Bank One Corporation - Page 13

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          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,             






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Last modified: May 25, 2011