Behind the curve

Most major derivatives dealers now accept that collateralised trades should be discounted using the overnight indexed swap rate, while a bank’s own cost of funding should be used for non-collateralised trades. But change has been much slower in South Africa. Matt Cameron reports

Derivatives markets have grown at breakneck pace over the past 30 years, with hundreds of trillions of dollars in notional now outstanding. So, it may come as a surprise that there’s so much debate about how to value a simple, plain vanilla swap. Since the financial crisis, however, derivatives dealers have had to re-evaluate how they price collateralised and non-collateralised swap transactions – a change that has led to multiple approaches and a lack of comparability between valuations