OIS Swaps
Axel van Nederveen
Treasurer, EBRD
Moscow, November 2010
Outline

OIS Swaps

OIS (RUONIA) vs. LIBOR (MOSPRIME) swaps

Advantages of OIS Swaps

Further steps in market development
OIS Swap

Interest Rate Swap with overnight index used for float leg

Replicates the exposure of a short-term loan funded by an
overnight deposit or an overnight loan funded by a short-term
deposit

Overnight index used is (usually, not always) calculated by Central
Bank as weighted average of rates on overnight trades on a given
day (RUB: RUONIA, EUR: EONIA, USD: Fed Funds, PLN:
POLONIA…)

Swaps are predominantly short term (<1y)
OIS Swaps
Cashflow diagram
Fixed Leg Cashflow:
Z% x Notional x Days x Day Count
Pay Fixed Leg: Z%
Receive Float
Leg: OIS
Daily O/N Fixings
Floating Leg Cashflow:
Daily compounding of O/N rates (annualised) x
Notional x Days x Day Count
OIS Swaps vs. LIBOR Swaps
OIS
LIBOR
+

+
“Pure” interest rate risk: credit
and liquidity risk negligible in
overnight trades

Reliable floating leg fixing


Long term swaps are currently
based on LIBOR

Float leg a better match to
floating rate assets and
liabilities
Generally a short term (<1Y)
market

Post-crisis, large liquidity premia
priced into LIBOR

These are now bank-specific, so
LIBOR is no longer generic

Doubts over credibility of LIBOR
fixings
Post-crisis developments in derivatives markets
Post-crisis developments in derivatives markets
Moreover, the problem is expected to persist:
10y 3M Euribor vs 6M Euribor basis swap
2004-2010
Post-crisis developments in derivatives markets

Liquidity and credit risk premia have become embedded in LIBOR
whereas OIS is a cleaner measure of interest rate expectations

The unsecured term interbank money market is not coming back.

Banks have started using OIS-based instead of LIBOR-based
discount curves for derivative valuations.

Valuation have become dual curve based rather than single curve
based.
Advantages of OIS Swaps
Market Participants
Monetary Authority

Allows hedging of short-term
exposures to a real traded rate

Transparent measure of market
interest rate expectations

Provides opportunities to
express views about direction
of interest rates

Central Bank of Russia to
target RUONIA, as ECB/Fed
(normally) do?
Further steps in OIS Market Development

Overcoming the current limitations of OIS swaps
– Lengthening the tenor of swaps on offer
– Making float leg of OIS a better match to risk profile of floating rate assets
and liabilities

Keeping it simple: make OIS swaps look more like LIBOR swaps, while
retaining their beneficial features
– For swaps longer than 1 year, replace the overnight fixing on the floating leg
with a short-term OIS swap fixing (e.g. 3 months)
– A “swap-within-a-swap”!
Thank you!
Q&A
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