INTL FCStone’s Chicago-based subsidiary, INTL FCStone Markets has expanded its OTC interest rates swap dealing capabilities to include cap and floor options on the London Interbank Offered Rate (LIBOR) with tenors out to 10 years.
The launch of these new products expands and enhances the Company’s existing OTC FX & Interest Rates trading and advisory offerings, creating a comprehensive interest rate hedging solution for corporate hedgers, real estate investors, and agribusinesses.
OTC products, available through INTL FCStone Markets, are designed to deliver benefits similar to exchange-traded futures and options, but can offer customisable terms (eg non-standard quantities, strike prices, expiration dates, etc.) that align more closely with hedging needs. Demand for interest rate hedging has grown steadily over the past two years, as the 150-basis point increase in LIBOR is putting increased pressure on balance sheets exposed to floating rates. Introducing more complex interest rate hedging capabilities offers more flexibility to control interest rate exposure on both sides of the market.
Eric Donovan (pictured), Managing Director of OTC FX & Interest Rates, says: “The launch of these new products continues to demonstrate our leadership in the interest rates derivatives business, as providing straightforward solutions and transparent pricing directly to hedgers eliminates the need for potentially costly intermediaries. Consequently, we anticipate that our OTC interest rates swap dealing business will grow significantly because of these new products.”
Cap and floor options enable corporate hedgers, real estate investors, and agribusinesses to set rates while minimising and simplifying the impact they have on a balance sheet. Similar to interest rate swaps, these long-term interest rate options can be purchased for any notional amount and will have multiple settlements based on LIBOR. However, unlike swaps which have exposure to both sides of the market, an interest rate option trades with a single premium and strike price. With these new products, INTL FCStone is able to offer strategies that can be used to protect against volatility on LIBOR.
Donovan says: “Non-bank lenders such as insurance companies and pension funds have increased the need for a direct third-party provider of interest rate hedging tools. We have a view that rates will continue rising, but you have to be prepared for potential volatility. Options allow you to make smarter decisions on market risk, as well as in how you access capital. With more choices than ever when it comes to structuring debt, the ability to use swaps, caps and floors to your advantage can make a major difference in the total cost of funding.”
