Australian Government, the Australian Office of Financial Management

OPERATIONAL NOTICE

No: 15/2003

PROCEDURES FOR EXECUTION OF AUSTRALIAN DOLLAR INTEREST RATE SWAPS

This notice outlines the procedures that will be employed by the Australian Office of Financial Management (AOFM) in 2003-04 to execute Australian dollar interest rate swaps.

  • The AOFM transacts interest rate swaps to manage the Commonwealth’s net debt portfolio in line with the interest rate benchmark for this portfolio (for details of the interest rate benchmark see AOFM Press Release 1/2003 of 18 September 2003).
  • In 2003-04 the AOFM will be seeking to transact around $2 billion to $4 billion of Australian dollar interest rate swaps with terms of at least 7 years for which the Commonwealth of Australia is the fixed interest rate receiver and around $4 billion to $6 billion of Australian dollar interest rate swaps with terms of up to 4 years for which the Commonwealth of Australia is the fixed interest rate payer.

Selective Tender

The swaps will be transacted through a series of selective tenders over the remainder of the 2003-04 financial year. At each tender three approved swap counterparties will be invited to submit bids for nominated swaps.

Generally, approved swap counterparties are parties:

  • with which the Commonwealth of Australia has a current ISDA Master Agreement;
  • that meet minimum credit ratings criteria for new swap transactions (generally minimum long-term senior debt ratings of Aa3 and AA- from the Moody’s and Standard & Poor’s credit rating agencies); and
  • for which there are unused credit limits available.

Parties selected to bid at tender 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. An email message will also be sent to the bidders at around the same time setting out the details of the nominated swaps (an illustrative pro-forma is attached).

Bids Sought

Bidders will be invited to provide bids for the fixed rates (in percentage terms per annum) for two nominated swap transactions:

  • a swap with a term of 7 years or more for which the Commonwealth of Australia is the fixed rate receiver (Swap One); and
  • a swap with a term of 4 years or less for which the Commonwealth of Australia is the fixed rate payer (Swap Two).

Bidders will be asked to submit three bids:

  • Bid One - a bid for Swap One swap assuming only that swap is executed with the bidder;
  • Bid Two - a bid for Swap Two assuming only that swap is executed with the bidder;
  • Bid Three - a bid for Swap Two assuming both Swap One and Swap Two are executed with the bidder.

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.

Tender Amounts

Bids for Swap One must be for a notional amount of either AUD 100 million, AUD 150 million or AUD 200 million. Bidders can only submit one bid – that is it is not possible to lodge a series of bids for different notional amounts.

  • The AOFM has the option of dealing for the amount offered or a smaller amount.

For Swap Two only bids for a notional amount of AUD 200 million will be accepted.

Selection of Winning Bids

The AOFM has the option of executing both swaps, only one of the swaps or none of the swaps. 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.

Assuming the bids received are considered acceptable, the combination of bids that offer the best value for the Commonwealth will be dealt.

If after this there remains a tie between bidders, selection of the winning bids will be made by reference to the volume offered for Swap One. The bidder that offers the highest notional amount will be favoured.

If after this there continues to be a tie, selection will be based on credit considerations.

Payment Dates

Swap One will have either quarterly or semi-annual payment dates. It is expected that there will be a broadly fifty-fifty mix of such payment dates.

Swap Two is expected to always have quarterly payment dates.

Advice of Tender Outcomes

All bidders at a tender will be advised of whether the swaps were dealt or not, and if so, the rates at which the swaps were dealt. The names of successful bidders and the amount dealt for Swap One will not be revealed.

There will be a monthly update of information on AOFM swap activity on the AOFM website. Updates will take place three weeks following the end of a calendar month.


ATTACHMENT

ILLUSTRATIVE EMAIL PRO-FORMA

Your organisation is invited to submit bids for the following Australian dollar interest rate swaps:

 

SWAP ONE

SWAP TWO

Notional Amount

Bids for AUD 100 million, AUD 150 million or AUD 200 million are invited


AUD 200 million

Effective Date

dd/mm/yyyy

dd/mm/yyyy

Termination Date

dd/mm/yyyy
subject to adjustment in accordance with modified following business day convention

dd/mm/yyyy
subject to adjustment in accordance with modified following business day convention

Mutual Early Termination Provision

Break date fifth anniversary of swap and semi-annually thereafter


None


FIXED AMOUNTS

Fixed Rate Payer

Counterparty

Commonwealth of Australia

Fixed Rate Payer Payment Dates

Either
Quarterly
or

Semi-annual



Quarterly

Fixed Rate

To be determined

To be determined

Fixed Rate Day Count Fraction

Actual/365 (fixed)

Actual/365 (fixed)


FLOATING AMOUNTS

Floating Rate Payer

Commonwealth of Australia

Counterparty

Floating Rate Payer Payment Dates

Either
Quarterly
or

Semi-annual



Quarterly

Floating Rate Option

AUD-BBR-BBSW

AUD-BBR-BBSW

Designated Maturity

Either
3 months
or

6 months



3 months

Spread

None

None

Floating Rate Day Count Fraction

Actual/365 (fixed)

Actual/365 (fixed)

     

Business Day Convention

Modified following

Modified following

Business Days

Sydney

Sydney

An officer from the Australian Office of Financial Management will telephone a nominated contact in your organisation to seek bids for these swaps.

Your organisation is invited to submit the following bids:

  • Bid One - a bid for Swap One swap assuming only that swap is executed with your organisation;
  • Bid Two - a bid for Swap Two assuming only that swap is executed with your organisation;
  • Bid Three - a bid for Swap Two assuming both Swap One and Swap Two are executed with your organisation.

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 advice as to whether your organisation’s bids have been accepted or not, it would be appreciated if a reply could be sent to this message with details of your organisation’s final bids attached. This is required for audit purposes.


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