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EIB ups swaps stakes with dollar ambitions
January 25, 2013 / 11:32 AM / in 5 years

EIB ups swaps stakes with dollar ambitions

* EU bank refuses to bow to bank pressure on swaps issue

* Need for increased cross-currency swaps ups the ante

* Change to two-way agreement could cost billions

By Christopher Whittall and John Geddie

LONDON, Jan 25 (IFR) - The European Investment Bank is set to apply pressure on its banking group this year as it looks to upsize its dollar funding programme that will require its banks to swallow punitive cross currency swap costs.

The EIB has so far resisted banks’ pleas to overhaul the collateral agreements - or credit support annexes - governing its derivatives, which could force it to raise billions more euros per year to cover large contingent liquidity demands.

Banks complain EIB’s one-way CSA - where it receives collateral when in the money on a swap with a dealer, but does not post collateral when out of the money - makes derivatives trades incredibly costly.

Some have threatened to stop quoting swaps altogether, while others show prohibitively expensive prices in the hope of forcing EIB to begin posting collateral.

The EIB seems to have called their bluff, though, with plans to issue 35% of its total 2013 debt in dollars, up from 28% last year. Much of this will have to be hedged via long-dated cross currency swaps - a sign that Europe’s largest supranational believes it can continue to strong-arm banks into offering it the hedges it needs at affordable prices.

“The volatile element of an issuer’s swap book is generally the cross-currency portion,” Sandeep Dhawan, head of US dollar funding at EIB said.

“It is certainly more challenging to navigate around these issues now, and we have to think a lot more about them, but, at the moment, it’s not causing enormous problems.”

The EIB is hardly incentivised to voluntarily sign up to a two-way CSA. Philippe Noel, head of capital markets at Cades, says the French agency’s two-way CSA with a EUR10m threshold shaves two to three basis points off swaps prices, but it does create a significant contingent funding burden.

At the end of 2012, Cades’ swaps counterparties were posting it EUR3.4bn of collateral, which had peaked at EUR8bn last August.

“We have to pre-fund so we have enough cash reserve to meet as much as EUR3bn margin call in the space of a week if the market was to become volatile and we had to post collateral to the banks,” said Noel.

EIB’s funding programme is more than twice the size of Cades’ at around EUR70bn, suggesting it would have to raise billions of euros in additional funds if it moved to two-way CSAs.


Public sector borrowers have traditionally had one-way CSAs in place due to their superior credit ratings. But with bank funding costs exploding since the 2008 crisis - compounded by credit and capital charges enforced by Basel III - swaps dealers began to exhort their clients to agree to post collateral when they owe money on their derivatives.

Some borrowers like Network Rail and the Bank of England duly switched to two-way agreements last year, but most supranationals have shown no signs of budging.

In contrast, EIB’s dollar funding ambitions, which are tipped to include a forthcoming seven- or ten-year deal, have once again upped the ante for its banking group.

Long-dated cross-currency swaps are the worst offenders, bankers say, potentially adding tens of basis points to swaps quotes if the charges are priced in correctly.

“For the industry, EIB’s one-way CSA is still a huge problem. Banks are posting them masses of collateral, which only gets negative interest rates paid on it,” said one head of SSAs at a major bank. “But while some banks continue to provide competitive pricing, it’s no surprise EIB hasn’t done anything.”

The ongoing saga has created bad blood among EIB’s banking group, with some accusing their peers of aggressively pricing swaps in order to win mandates. Those accused blame this on sour grapes, claiming superior distribution capabilities secure their place on the deals.


In the meantime, the dollar versus euro arbitrage is still around 20bp, which should be large enough to cover the additional cross currency swaps charges, bankers say.

“Banks also look at these credit and funding charges differently, which may vary depending on their models or existing swaps portfolio - so prices can differ,” said one senior SSA banker.

Despite the current impasse, bankers remain confident EIB will move to two-way CSAs soon, paving the way for other supranationals to follow.

Ultimately, banks’ credit lines are filling up and EIB’s concentration to a shrinking pool of counterparties is thought to be edging uncomfortably higher. It has already lost one counterparty after UBS was forced to close its SSA business late last year because it was deemed too capital intensive.

“I’d imagine EIB’s exposure to certain institutions is extremely large right now. From a risk perspective they’ll be better moving to two-way CSAs and being able to diversify their swaps counterparties,” said another senior SSA banker. (Reporting by Christopher Whittall and John Geddie; editing by Alex Chambers)

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