BNP Paribas takes €108 million hit on swaps after switch to OIS discounting

French bank becomes the latest to divulge a revenue impact from a change to overnight indexed swap discounting

BNP Paribas is the latest bank to reveal the revenue impact from a change in how it discounts part of its collateralised swap portfolio. The French bank revealed a hit of €108 million on revenues following a change in the discount rate from Libor to the overnight indexed swap (OIS) on fixed-income swaps backed by a credit support annex.

The majority of dealers now agree that collateralised swaps should be discounted at the appropriate OIS rate, determined by the currency of the collateral being posted (Risk March 2010, pages 19-23, Risk March 2011, pages 19-23). London-based clearing house LCH.Clearnet switched to OIS discounting for its swaps portfolio last year, reflecting the change in market practices.

Other banks have reported a hit to their revenues too. According to Credit Agricole's fourth-quarter 2010 results, its fixed-income results reflected a €120 million charge arising from a change in valuation parameters for collateralised swaps.

However, some firms have realised gains revaluing their portfolios. According to Morgan Stanley's 2010 annual report, the bank began using OIS curves as an input to value its collateralised interest rate derivatives contracts in the fourth quarter – and recognised a pre-tax gain of approximately $176 million in principal transactions.

Meanwhile, Royal Bank of Scotland has amended its valuation approach for the substantial portion of its collateralised derivatives to use OIS. In addition, the rate for discounting uncollateralised derivatives was changed in line with observable market pricing, the bank said. The change resulted in a net increase in income from trading activities of £127 million for 2010.

UBS also amended its valuation approach for the substantial portion of collateralised derivatives portfolio in first quarter of 2010, resulting in a pre-tax gain of Sfr76 million ($87 million), according to its 2010 annual report. Meanwhile, HSBC has adopted a discounting curve that reflects OIS rates for single-currency swaps with collateralised counterparties and in significant major currencies. The UK bank claims the financial effect of this change was not significant.

Risk understands that most banks have only revalued portions of their fixed-income swaps portfolios and further impacts are likely.