The transaction of interest rate swap indexed to POLONIA (OIS)

 

The transaction of interest rate swap indexed to POLONIA (OIS)

The subject-matter of an OIS transaction is a forward contract consisting in swapping interest payments based on a fixed contract interest rate in exchange for interest payments based on a Floating Interest Rate. The floating interest rate is determined on the basis of POLONIA index. It is also permissible to conclude transactions on the basis of WIBOR Overnight (O/N).

Definitions relating to OIS transactions:

1. Interest Payment Day – means the business day on which the payables and receivables resulting from a given Interest Payments Flow are being settled.
2. Business Day – means any day from Monday to Friday with the exception of public holidays or days in which the commercial banks operating in Poland, through which payments are settled, do not perform such tasks
3. OIS start day – means a Business Day on which the OIS interest period begins.
4. OIS end day – means a Business Day on which the OIS interest period ends.
5. OIS Early Termination Day – means a Business Day on which an Early Termination of OIS Transaction takes place and which falls before the OIS End Day.
6. OIS Buyer – means a party to an OIS Transaction which obtains the entitlement to the OIS Floating Interest Payments Flow and is required to pay the other party to the transaction the amount of the OIS Fixed Interest Payments Flow
7. OIS Transaction Amount – means an amount with regard to which interest payments are being calculated for the OIS Interest Payments Flow in a given Interest Period.
8. OIS Early Termination Amount – with regard to either party, means a total value of unmatured obligations resulting from an OIS Transaction, as calculated for the OIS Early Termination Day, being due to one of the parties to the OIS Transaction.
9. Interest Period – means a period from the OIS Start Date (including this Day) until the OIS End Date (excluding this day).
10. Interest Payments Settlement – means the method of settlement by mutual netting of OIS Fixed Interest Payments Flow and OIS Floating Interest Payments Flow
11. OIS Seller – means a party to an OIS Transaction which obtains the entitlement to the OIS Fixed Interest Payments Flow and is required to pay the other party to the transaction the amount of the OIS Floating Interest Payments Flow
12. Reference Rate – means POLONIA index, unless the parties have agreed on WIBOR Overnight.
13. OIS Interest Payments Flow – means one of the two of the OIS Interest Payments Flows, relating to interest payments.
14. OIS Fixed Interest Payments Flow – means an OIS Interest Payments Flow based on the contractual fixed interest rate of an OIS Transaction.
15. OIS Floating Interest Payments Flow – means an OIS Interest Payments Flow based on the contractual floating interest rate of an OIS Transaction.
16. Early Termination of OIS Transaction – means an early termination of mutual payables and the settlement of the OIS Transaction on the basis of netting before the OIS End Date.
17. Floating Interest Rate – means an interest rate calculated on the basis of an interest rate compounded of the indices POLONIA (unless the parties have agreed on WIBOR Overnight) as determined on each Business Day throughout the duration of Interest Period, rounded up to fourth decimal point.

PRINCIPLES OF OIS TRANSACTION

1. BID and OFFER prices are quoted for the contractual fixed interest rate of OIS Transaction.
2. There is no exchange of the notional amount in OIS Transaction.
3. The parties are entitled to an Early Termination of OIS Transaction by netting. The OIS Transaction Early Termination Amount is calculated by the discount method.
4. Standard periods between the OIS Start Date and OIS End Date are:
■ 1 week
■ 2 weeks
■ 3 weeks
■ 1 month
■ 3 months
■ 6 months
■ 9 months
■ 1 year

TERMS AND CONDITIONS OF OIS TRANSACTION

An OIS Transaction requires the confirmation of

1. OIS Transaction Currency
2. OIS Transaction Amount
3. OIS Start Date
4. OIS End Date
5. Interest Payment Day
6. Contractual fixed interest rate
7. OIS Buyer
8. OIS Seller

A standard OIS Transaction is concluded under the following conditions:

1. OIS Transaction Amount is fixed for the whole Interest Period.
2. OIS Start Date is the date falling two Business Days after the day of concluding the OIS Transaction.

The Interest Payment Day is the following Business Day after the OIS End Date.
The Basis of Interest Calculation in an OIS Transaction for the contractual floating and fixed interest rate is ACT/365.

OBLIGATIONS OF PARTIES

The Interest Payments Settlement is done by calculating a difference in interest between the OIS Fixed Interest Payments Flow and OIS Floating Interest Payments Flow.

The party to the transaction required to pay the difference in interest is:
■ OIS Seller, when the OIS Fixed Interest Payments Flow on the OIS End Date is lower than the OIS Floating Interest Payments Flow, or
■ OIS Buyer, when the OIS Floating Interest Payments Flow on the OIS End Date is lower than the OIS Fixed Interest Payments Flow.
OIS Fixed Interest Payments Flow is calculated according to the following formula:

Sst=N* R* d/36500

where:

Sst - OIS Fixed Interest Payments Flow
N - OIS Transaction Amount
d - number of calendar days in the Interest Period
R - Fixed Interest Rate

Floating Interest rate is calculated according to the following formula:

Z = [(1+W1*D1/36500)*(1+ W2*D2/36500*...(1+ Wn*Dn/36500 - 1]* 36500 / d

where:

Z - Floating Interest Rate
D - number of calendar days for which the Reference Rate is binding during the Interest Period
d - number of calendar days in the Interest Period
W - Reference Rate applied on a given day of the Interest Period
OIS Floating Interest Payments Flow is calculated according to the following formula:

Szm=N* Z* d/36500

where:
Szm – OIS Floating Interest Payments Flow
N – OIS Transaction Amount
d – number of calendar days in the Interest Period
Z – Floating Interest Rate

The difference in interest is calculated according to the following formula:

Ro = | Sst - Szm |

where:

Ro – OIS Settlement Amount
- absolute value of the expression