-102-
with FNBC, and it hurt FNBC’s ability to enter into new swaps.
FNBC’s end-user customers were worried about having periodic
payments that would be due to them from a lower rated dealer.
Some banks required collateral provisions in their swap
agreements with FNBC because they were a better credit risk than
FNBC and were not allowed to take on any risk.
E. Quoting a Price
FNBC’s practice at the start of each business day was to
announce to brokers its bid and ask quotations on interdealer
generic swaps. During the course of the day, FNBC’s traders
would receive calls from brokers informing the traders that the
brokers had a particular dealer that wanted to enter into a swap
at one or more of FNBC’s quoted rates. The broker would not
identify the other dealer until FNBC agreed in principle to the
terms of the swap. Once FNBC learned the other dealer’s
identity, it would decide whether to go forward with the swap, in
view of the other party’s credit rating and the credit limit that
FNBC had established for the counterparty.
FNBC generally went through two steps in deciding what price
to quote on a specific swap (whether with a dealer or an end
user). First, FNBC calculated (usually on its Devon system) the
midmarket rate that would result in both legs of the swap having
the same present value. Second, FNBC added (or subtracted) a
spread to arrive at its ask (or bid) price. In pricing a swap,
Page: Previous 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 NextLast modified: May 25, 2011