Fixing of Swap Reference Rates

INTRODUCTION

Effective as from 1 October 2008, Danmarks Nationalbank calculates and publishes swap reference rates on a daily basis for maturities between 2 and 10 years. The reference rates are published on the basis of daily re porting by 7 banks, 4 Danish and 3 foreign banks.¹

The swap reference rates are fixed at 11:00 a.m. and published via DN News at 11:30 a.m., after which time they are also available on Dan marks Nationalbank's website. The rates quoted by the individual banks are published on the website of the Danish Bankers Association.

SWAP REFERENCE RATES – BACKGROUND

Previously, official Danish reference rates for maturities of more than 12 months have not been available. The fixing of swap reference rates extends the range of Danish reference rates to include maturities of up to 10 years.

A swap is a financial agreement between two parties to exchange pay ments over a fixed period on terms stipulated today, based on an agreed nominal amount. An interest-rate swap entails exchange of payments in the same currency, and typically fixed interest payments are exchanged for variable interest payments.

Interest-rate swaps are used in connection with many different products in the financial markets. For example, some mortgage loans are based on a 10-year swap rate. In view of the widespread use of interest-rate swaps, a reference rate can provide an easily accessible basis for a great variety of commercial contracts and thus contribute to market efficiency.

RESPONSIBILITY AND PARTICIPATION

The Danish Bankers Association administers the rules on participation in the fixing of swap reference rates, while Danmarks Nationalbank under takes the daily calculation and publication of the swap reference rates. A committee has been established under the auspices of the Danish Bankers Association to address issues in connection with the reference rates. The committee consists of representatives of all of the quoters and the Danish Bankers Association, and Danmarks Nationalbank has obser ver status.

Any bank that is an active player in the Danish interest-rate swap mar ket can be approved by the committee as a quoter of swap reference rates. Approval is based on an immediate assessment of the applicant's activity in the swap market and on a trial period.

A participant may likewise withdraw from the group of quoters by submitting written notice to the committee by the end of the month, with effect from the end of the following month.

The reporting banks are responsible for ensuring that their reported rates reflect realistic interest-rate levels to the highest possible degree. No quoter is obliged to conclude deals with the other quoters on its quote.

CALCULATION OF SWAP REFERENCE RATES

The daily calculation of swap reference rates is based on reporting of swap rates for all maturities between 2 and 10 years in which the vari able leg is 6-month Cibor. The swap reference rate is calculated to 4 decimal places on all Danish banking days.

The reference rate is calculated by removing the highest and lowest reported rates and calculating the average of the rest. The number of reported rates removed depends on the number of reports. All the par ticipating banks are thus given the same weight in the calculation of the reference interest rate.