responsibilities.
Resets, MtM statements, and many
other reports can either be
automatically generated or run
effortlessly.
DerivativeEDGE™: Our Trading Platform
A game-changing, highly secure cloud-based derivatives platform developed by a
team of seasoned trading and technology professionals.
53
Dodd-Frank
Compliance
Operations SupportSales Support
2001 North Main Street, Suite 250Walnut Creek, CA 94596
258 Newark Street, Suite 208 Hoboken, NJ 07030
Contact Us
53
www.Derivative .com
415-992-8200
sales@derivativepath.com
General Privacy & Risk Disclosure Statement
Derivative Path, Inc. ("DPI") is a member of the National Futures Association (NFA) and is registered as an Introducing Broker (IB).
This communication is for informational purposes only, is not an offer, solicitation, recommendation or commitment for any transaction or to buy or sell any security or other financial product, and is not intended as investment advice or as a confirmation of any transaction. Any market price, indicative value, estimate, opinion, data or other information contained herein is not warranted as to completeness or accuracy, and DPI accepts no liability for its use or to update or keep any such information current.
Transactions in over-the-counter derivatives have significant risks, including, but not limited to, substantial risk of loss. Institutions should consider whether derivative transactions are appropriate in light of their own financial objectives, experience, operational resources, legal capacity and regulatory authority.
These materials are confidential and may not be distributed to any other party without the written consent of DPI.