FAIRFix derivative obligation removes conflicts of interest

 

The derivative is written:

CLIENT PERSPECTIVE

  • Client pays 0.10% for 5 years against receiving 3m FAIRFix SONIA in £50mil notional

    BANK-A PERSPECTIVE

  • Bank-A receives 0.10% for 5 years against paying 3m FAIRFix SONIA in £50mil notional

 

3m FAIRFix fixes every 3 months:

CLIENT PERSPECTIVE

  • Client pays Bank-A 0.10% and receives 3m FAIRFix SONIA fixing rate

    BANK-B PERSPECTIVE

  • Bank-B submits competitive bids and offers in 3m SONIA into FAIRFix auction

  • Bank-B is successful on £50 3m bid and pays 3m FAIRFix SONIA fixing rate (the clearing price of the auction) against receiving compounded realised overnight SONIA rate for 3 months

    BANK-A PERSPECTIVE

  • Bank-A submits non-competitive order to rec 3m SONIA in £50mil at FAIRFix auction

  • Bank-A deals with Bank-B and receives 3m FAIRFix SONIA rate against paying compounded realised overnight SONIA rate for 3 months

  • Bank-A pays Client 3m FAIRFix SONIA fixing rate and receives 0.10%

 

No net exposure to FAIRFix:

BANK-A PERSPECTIVE

  • Net-net, Bank-A receives 0.10% for 5 years against paying realised overnight SONIA rate in £50mil notional

  • No net exposure to FAIRFix and so no conflict of interest if Bank-A is also involved in market making FAIRFix SONIA auction