-82- 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.Page: Previous 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 Next
Last modified: May 25, 2011