1. Moscow, November 2010 OIS Swaps Axel van Nederveen Treasurer, EBRD

2. Outline OIS Swaps OIS (RUONIA) vs. LIBOR (MOSPRIME) swaps Advantages of OIS Swaps Further steps in market development

3. 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)

4. 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

5. OIS Swaps vs. LIBOR Swaps OIS +  “ Pure” interest rate risk: credit and liquidity risk negligible in overnight trades  Reliable floating leg fixing -  Generally a short term (<1Y) market LIBOR +  Long term swaps are currently based on LIBOR  Float leg a better match to floating rate assets and liabilities -  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

6. Post-crisis developments in derivatives markets

7. Moreover, the problem is expected to persist: 10y 3M Euribor vs 6M Euribor basis swap 2004-2010

8. 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.

9. Advantages of OIS Swaps Market Participants Allows hedging of short-term exposures to a real traded rate Provides opportunities to express views about direction of interest rates Monetary Authority Transparent measure of market interest rate expectations Central Bank of Russia to target RUONIA, as ECB/Fed (normally) do?

10. 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”!

11. Thank you! Q&A

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