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cashflows, (4) adjustment to reflect borrowing and lending rates
for in- or out-of-the-money positions, (5) liquidity, and
(6) model risk. We discuss the adjustments recognized by the
parties and/or experts.
B. Administrative Costs Adjustment
1. Overview
The adjustment for administrative costs represented those
expenses which a dealer expected to incur in the future in
holding, managing, and administering its existing swap portfolio
to maturity. The adjustment reflected the dealer’s operation,
maintenance, and staffing of the support functions and limited
trading personnel, including the personnel needed to execute swap
transactions to service the existing portfolio, process payments
on the swaps, determine and execute the appropriate hedges as to
the swaps, and monitor the credit standing of counterparties.
The adjustment reflected the appropriate data feeds, software
licenses, activities needed to support the trading floor, and
associated space costs.
2. Dealers’ Practice
Dealers did not take administrative costs into account for
purposes such as pricing and trading. Negotiations among dealers
were over the total price of a swap, and dealers did not
separately negotiate an administrative costs component of the
spread from midmarket value.
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