“What’s in a name? That which we call a rose
By any other name would smell as sweet”
Shakespeare, for those who did not already know.
We have many issues in this complex world of Interest Rate Hedging, but the one I wish to look at now is that of names – what we call the structures, the options, the derivatives, the loans, the facilities, the hedging, the mechanisms etc. etc. etc.
It appears to me that simply by calling something by a different name, you can avoid regulators, you can avoid regulation, and you can even avoid the FSA Scheme now in place to deal precisely with the issue at hand – mis-selling of hedging…
There are many problems, issues and concerns about hedging in general for SME’s (and larger entities), about the FSA’s involvement, about the FSA Scheme that is in place, and about litigation. However one of those plethora of issues, is one of names -
Swap, Vanilla Swap, Plain Swap, Plain Vanilla Swap, Amortising Swap, Rollercoaster Swap, Base rate Swap, LIBOR Swap, Interest Rate Swap – off the top of my head I can think of 9 different names that you could call a Swap. Underlying all of these names is the same structure – that of a Swap (the above give rise to different notional flows and, or different basis, but they are still the same structure). All these names have been used in emails, presentations, and confirmations by banks and yet they all mean the same structure.
The reason I highlight this, is that the banks use a different name for not only different structures but often underling them is the same structure, or the same out-come (ie. break-costs for a fixed rate loan as break-costs for a Swap).
I have therefore written a document trying to explain in simple terms a fixed rate loan, its relationship with a swap, and most importantly why it should be considered regulated by the FSA, why these structures should be included in the FSA scheme, and lastly why they were mis-sold in the same way as official derivatives.
Click on the below to download the pdf document