1. SAM risk-free rate workshop Swaps versus bonds Lindy Schmaman

2. © 2012 Deloitte Touche Tohmatsu Limited Swap curve versus Bond curve 2 Source: Bond Exchange of South Africa

3. © 2012 Deloitte Touche Tohmatsu Limited Bonds curve | Swap curve | NCD curve 3 Source: Bond Exchange of South Africa overlayed with Deloitte bootsrtrapped NCD curve NCD: Contains credit and liquidity risk

4. © 2012 Deloitte Touche Tohmatsu Limited Criteria for deriving the risk-free curve BondsSwaps Credit risk Questionable? Collateralisation arrangements in place Credit risk on unsecured note / deposit earning JIBAR Less credit risk on an overnight deposit, although still unsecured. No liquid OIS curve in SA Realism Not investible - investors can’t earn swap rates Reliability Tend to be more volatile Smaller number of points along the curve Liquidity Lower dealing costs No technical bias Government policies affect yields 4

5. © 2012 Deloitte Touche Tohmatsu Limited Criteria for deriving the risk-free curve - continued BondsSwaps Objectivity Interpolation Smaller number of points along the curve Extrapolation Shortening of the curve as bonds mature 5

6. © 2012 Deloitte Touche Tohmatsu Limited Swap spreads over government bonds (2006 – 2012) 6

7. © 2011 Deloitte Touche Tohmatsu Limited Equilibrium swap pricing 7 Source: ‘Swap spreads – why have they become negative?’ Deloitte CMG, 2008 Swaps - supply and demand ‒ Receive fixed, pay floating ‒ Demand increases with higher swap yields (earn more) ‒ Invest in corporate bonds / offset the swap ‒ Supply increases with lower swap yields (earn a higher margin) Demand (investors) Supply (banks) Equilibrium ‒ Swap based strategies attractive despite low yields ‒ Good hedge for swap-based discounting => stable profit - Easier portfolio rebalancing

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