For Immediate Release Thursday, July 29, 2004
For More Information Contact: Louise Marshall, (212) 901-6000; lmarshall@isda.org
The International Swaps and Derivatives Association, Inc. (ISDA) has published Index and Share Variance Swap Annexes (the “Variance Annexes”) to its 2004 Americas Inter-dealer Master Equity Derivatives Confirmation Agreement (the “Inter-dealer Master Confirmation”). The Variance Annexes were designed to expand market coverage to index and share variance swap trading under the Inter-dealer Master Confirmation architecture.
Variance swaps have become commonplace in the equity derivatives market over the last few years as traders are able to use this type of derivative to take a “pure” view on the future volatility of a given stock or index. The variance swap provides the trader with a constant exposure to volatility with a fixed gamma and time decay that is not dependent on stock prices.
A variance swap is a contract in which the parties agree to make cash payments based on whether the realized variance (i.e. volatility squared) of a stock or index over a specified period is more or less than an agreed level. The variance buyer receives a payment if the realized variance is higher and receives a payment if it is lower than the agreed level.
The work on the Variance Annexes builds upon ISDA’s Inter-dealer Master Confirmation for use in equity derivatives trades, completed in late March. In finalizing this document, ISDA responded to a need for consistency around variance swap confirmations. Publication of the Variance Annexes reflects ISDA’s continued goal of streamlining the process supporting OTC equity derivatives trading through the creation and promotion of standardized documentation.
“Publication
of these annexes takes forward the work of ISDA’s Equity Derivatives Committee
into an area of increasing importance for market participants. Variance swaps
are an efficient tool to express a long or short view on future volatility that
can be used for hedging or speculative trading strategies. Standardizing the
terms on which institutions can transact will help facilitate continued growth
of this product.” said Glen A. Rae, Vice President & Assistant General
Counsel at Goldman, Sachs & Co. in
The Inter-dealer Master Confirmation, which dealers enter into bilaterally, incorporates the 2002 Equity Derivatives Definitions (the “2002 Definitions”) and is subject to the applicable ISDA Master Agreement between such dealers. It includes four General Terms Confirmations (each an Annex) with agreed upon elections under the 2002 Definitions, and is supplemented with a related Transaction Supplement including trade details. With the publication of the Variance Annexes, dealers now have the ability to trade index and share variance swaps in addition to Index Options, Index Swaps, Index Basket Swaps, Share Options, Share Swaps and Share Basket Swaps on US underliers.
ISDA is the global trade association representing leading participants in the privately negotiated derivatives industry. ISDA was chartered in 1985, and today has more than 600 member institutions from 46 countries on six continents. These members include most of the world's major institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental entities and other end users that rely on over-the-counter derivatives to manage efficiently the financial market risks inherent in their core economic activities. Information about ISDA and its activities is available on the Association's web site: www.isda.org.