Tag Archives: bank

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Funding curves

In the extension of the previous post, I’ll cover a bit the funding curves: what it means and how they’re being used.

  1. What are the funding curves?

A funding curve crystallizes the  funding spreads over the market rates for the bank. Usually you will find that these spreads are over the O/N rate and the funding curve is often in USD.

That curve represents the cost to the bank to fund their positions. When it needs to be expressed in different currencies the current approach is to ratio discount factors: Df(XXX funding curve)/Df(USD funding curve)=Df(XXX/USD basis curve)/Df(USD OIS curve). The assumption behind is that swap points are a constant.  So you end up with the discount factor you’re after (Df(XXX funding curve) as Df(XXX/USD basis curve)*Df(USD funding curve)/Df(USD OIS curve).

2.  How to set them up?

In Murex, this can be setup using the Automatic CSA curve setting. You’ll need to define a CSA category (such as No collateral) and attach the proper curve assignment to USD (assuming you’re using USD for funding).

3.  When are they used?

Trades can be collateralized or not. To be collateralized, they need to be covered by an agreement with your counterpart and in that case, any large market value for that transaction will trigger a margin call and thus limit the risk for both sides.
When the trades are not collateralized, this is when you want to use the funding curves as the bank is much more exposed and the returns expected are higher.

In terms of pricing, this also means that when trading with a non collateralized counterparty, the prices will be worse given the increased rates.

4.  Anything else? Risk management maybe?

This is where the funding desk comes into the picture. The role of that desk is to determine the funding spreads but also to manage the risk coming from these curves. For traders, they will also look at their portfolios as if all trades were fully collateralized BUT any trade with a counterparty with no agreement will effectively use the funding desk as an intermediary : the funding desk trades the same trade back to back, with the counterpart using the funding curves and with the trading desk using normal curves (OIS or basis curves).

In a nutshell, that’s what funding curves are about. As always, questions or comments are more than welcome!

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Bank organization

This post is not really for you veterans out there but more for more junior readers for which there is a bit of mystery about how a bank works.

If we focus solely on the financial markets part of the bank, you have 4 big categories:

Front office: This team encompasses the traders, the quants (depending on how a bank is organized, you sometimes have FO quants effectively sitting with the traders and pure quants), sales, treasury and FO management.
Processing: This massive team (sometimes referred to as Back office) processes confirmations, accounting, payments, securities and cash nostros, …
Risk: They ensure that the risk held by Front Office is actually within limits and their job is to ensure that the bank is not too exposed. You will find here risk controllers.
IT: The role of IT is to ensure that all works as expected. They are also in charge of upgrades/migrations (with the help of the teams above).

Of course, you have some roles which actually sit in between 2 or 3 categories and within each categories you have roles which are very different. But the idea here is to draw attention that there are different needs and drivers between teams.

Murex consultants normally act as second level of support and are most often contacted by people from the IT category. It often happens that they find themselves on the front line especially on more complex or urgent issues.

At some later stage, I’ll try to detail a bit more within the different groups but if you’re impatient or got some questions, feel free to ask!