Equity Swap Equivalency
Equity Swaps using OneChicago™ Exchange Futures for Physicals
A basic OTC equity swap involves swapping equity exposure for a stream of cash flows. For instance, the total return of a $50 million position in ABC stock swapped for LIBOR on the $50 million. In essence, the equity holder (the swap buyer) is swapping his stock for cash and paying interest on the cash to the counter party (the swap seller) who is swapping cash for the stock. At the end of swap term, the parties will return to their original positions, the stock is returned to the original equity holder (the swap buyer) and the cash is returned to the swap seller.
The OneChicago Exchange Futures for Physical (“EFP”) transaction provides the same economics as the OTC equity swap. However, the EFP is a competitively traded, central counter party cleared, transparent exchange traded product. Market participants can enjoy the benefit envisioned by Dodd-Frank Act when it created Swap Execution Facilities (“SEFs”) today without waiting for or paying for SEFs to be established and offer equity swaps. All OneChicago futures positions are cleared at the AA+ rated OCC f/k/a The Options Clearing Corporation.
The OTC swap buyer becomes the EFP buyer, swapping their stock for cash while the OTC swap seller becomes the EFP seller, swapping their cash for the stock. As in the OTC swap, the buyer is monetizing their stock for the duration of the position.
The following table compares the OTC equity swap with the OneChicago EFP transaction.
|OTC Equity Swap||OneChicago EFP|
|Starting Position||$50 million ABC shares||$50 million ABC shares|
|Trade||OTC with chosen counter party, swapping $50 million notional value ABC against $50 million at LIBOR + 0.03%||Buy OneChicago $50 million notional value OCX.NoDivRisk™ EFP|
|Resulting Position||$50 million cash and a contractual agreement providing exposure to the total returns of ABC stock||$50 million cash and long a $50 million notional value OCX.NoDivRisk futures position|
|Periodic Cash Flows||Periodic marked to market as called for in the OTC swap agreement when the difference between LIBOR interest payments and ABC stock movements and distributions are paid/collected||Daily futures pay/collect based on daily futures settlement price|
|Swap Termination/Futures Expiration||Final marked to market when the difference between LIBOR interest payments and ABC stock movements and distributions are paid/collected||The long future expires into stock, which is paid for from the proceeds from the original sale plus/minus the daily pay/collects.|
|Ending Position||$50 million ABC shares||$50 million ABC shares|
As you can see, the OneChicago EFP is economically equivalent to an OTC equity swap with the advantages of transparency in a competitively bid/offer electronic market with central counter party and the time tested efficiency and safeguards of an exchange traded derivative. These products exist today, you can see the current market on our website at http://www.onechicago.com/?page_id=4289.
Please contact OneChicago at email@example.com or 312.424.8500 for additional information.