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Interest Rate Swaps, Caps, and Floors

The Federal Home Loan Bank of Boston offers a number of derivative products to bring you more ways to manage interest-rate risk. Whether you are interested in an interest-rate swap, cap, or floor, FHLB Boston can help you develop a strategy tailored to your needs. And you’ll be entering into these transactions with a triple–A counterparty.

Interest-Rate Swaps
Interest rate swaps offer protection against interest-rate or basis risk without growing the balance sheet. Fixed/LIBOR swaps are available for maturities of up to 10 years. Notional amounts as small as $2.5 million are possible. Pricing is highly competitive.

Interest-Rate Caps
Concerned about your exposure to rising interest rates? Purchase an interest-rate cap to stabilize liability costs without growing the balance sheet. Caps are typically available for terms of one through ten years. For the index, you may choose one- or three-month LIBOR. You choose the notional principal amount that is to be protected and the "strike" level. Fees are competitive and are based on the term, strike level, and amount of notional principal.

Interest-Rate Floors
Will falling rates compress your margins? Interest-rate floors are a cost-effective way to hedge against this type of risk. Floors are typically available for terms of one through 10 years. For the index, you may choose one-, or three-month LIBOR. You choose the notional principal amount that is to be protected and the "strike" level. Fees are competitive and are based on the term, strike level, and amount of notional principal.

Key Features

Product Set: 

  • Interest rate derivative transactions are limited to bullet notional fixed vs. floating interest rate swaps and to caps or floors purchased from FHLB Boston.
  • Floating rate benchmark is limited to either one- or three-month LIBOR.

 

 

Term: 

  • 12 to 120 months for swaps, caps or floors.

 

 

Minimum Size: 

  • The minimum notional size per derivative transaction is $2.5 million.

 

 

Pricing:

  • Members may obtain current pricing by contacting the Money Desk.
  • Fees and/or an interest rate spread will be charged to cover costs and risks associated with derivative transactions.
  • Legal fees, if any, incurred by FHLB Boston on a derivative transaction for a member will be passed through to the member as an additional fee.

 

 

Required Documents: 

  • Executed ISDA Master Agreement prior to trading.

 

 

Availability:
  • Derivative transactions may be normally requested until 3 p.m. on a Bank business day.
  • Financial markets are sometimes subject to pre-holiday early close of business. On these days, derivative transactions may be requested until 1 p.m. 

 

 

Collateral:
  • The member will be required to pledge collateral in accordance with the requirements set forth in the Products Policy.
  • The maximum amount of “required collateral” for an interest rate swap transaction is the sum of the current market value (if positive, or zero if negative – both from FHLB Boston’s perspective) plus an amount representing the potential future exposure of up to 1.5 percent of the notional amount.
  • Required collateral will be determined on a daily basis.
  • Interest rate caps and floors purchased by a member are not subject to any collateral requirement.

 

 

Capital Stock:
  • A member is required to hold activity-based capital stock equal to 4.5 percent of the amount of required collateral for each interest rate swap.
  • Members will be notified of any required stock purchases.
  • Interest rate caps and floors purchased by the member do not have a capital stock requirement.

 

 

Modification or Termination:
  • A derivative transaction may be modified or terminated only by mutual consent of the member and FHLB Boston and by agreement on individually negotiated terms.
  • It may not be possible for the member to modify, terminate, or offset its obligations or its exposure to the risk associated with a derivative transaction prior to its scheduled termination date.

 

 

Disclaimer:

  • FHLB Boston is acting in the capacity of an arm’s length contractual counterparty to a member in connection with interest rate derivative transactions and not as the member’s financial advisor or fiduciary.
  • The member should not regard transaction proposals, suggestions, or other written or oral communications from FHLB Boston as recommendations, advice, or as expressing FHLB Boston’s view as to whether a particular transaction is appropriate for the member or meets its financial objectives.

Transaction Process

 

Pre-trade:

  • Member must have an executed ISDA Master Agreement and be in receipt of FHLB Boston’s standard disclosure documents (not trade-specific).
  • FHLB Boston’s standard disclosure documents include:
  • FHLB Boston will complete an appropriateness review with each member before transacting interest rate derivative products.
  • A member may request interest rate derivative products by telephone.
  • Instructions received from a member by telephone requesting execution of an interest rate derivative are electronically recorded, stored, and archived to provide for future review and verification, as necessary.
  • Derivative transactions are subject to credit underwriting review and approval by FHLB Boston prior to execution.

 

 

Post trade:   

  • As soon as practicable, FHLB Boston will fax or e-mail to the member a trade confirmation executed by FHLB Boston, which in turn must be signed by an authorized officer of the member and faxed or e-mailed back to FHLB Boston.
  • FHLB Boston will confirm all derivative payment flows due to/from FHLB Boston on or before payment date.

 

 

Primer:   

 

 

For more information:

Contact your relationship manager or the Money Desk at: 800-357-3452 or moneydesk@fhlbboston.com