Set out below are the following:
- "What is a currency swap?";
- "Preliminary issues"; and
- "Special issues"
What is a currency swap?
A currency swap is similar to an interest rate swap except that each cash flow is denominated in a different currency. These swaps may be on a fixed-to-fixed, fixed to floating, or floating-to-floating interest rate basis.
To document currency swaps under Australian law using the ISDA Master Agreement participants should ensure that they have executed an ISDA Master Agreement with their counterparty.
Has the participant used ISDA documents before? If a participant is not familiar with the ISDA documents, it is recommended that they:
- read the User's Guide and the ISDA Master Agreement;
- read the 2.1 "ISDA";
- read this part of the Guide, "Currency swaps".
If a participant is familiar with the ISDA documents, it is recommended that they start by reading this part and refer to the other portions of the Guide as necessary.
Unless otherwise stated, this commentary on currency swaps is prepared on the assumption that participants use the 2006 Definitions and the 2002 ISDA Master Agreement.
A number of important changes were made to the hard-copy version of the Guide on 1 January 2002. Updates 1 to 8 in 6.1.2 "Updates as at June 30 2007" which can be found in 6.2 "History". It is recommended that participants carefully read these items. Take particular care in relation to the comments at the February 2005 Update to Part 5 in 6.1.2 "Updates as at June 30 2007" (ISDA Definitions booklets).
The issues discussed in 4 "Issues", such as regulation, tax/stamp duty, netting, investment managers, novation and collateral, may also be relevant to currency swaps.
Set out below are some Australian specific considerations to be taken into account when completing the 22.214.171.124 "Confirmation without commentary". Further commentary can be found in 126.96.36.199 "Confirmation with commentary".
- Fixed Rate Day Count Fraction. The Fixed Rate Day Count Fraction and the Floating Rate Day Count Fraction are normally specified in an abbreviated form, such as "Actual/Actual". The Confirmations refer to various conventions for calculating the number of days elapsed. These are set out in Section 4.16 of the 2006 Definitions.
It is important to specify a Fixed Rate Day Count Fraction which will normally be "Actual/365(Fixed)" which is consistent with the market practice in Australia. Note that if the word "(Fixed)" is not included, the denominator of the fraction will become 366 in a leap year.
- Floating Rate Option. Article 7 of the 2006 Definitions refers to the definitions for various Floating Rate Options. Section 7.1 (a) of the 2006 ISDA Definitions sets out various Floating Rate Options for the Australian Dollar. Two of these options (AUD-BBR-AUBBSW and AUD-BBR-BBSW) are based on rates for bills of exchange and two (AUD-LIBOR-BBA and AUD-LIBOR-Reference Banks) are based on LIBOR.
The AUD-BBR-BBSW rate is the one which would normally be used for domestic Australian dollar interest rate swaps. ** The AUD-BBR-BBSW rate was fully reviewed by AFMA before being put in the 1991 Definitions (and now reflected in the 2006 Definitions) and is the rate which should now generally be used if an Australian Dollar bank bill rate is required.
To use the AUD-BBR-BBSW rate in a confirmation in which the 2006 Definitions are incorporated simply insert "AUD-BBR-BBSW" alongside the "Floating Rate Option" item. Nothing more is required for this item (although it is necessary to specify the Designated Maturity) **
- Designated Maturity. This definition is used in the definitions of the various Floating Rate Options relating to Australian Dollars.
For Australian Dollar Floating Rate Options based on bills of exchange (AUD-BBR-AUBBSW and AUD-BBR-BBSW), the Designated Maturity is the tenor of the bills of exchange on which the Floating Rate is to be calculated. Normally the Designated Maturity will be three months for quarterly payment swaps and six months for semi-annual swaps.
For Australian Dollar Floating Rate Options based on LIBOR (AUD-LIBOR-BBA and AUD-LIBOR-Reference Banks), the Designated Maturity is the term of the deposits on which LIBOR is based.
It is at this item where participants should specify the Designated Maturity for Calculation Periods which differ from the Designated Maturity which will generally apply in the transaction.
Care! As it is possible that the designated maturity for a particular rate set may not match one of the terms for which BBSW is calculated, consider whether to specify in the confirmation that "Linear Interpolation is to apply" (see Section 8.3 on pg.84 of the 2006 ISDA Definitions) If Linear Interpolation does apply, the two Floating Rate Options needed to calculate the interpolated rate need to be specified.
- Floating Rate Day Count Fraction. See commentary on "Fixed Rate Day Count Fraction" above. If no Floating Rate Day Count Fraction is specified, the fraction will be determined in accordance with Section 6.2 (g) of the 2006 Definitions. The Floating Rate Day Count Fraction specified by Section 6.2 (g) if an AUD-BBR Floating Rate Option is chosen is "Actual/365(Fixed)" which is consistent with the market practice in Australia. Note that if the word "(Fixed)" is not included, the denominator of the fraction will become 366 in a leap year.
- Specify the place for each currency to be applicable for the Business Day definition. See Section 1.4 of 2006 Definitions. This item need not be included if the Transaction is entirely A$ denominated and Sydney is the only centre which need be "open" (see Section 1.4 (a)(i) of the 2006 Definitions).
Last Update Date 29 Jun 2011