13 July 2005
2005-06 AUSTRALIAN DOLLAR INTEREST RATE SWAP PROGRAM
This notice provides details of the Australian Office of Financial Management's (AOFM) intended Australian dollar interest rate swap program for the 2005-06 financial year.
In 2005-06, the AOFM plans to execute interest rate swaps with a notional value of up to $3 billion. This is expected to consist of around $2 billion of swaps to pay fixed interest rates with maturities of up to 4 years and up to $1 billion of swaps to receive fixed interest rates with maturities of at least 5 years. Execution of these swaps will be dependent upon prevailing market conditions.
The AOFM will execute swaps in 2005-06 using procedures similar to those employed in 2004-05. For further details see Attachment.
The lower volume of swap activity in 2005-06 versus recent years is principally driven by two factors.
- Firstly, in order to provide seed capital for the Future Fund, assets currently being held in the AOFM's Long Term Debt Portfolio (LTDP) will be transferred out of the LTDP over the course of the financial year. The removal of these short-dated assets places downward pressure on the modified duration of the LTDP.
- Secondly, the target modified duration of the benchmark portfolio for the management of the LTDP has been revised from 2.0 years to 2.5 years following the annual review of the benchmark.
Further information on the AOFM's swap activities can be found on the AOFM website.
PROCEDURES FOR EXECUTION OF AUSTRALIAN DOLLAR INTEREST RATE SWAPS IN 2005-06
All swaps executed by the AOFM will be transacted via selective tenders. For each tender four approved swap counterparties will be invited to submit bids.
An email message setting out the details of the swaps being tendered will be sent to the parties selected to bid. At around the same time the selected parties will be telephoned and invited to submit bids as soon as possible for the nominated swaps – the caller from the AOFM will remain on the telephone line to receive bids. Bidders will have three minutes from the time they are telephoned in which to submit bids – any bids submitted after this time may not be accepted.
Selection of bidders for tenders will have regard to competitiveness in recent tenders and the number of tenders that have been conducted since a party last participated in a tender. To this end bidders who are successful at a tender will normally be selected to particpate in the next tender if they have signed a Credit Support Annex with the Commonwealth of Australia (the legal entity for which the AOFM executes swaps is the Commonwealth of Australia).
Tenders will be conducted for either one or two swaps. If a tender is conducted for two swaps the Commonwealth of Australia will be the fixed rate receiver for one of the swaps and the fixed rate payer for the other swap.
Bidders will be invited to provide bids for the fixed rates (in percentage terms per annum). Bids can contain up to 3 decimal points e.g. 5.022%.
Bidders may change or withdraw bids prior to acceptance or rejection of bids by the AOFM.
Following the receipt of bids and advice as to whether the bids have been accepted or not, all bidders (i.e. both successful and unsuccessful bidders) will be requested to send a reply to the email message confirming their final bids.
The swaps tendered will be for notional amounts of up to $200 million. However, it is expected that most swaps executed in 2005-06 will be for a notional amount of $100 million.
Selection of Winning Bids
The AOFM has the option not to execute swaps for which bids are sought. This could occur if none of the bids received are considered acceptable or some event has occurred while a tender is being conducted that has significantly affected the market.
Assuming it is decided to execute a swap, the bid that offers the best value for the Commonwealth will be dealt i.e. the highest rate offered for swaps where the Commonwealth is the fixed rate receiver and the lowest rate offered for swaps where the Commonwealth is the fixed rate payer.
If there is a tie between bidders, selection of the winning bid will be made by reference to credit considerations.
If two swaps are tendered this could involve executing with more than one bidder. However, the AOFM will not execute the same swap with more than one bidder at the same tender.
Advice of Tender Outcomes
All bidders at a tender will be advised of whether the swaps tendered were dealt or not, and if so, the rates at which the swaps were dealt. The names of successful bidders will not be revealed.
Information on actual AOFM swap activity will continue to be updated monthly on the AOFM website. These updates take place on the third Thursday of each calendar month.