ZMFS Announces New Global OIS Discounting Functionality
ZM Financial Systems (ZMFS) today announces new functionality to their financial analytic tools with the addition of Overnight Index Swap (OIS) discounting and valuation. The credit crisis that began in 2007, along with new regulations, has led to a number of changes in the over-the-counter derivatives market. OIS discounting has emerged as the preferred method for valuing derivatives.
“OIS is widely used in the financial industry as it reflects the financial borrowing cost more correctly and is a good indicator of interbank credit markets,” said Dai Zhao, PhD, CFA, co-founder, ZMFS. “We adopted dual curve stripping technology to separate the discounting curve and forward LIBOR projection curve, allowing for proper estimate of the required collateral on a swap and its market-to-market valuation.”
Federal regulations, such as the Dodd-Frank Act and capital adequacy guidelines under Basel III, now require OIS curve analysis because it is considered less risky than traditional LIBOR curve. With the addition of this OIS discounting setting, ZMFS clients can better manage their daily margins of liquid collateral. Changes in swap math have been in development since 2009, in an effort to help financial institutions reexamine the link between forward rates and par rates.
ZMFS’ OIS discounting and valuation tool can be a complete solution for those banks interested in covering their whole balance sheet while also providing flexibility for banks that want to introduce OIS at a slow and gradual transition.
“While the OIS discounting method was introduced for collateralized swap market, the migration from traditional LIBOR discounting framework to the new OIS discounting framework has a general market impact to a bank’s book,” said Zhao. “Consistency of valuation techniques – throughout a firm and broadly in the market – are still a challenge.”
These challenges may be on the valuation side (volatility change/forward rate change that impacts most financial instruments); the accounting side (reporting the fair value of a derivative on the balance sheet or hedging effectiveness valuation); and the practical side (adopting OIS discounting for interest rate products has been more pervasive, whereas for other asset classes the adoption of OIS discounting is occurring at a slower pace).
Even with these challenges, the OIS discounting and valuation functionality available from ZMFS will help clients meet new regulations and – whether immediately or at a slower pace – achieve full balance sheet realization.