Question ID: 600
Regulation Reference: (EU) No 2015/2450 - templates for the submission of information to the supervisory authorities
Article: 35
Template: S.08.01
Status: Final
Date of submission: 30 Aug 2016
Question
a) Trigger value of exchange traded index futures
We have entered into Exchange traded index futures such as the LIFFE FT-SE 100 contracts. These are ‘Contract for Difference’ contracts. The nature of these contracts means that they have a defined life-span, generally 3 months. Investors can enter into a contract at the prevailing index level and either hold it until expiry or sell it at the prevailing index level at their discretion. If the contract is held until expiry, parties settle the contract at the prevailing index level. There is no agreed future price for these contracts. Profit/(loss) of the contract is determined by the opening and closing index levels.
Example:
Say we enter into a contract at Index level 5,000. At the expiry index level is 6,000. Assuming we have taken a long position we can make a profit of 1,000.
At the expiry if the index level is 3,000, assuming we have a long position we will incur a loss of 2,000.
QRT Log guidance for S.08.01 defines Trigger value for Futures as ‘Reference price’. In your Q&A Log (question 117 – dated 27/01/15) you have further clarified the Reference price for futures. As per your reply ‘Reference price is the price agreed for the future transaction’. In relation to exchange traded index futures there is no a price agreed for future settlement and we do not know what the future settlement price would be.
Given that, we believe there is no trigger value for exchange traded index futures and plan to leave the cell C0390 (Triger value) blank for these contracts. Can EIOPA confirm this?
If EIOPA does not agree with us can you explain what should be the trigger value for these types of contracts based on the above example?
b) Swaps
The Log guidance for S.08.01 and S.08.02 explicitly states that ‘Trigger value’ is not applicable to CIC D3 - Interest rate and currency swaps.
However, we believe ‘trigger value’ is not applicable to other swaps like interest rate swaps (D1) and currency swaps (D2) as well. Swaps involve exchange of cash flows between two parties based on a notional principal amount that both parties agree to. As such, we do not believe the concept of trigger value is applicable to Swaps. Can EIOPA confirm this?
If EIOPA does not agree with us can you explain what should be the trigger value for interest rate swaps (D1) and currency swaps (D2)?
EIOPA answer
- In case of exchange traded index futures report the “prevailing future index level” which is the value for which the security can be sold at their discretion or the value for which parties settle the contract;
- For currency swaps it should be the exchange rate underlying the cash-flows’ swap (exchange rate given by the “currency of the swap price” reported in C0410. For example, if C0410 is GBP and the notional amount is EUR as reported in C0420), then the exchange rate is EUR/GBP); and for interest rate swaps it should be the identification of the interest rate generating each cash-flow (delivered rate and the received rate), like in the following two examples: “Euribor+2% / 3%”, “Euribor+2% / Libor+1%”.