How are the Effective Dates and Maturity Dates of a forward starting IRS (eg: EURIBOR3M 5Y5Y) handled when the forward starting term ends on a non-business day? And if that date is adjusted, how does that impact the maturity date of the forward starting IRS? For example if I trade on 6th Jan 2023, the T+2 spot date becomes Monday because I am trading on a Friday. For a EURIBOR 10Y that would result in a maturity date of 9th Jan 2033. For the matching 5Y 5Y traded on the same day, the Effective Date falls on a Sunday (9th Jan 2028) which I presume would be adjusted to the Monday (10th Jan 2028)...which would then imply a maturity date of 10th Jan 2033. Which is mismatched vs the 10Y. If, however, the Effective Date remains unadjusted, the maturity of the 10Y would match the 5Y5Y but the forward term would be less than 5 years. How does the market get around this issue?
1 Answer
If you trade a 10Y IRS, the second half of that IRS represents a 5Y5Y from the point of view of a swaps dealer.
If a swaptions dealer trades a 5Y5Y Swaption the 5Y swap that this refers to is measured as of 5Y derived from spot derived from a 5Y expiry measured from today.
This is two different definitions. This is why the Schedule generator in my own fixed income library (https://rateslib.readthedocs.io/en/latest/api/rateslib.scheduling.Schedule.html#schedule) has two different parameters available, a swaps_align or swaptions_align version.
I have also had discussions with Bloomberg about this when they have been implemeting definitions for schedules. Local currency broker markets also use one or the other above or both if no-one religiously sticks to a variety. Bloomberg reported to me that they had various feedback for the use of both methods and by different client / dealer types. Ideally Bloomberg would like to provide both definitions but they have chosen to adopt the swaptions variety in a first draft of what they are building. I am a swaps dealers so my own library defaults to the swaps align method.
Today: Friday 6th Jan 2023
Spot: Tuesday 10th Jan 2023
A regular 10Y ends on Monday 10th Jan 2033 and the swap has 10th rolls.
A 5Y5Y (Swaps Align) starts on Monday 10th Jan 2028 ends on 10th Jan 2033 and has 10th rolls.
A 5Y5Y (Swaptions Align) starts on Monday 10th Jan 2028 ends on 10th Jan 2033 and has 10th rolls.
All the above periods are regular periods when accounting for the regular adjustment of business days.
There is a more interesting example on that documentation link, since in this example there is no difference becuase nothing lands on a holiday at the 5y point.
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$\begingroup$ Thank you very much for your assistance. That is very clear. $\endgroup$ Commented Dec 1, 2023 at 16:09