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Rules for participating as a reference rate supporter in the Interest Rate Swap market

An Interest Rate Swap (IRS) is a contract for exchanging interest payments in the same currency from variable to fixed interest or vice versa. At the time of entering the contract, a notional principal as well as conditions for the variable and fixed “legs” in the swap are agreed upon. The principal is not exchanged and the only element that is physically paid for by the two parties that have entered a swap is the difference between the fixed and variable interest payment of the principal at the time of settlement.

Reference rates
Current rules regulate the conditions for participating in the daily fixing of reference rates for Danish interest rate swaps.

SWAP reference rate fixings are prepared for the following periods: 2 - 10 years.

Each supporter should ensure that their SWAP reference rate fixing reflects an interest level that is as realistic as possible. No SWAP reference rate supporter is obliged to enter agreements for their set fixing with other supporters.

Finance Denmark carries out the administration of the SWAP reference rate fixing system. 

The current rules for the daily fixing and quoting of SWAP reference rates are stated in “Rules for participating as reference rate supporters in the interest rate swap market”. Conditions for collecting and calculating the fixing can also be found here.

Quoting takes place on all Danish banking days. However, supporters who are London residents are not obliged to fix quotas on UK bank holidays.

Conditions for participating as a SWAP reference rate supporter

Every bank and savings bank that actively participates on the Danish interest rate swap market can be enrolled as a SWAP reference rate supporter. Applicants may be required to document their active participation on the Danish interest rate swap market.

Importance is attached to whether the bank in question is a market maker or is otherwise known as a frequent market participator in the products when assessing whether the bank or savings bank in question is active on the Danish interest rate swap market.

The assessment will also include the results of a period, where the bank in question will conduct reporting on a trial basis.  The aim of the trial period is to test the quality of the set rates in the individual maturities and the applicants ability to comply with reporting rules. The trial period commences in accordance with the committees decision. The trial period can last up to two months in accordance with the committees assessment.

A SWAP reference rate support must be technically able to report interest rates. The technical guidelines are set by the committee.

Enrolment procedure
Applications for enrollment as a SWAP reference rate supporter are to be sent to Finance Denmark and the application will then be considered at the next committee meeting, as the committee is responsible for SWAP reference rates.

Applicants may be rejected by the committee prior to a trial period if the applicant cannot provide documentation for their active participation on the Danish interest rate swap market.

The reported interest rates, as well as an overview of how the SWAP reference rate fixing would have looked if the applicant’s quotas were included, are presented at the next committee meeting after the trial period expires.

If the trial period proceeds in a satisfactory manner and if the overall picture of the applicant shows that they are an active participant on the Danish interest rate swap market, the committee will send a recommendation about enrollment to Finance Denmark’s board of directors.

In the overall assessment of an applicant and the course of the trial period, importance is attached to whether the fictive SWAP reference rate fixing statement, where the bank or savings bank in question’s quoted rates are entered, is recognizable (in other words, reflects the market prices) to committee members. This can be seen if the applicant does not fall by more than three basis points outside of the fixing, which corresponds to the automatic monitoring of the reported interest rates.

The committee decides the date for when continuous reporting should commence.

Re-enrollment as a SWAP reference rate supporter without a trial period can take place if the committee decides on this with a qualified majority (2/3). If there is not a qualified majority to allow informal re-enrollment, the financial institution in question must re-enroll through the normal enrollment procedure. The committee decides when re-enrollment may occur. Decisions concerning re-enrollment must not be submitted to Finance Denmark’s board of directors.

The responsible superiors in relation to banks or savings banks provisions regulating the power to bind the company must sign a solemn declaration on reporting in line with guidelines for the SWAP reference rate fixing. This declaration is sent to Finance Denmark.

Resignation and exclusion
A financial institution can at its own request resign from the scheme as a SWAP reference rate supporter. Resignation requires one month’s written notice to the committee before the end of the month (running month) with effect from the end of the following month.

If a supporter does not live up to their obligations in relation to the current rules or is no longer an active participant on the Danish interest rate swap market, the other members of the committee can decide to exclude the bank or savings bank in question from the circle of supporters (and thereby also the committee) by a qualified majority (2/3). This also applies if a qualified majority (2/3) discovers that a supporter does not quote true and fair rates. The same elements involved in enrolling in the scheme are used to decide whether a SWAP reference rate supporter no longer is active.

The exclusion of a supporter takes effect from the moment that the committee makes a decision on the matter.

If the financial institution is represented in the committee, it does not have voting rights but has the right to speak when the committee handles a case on the supporter’s circumstances, including possible exclusion.

Any decision on excluding a supporter must be subsequently approved by Finance Denmark’s board of directors. The subsequent approval procedure does not have a delaying effect. If the exclusion is overruled by Finance Denmark’s board of directors the financial institution in question will re-enter the scheme as soon as possible.

The committee
A committee has been established in connection with CIBOR and SWAP reference rate fixings. The main aim of the committee is to ensure the quality of CIBOR and SWAP reference rate supporters and their quota fixings.

Members of the committee are appointed by Finance Denmark’s board of directors. Eligibility requires an employment relationship with a CIBOR or SWAP reference rate supporter. If the employment relationship is terminated, membership of the committee will be automatically terminated. The applicable CIBOR or SWAP reference rate supporter can subsequently choose to nominate a new person as a member of the committee. Eligibility for the committee requires thorough knowledge of the Danish financial market and that the person in question does not fix quotas for CIBOR and SWAP reference rates on a daily basis. Finance Denmark is the secretariat for the committee and participates in its meetings without voting rights.

The committee handles all questions concerning the SWAP reference rate, including fixing the circle of supporters.

The main aim of the committee is to ensure the quality of quotas as well as to develop and follow up on this product area.

The committee's tasks are:
to make proposals for potential new supporters
to evaluate new supporters and decide whether an application should be referred for final approval by Finance Denmark’s board of directors
to update and revise the rules based on applicable market circumstances
to follow the development in the SWAP reference rate fixing on the basis of the material that is drafted at committee meetings
to discuss re-enrollment of supporters
to take steps to exclude a supporter who does not comply with “Rules for fixing a SWAP reference rate fixing”
to participate in committee meetings as well as any telephone conferences.

Committee meetings
Committee meetings for the SWAP reference rate are held as required, approx. 2-3 times per year. Calling an ordinary meeting requires appropriate warning.

If a member of the committee or a supporter becomes aware of irregularities, they can request that a meeting concerning the case is called immediately. The meeting can potentially be held fully or partially by telephone or electronically

Continuous monitoring
Daily monitoring of the reported rates will be conducted. The specific procedure is established in collaboration with the committee.

Individual supporters must report their rates between 11:00AM and 11:10AM. If the rates are not reported by this time they will not be entered into the fixing of the day. However, exemptions may be granted under special circumstances. Importance is attached to whether the missing reporting is due to an oversight. In this case, the supporter must make contact with the estimator as soon as possible and before the fixing of the day is calculated at 11:20AM.

Immediately after 11:10AM, an automatic email is sent to supporters with their rates and the median. If the individual supporter deviates by more than 3bp from the median, this will be stated in the email and clearly marked. The email will also contain information on how many supporters deviated from the median. The information in the email is to be treated confidentially.

Should the individual supporter discover that there is an error in the reported rates, this may be rectified before 11:20AM. The option of rectifying errors is calculated as an exceptional case. The final fixings are calculated based on the rates that are in the system at 11:20AM and are then published at 11:30AM.

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Finance Denmark is an business association for banks, mortgage institutions, asset management, securities trading and investment funds in Denmark. Our members are mortgage institutions, banks, savings banks, cooperative savings banks, Danish branches of foreign banks, asset managers, Danish securities dealers and investment funds. 

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