Bank One Corporation - Page 211

                                        -51-                                          
          spread is 4 basis points,23 and the midmarket rate is 6.52                  
          percent.  If the dealer’s bid price is accepted and the dealer              
          enters into a swap under which it is paying a fixed interest rate           
          of 6.5 percent, then the spread from midmarket is 2 basis points.           
                    4.  Significance of Spreads                                       
               The spread from midmarket that a dealer is able to obtain              
          when it negotiates a swap provides it with the revenue necessary            
          to cover its costs connected with the swap and, it hopes,                   
          generate a profit.  When a dealer buys a swap, the dealer                   
          captures the difference between its bid on the transaction and              
          the midmarket rate.  When a dealer sells a swap, the dealer                 
          captures the difference between its ask on the transaction and              
          the midmarket rate.                                                         
               In general, a dealer did not enter into a swap unless it               
          expected to make a profit.  As two exceptions to this rule,                 
          dealers entered into swaps without profit to develop a                      
          relationship with a particular customer or to hedge their                   
          portfolio.                                                                  
               Dealers typically charged smaller spreads to other                     
          dealer/counterparties than to end users.  A dealer that entered             
          into an interdealer swap usually contemporaneously entered into a           
          similar swap with an end user.  The dealer typically earned a               
          profit on the end-user swap by negotiating a bid or ask rate that           


          23 A basis point is 0.01 percent.                                           




Page:  Previous  41  42  43  44  45  46  47  48  49  50  51  52  53  54  55  56  57  58  59  60  Next

Last modified: May 25, 2011