Aster Group and Notting Hill face each other on interest rate swaps executed through OTC Exchange
Two corporates - Aster Group and Notting Hill Housing Trust - have recently entered into interest rate swaps with each other via TradeRisks’ swap platform, OTC Exchange.
This is a notable example of end-users of swaps choosing to transact with each other directly rather than using the banking system to intermediate all transfers of financial risk.
These transactions through OTC Exchange have provided a number of benefits to the counterparties:
• Transaction costs: the swaps were executed at the prevailing mid-market rate at the time of execution, providing a substantially improved rate and execution cost savings for each counterparty compared with transacting with a bank counterparty;
• Counterparty strength: both parties are of higher credit quality than most banks. In addition, both parties benefit from collateral arrangements to further mitigate counterparty risk. Housing Associations have typically taken uncollateralised exposure to bank counterparties;
• Liquidity risk: both counterparties have the flexibility to provide charges over property as collateral, avoiding the liquidity risks associated with providing cash margin calls.
• Systemic risk: End-user-to-end-user markets prevent the build-up of systemic risk in the financial system – in contrast to the current situation where bank counterparties intermediate almost all financial transactions. Financial regulators support end-user-to-end-user markets as a means of reducing systemic risk. This is because the failure of one counterparty would only affect the other, rather than affecting the whole financial system as would be the case in the event of a bank failure.
John Brace, Group Resources Director at Aster, said “Since the financial crisis, the cost of transacting long-term swaps has risen considerably. OTC Exchange allowed us to achieve part of our hedging strategy on favourable terms at very low transaction costs.”
Paul Phillips, Group Finance Director at Notting Hill, said “Following our recent bond issue, we were looking for a cost-efficient way to reduce our fixed rate exposure and cost of carry. OTC Exchange provided just that.”
There is now increasingly a mixture of willing payers and receivers of fixed rates within the corporate and infrastructure sectors generally. This mixture is more balanced than in the past given the increased importance of funding through fixed-rate bonds as opposed to floating rate bank loans. This change in the structure of funding means that more corporates need to receive fixed rates on interest rate swaps in order to maintain a target fixed-floating mix or duration.
Particularly for end-users who are unwilling to post cash collateral, high transaction costs and the limited pool of suitable counterparties have dis-incentivised hedging and forced corporates to retain more financial risk than is optimal. OTC Exchange can play an important role by providing a cost-efficient and secure mechanism to enable end-users to lay-off risks directly between themselves.
About OTC Exchange:
OTC Exchange is a platform that allows corporates to enter into swaps with many more counterparties than have previously been available to them, not least pension funds, insurance companies and other corporates.
OTC Exchange promotes two core themes in the financial markets, namely (i) transparency and fair competition in the provision of OTC hedging and debt products, and (ii) the creation of new non-bank regulated channels for funding and hedging.
Through OTC Exchange, end-users subscribe to a standard set of market place rules, with transactions governed by best-practice ISDA principles. On top of this core market infrastructure, end users pre-specify ISDA elections and credit support arrangements which OTC Exchange uses to match potential pairs of counterparties to each other.