ISDAfix Swap Rate Manipulation – Q&A

ISDAFIX swap rate lawsuit

ISDAfix Swap Rate Manipulation – Q&A

ISDAfix Swap Rate Manipulation – Q&A

Originally published September 24, 2014, updated June 19, 2015

13 banks sued by Alaska Electrical Pension Board (AEPB) over ISDAfix Swap Rate Manipulation. The banks named are Bank of America, Barlclays, BNP Paribas, Citibank, Credit Suisse, Deutschebank, Goldman Sachs, Royal Bank of Scotland, J.P. Morgan, Chase Bank, Nomura Group, HSBC, UBS & Well Fargo & Co, Inc. Also named – and in bold print is ICAP, PLC the interdealer broker who was responsible for collecting the benchamrk rates from the panel banks.

ISDAfix Benchmark Swap Rates versus LIBOR Reset Rates

To eliminate any confusion about LIBOR reset rates and ISDA FIX swap rates1, here’s a quick compare and contrast. You can also read this blog post to more fully understand the process by which rates are reset. 

LIBOR Reset Rates are benchmark rates for shorter term lending rates from overnight to 36 months. LIBOR Reset Rates are used to fixed the floating leg of interest rate swaps resetting that day as well as to reset Floating rate loans resetting that day.

ISDAfix Swaps Rates are also benchmark rates. with maturities from 2 years to 30 years were submitted by 13 banks to ICAP (an interdealer broker) at 11:00AM New York Time. ISDAfix refers to the fixed rate on an interest rate swap where a Counterparty Pays (receives) Fixed & Receives (pays) LIBOR. There is no principal amount, but rather a notional amount upon which all cash flows are calculated.

Who uses ISDAfix Rates & how do they use them?

  • ISDAfix Swap rates are used by roughly 6,000 corporate treasurers and lenders to determine borrowing costs as well as value embedded options (swaptions).
  • ISDAfix Swap rates are used to value cash-settled swaptions on expiration day.
  • ISDAfix Swap Rates are tied to commercial and residential real estate securities
  • ISDAfix Swap Rate changes are used to calculate the performance of Structured Notes

How much of the market is effected by ISDAfix?

  • As of July 26, 2014 DTCC’s stats show ISDAfix used for the following:
  • $29.5 trillion: Swaption contracts outstanding
  • $550 billion: Securities tied to Commercial Real Estate

The ISDAfix Swap Rate Manipulation

The manipulation seems surprisingly simplistic. Each business day (before 11:00 AM NY Time) just prior to the actual fixing time, ICAP would call their submitting banks (see list above) and provide an indicative ISDAfix swap rate. If the submitting bank agreed, their name was added to the list of institutions supporting that rate. If the submitting bank felt ISDAfix should be a different rate, their preferred rate was noted by ICAP.

As administrator, ICAP was intended to request for the rates the submitting banks had traded at so far that day. In other words, ISDAfix was supposed to follow the same procedure LIBOR Reset rates were supposed to follow. You can see that process here.

ISDAfix rates were identical 90% of the time, out to five decimal places. Once the investigation began in December 2012, ISDAfix rates were identical only 70% of the time.

Changes Made to ISDAfix Benchmark, 2014

The following changes have been announced:

  • Clarification of ISDAfix now emphasizes that contributing banks use executable bid/offer rates
  • Suspension of ISDAfix maturities or currencies with insufficient liquidity in the underlying swap market
  • Stronger checks on Submission rates for validation
  • “Stronger checks” seems a bit ambiguous and this blogger hopes the language is strengthened to afford market participants great confidence as to the course and criteria for these all-important benchmark rates.
ISDAfix Rates Impact on Cash-Settled Swaptions

There are many users of swaptions who, instead of choosing to exercise (be assigned) into an interest rate swap can choose to receive cash. The cash amount will be the difference between the swap rate on expiration date (the ISDAfix Swap Rate) versus the strike rate.


Client is long a 1 year PAYER into a 10 year swap, strike rate is 3%. On expiration date the ISDAfix 10 yr swap rate is 2.50%. But the 10 yr swap rate in the open market is trading at 2.45% just moments later.

The client has made 50 basis points, the strike rate 3% – the ISDAfix Swap Rate 3.50%. The profit will be the present value of 50 bps per year for 10 yrs

But if the “true” rate was 3.51%, the client would have made 51 bps, strike rate 3% – 3.51%.

The client should have made 1bps more than they did.

Table 1 shows the result if ISDAfix Swap rates were benchmarked 1 bps higher. On $1 million notional amount of 10 yr swap rates, 1bp = $902.54

A look at the overall market impact, $29 trillion notional of swaptions outstanding all participants long RECEIVERS left $26.1 billion on the table.

The last two columns on the right, show the difference for each year. For example, if the average maturity of all swaps (underlying outstanding swaptions) was 5 years, the participant LONG THE RECEIVER left $2.8 billion on the table.


BLOGDIAG_isdafix rec profit 29 CORR 071115click to enlarge

The real impact of incorrect ISDAfix Swap Reset Rates was much larger than the above diagram shows. Note, this diagram only shows the impact of 1bp difference on the swaptions alone. The diagram does not include all the other markets which use ISDAfix reset rates (see above).

Our Cat formerly known as SWAP demands a name change! So, Puffy it is!

Our sweet kitten “Swap” has demanded a name change. He no longer wants to be affiliated with the business in any way (yeah…. but boy he doesn’t mind the food it buys him)! Lest he thinks he won the war, we changed his name to “Puffy”. And yes, I’m grinning at the thought of my niece putting pink ribbons on him.

ISDA 1Q15 Derivative Statistics
Derivatives Cheat Sheets