Moscow, September 2011 OIS Swaps Axel van Nederveen Treasurer, EBRD

Outline Why? What is OIS Swap? OIS (RUONIA) vs. LIBOR (MOSPRIME) swaps Advantages of OIS Swaps Further steps in market development

Why?

OIS Swaps Interest Rate Swap with overnight index used for float leg 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 Pay Fixed Leg: Z% Receive Float Leg: OIS Daily O/N Fixings Fixed Leg Cashflow: Z% x Notional x Days x Day Count Floating Leg Cashflow: Daily compounding of O/N rates (annualised) x Notional x Days x Day Count

OIS Swaps vs. LIBOR Swaps OIS +  “ Pure” interest rate risk  Reliable floating leg fixing -  Generally a money market instrument (<1Y) LIBOR +  Long term swaps are currently based on LIBOR  Better match for floating rate term loans -  Post-crisis, large liquidity premia priced into LIBOR  Actual rate are bank-specific, may differ from LIBOR fixing  Doubts over credibility of LIBOR fixings

Post-crisis developments in derivatives markets 3 m Euribor – 3 m EONIA Swap, January 2006 – September 2011

Post-crisis developments in derivatives markets Moreover, the problem is expected to persist: 10y 3M Euribor vs 6M Euribor basis swap

Post-crisis developments in derivatives markets Large liquidity premia embedded in LIBOR whereas OIS is a cleaner measure of interest rate expectations LIBOR curves no longer satisfy “normal” conditions, e.g. compounding two consecutive 3m LIBOR rates no longer corresponds to the 6m LIBOR rate.  Banks have started using OIS-based instead of LIBOR-based discount curves for derivative valuations

Advantages of OIS Swaps Market Participants Allows hedging of short-term exposures Provides opportunities to express views about direction of interest rates Provide pricing information transparently on market “consensus” Monetary Authority Transparent measure of market interest rate expectations More direct linkage with monetary policy tools 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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