Considering the customer when evaluating interest rate swap strategies
Head of Sales
Financial Institutions | Denver, CO
In this brief video, Ben Lewis discusses the impact indirect swaps can have on the community bank's borrower.
In a previous video, we discussed the two ways that community banks may offer interest rate swaps to their borrowers: traditional interest rate swaps (offering swaps directly to a borrower) and indirect swaps (where a community bank introduces a correspondent bank who then offers an interest rate swap to their borrower).
Community banks are all about relationships
There are a few things to think about as it relates to your customer and indirect swaps.
Entering into a swap with the third party
It's important to note that your customer doesn't know or have a relationship with the correspondent bank. They also rarely know the correspondent bank's creditworthiness. In comparison, when using traditional swaps, your customer is entering the swap directly with you, their relationship bank.
Understanding the differences in documentation
Correspondent banks use non-standard documentation for the swap between the correspondent bank and the customer, which might put your customer at a disadvantage. In contrast with traditional swaps, your customer will enjoy the legal precedents and protections provided by the industry-standard documentation.
Learning how the swap and loan are recorded on a monthly basis
With indirect swaps, your customer will receive a monthly payment notice from your bank, and it may appear to look like a fixed-rate loan to your customer. In reality, they have a floating-rate loan and an interest rate swap. That could lead to confusion in a scenario where the customer wants to pre-pay the loan and then finds out that they have some breakage related to the swap due to the correspondent bank.
Banks should consider the impact that indirect swaps can have on their customers. Because of these concerns, most community banks opt to offer traditional swaps directly to their customer, allowing them to deliver the full financing solution.
We'd like to hear from you
Contact us if you are looking to learn more about a traditional swap program.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0143
Our featured insights
FOMC hikes 75 basis points, signals more to come
In a week dominated by the highly-anticipated September FOMC policy meeting, Treasury yields pushed significantly higher as investors recalibrated their bets for Fed policy action in the near term.
CFTC releases a Request for Information on climate-related financial risk
In June, the Commodity Futures Trading Commission (CFTC) released a Request for Information (RFI) on climate-related financial risk, and they have recently extended the deadline for comment until October 7. Regulators signal that climate-related issues will remain near the top of their agendas, so we wanted to ensure that our clients and the market were apprised of the RFI and could submit comments.
Hotter-than-expected inflation sends rates higher
The Treasury selloff intensified last week as investors recalibrated their bets for Federal Reserve policy action in the near term after the latest inflation readings showed prices accelerating faster than expected.
Chatham's Q4 2022 outlook: Inflation, market volatility, and LIBOR transition
Watch Chatham's Managing Partner and Chair, Amol Dhargalkar, discuss key trends for the upcoming quarter like inflation, market volatility, and LIBOR transition.
Rates higher on hawkish Fed
In a light week for economic data releases, Treasuries continued to sell off, while the major U.S. equity indices snapped a three-week losing streak as investors digested the hawkish comments of several Federal Reserve officials, including Federal Reserve Chair Jerome Powell.
Mike Bilello brings decades of experience in credit, lending, derivatives, and capital markets to our financial institutions team
Mike Bilello joins Chatham’s Financial Institutions advisory practice, bringing decades of experience in credit, lending, derivatives, and capital markets to our financial institutions team.
Curve steepens; August NFP impresses
The hawkish message delivered by Fed Chair Jerome Powell at Jackson Hole the week earlier continued to weigh on investor sentiment last week. Treasury yields, particularly at the long end, legged higher, while the major U.S. equity indices continued to fall from their mid-August highs.
Market Update: Strategies for Volatile Markets
In this installment of Chatham Financial’s Market Update webinar series, our experts will examine the factors driving the markets and discuss the balance sheet risk management strategies that are being implemented by our clients. We will share perspective on the interest rate risk management...