Mid-market mark and unwind mark disclosure
As a registered swap dealer, Commodity Futures Trading Commission (“CFTC”) rules require us to provide a pre-trade mid-market mark (“MMM”) to certain counterparties either orally or in writing prior to entering into a transaction. As required by CFTC Regulation § 23.431, the pre-trade mid-market mark must not be adjusted for credit reserve, hedging, funding, liquidity, profit or any other costs or adjustments. The MMM may not reflect the level at which we would hedge your transaction and it is not necessarily indicative of a price at which we would enter into or be willing to close out similar positions. We accept no liability with regard to any use on your part of the MMM for purposes of accounting, forecasting or any other analysis whether losses or damages are direct, indirect, incidental or consequential, even if we are advised of their possibility.
For most swaps (e.g., plain vanilla swaps), our disclosure about the value of your swap is based on our view of the mid-point between the bid and the offer for the swap at the relevant time. In determining the mid-point, we take into account a variety of factors, including the current bid and offer of the relevant underlying markets. The level we disclose to you (typically referred to as the MMM) represents the difference between the estimated mid-point and your swap price.
For structured swap transactions, the MMM is prepared by discounting future cashflows of the swap to arrive at a current value. For each underlying commodity, spot and forward curves, variance ratio and volatility levels are determined on the basis of observable market inputs when available and on the basis of estimates when observable market inputs are not available. These spot and forward curves, variance ratio and volatility levels are used to estimate future cashflows that are not certain (for example floating interest rates or options). In some cases, we may use a Black-Scholes model to determine the expected value of future cashflows. These estimated cashflows, along with future cashflows that are known with certainty, are then discounted to their present value using discount factors derived from relevant market inputs.
In our sole discretion, we may use a variety of methodologies and assumptions to prepare the estimated cashflows described above, including without limitation, utilizing Black-Scholes and other mathematical pricing models. In our sole discretion, we may vary the inputs used in such simulations and modeling, and we are under no obligation to disclose to you the proprietary or confidential methodology used or the inputs thereto; however, we will notify you if we have changed any of our calculation methodologies or assumptions in any material manner. Please note that the MMM calculated by us and reported to you may differ from the value that may be provided by other swap dealers or that may be recorded on our books or any value used by us for the purpose of calculating margin, which may take into consideration other factors and aspects other than those used to calculate the MMM.
As required by CFTC regulations, we will give you a daily mark for the swap (“Daily Mark”), which will be based on the estimated mid-point for each business day for the duration of the swap.
Please note that we may also elect to provide you with an unwind valuation mark for certain structured swaps (the “Unwind Mark”). We agree to unwind or terminate the transaction at or close to the Unwind Mark, which may be different than the Daily Mark. The Unwind Mark is an indicative number and is dependent on a variety of factors including but not limited to market liquidity and market volatility. The Unwind Mark is also subject to our revenue recognition policy.
According to our policy, the revenue for each structured product transaction is estimated at the time of execution with final estimated revenue determined upon market settlement on the trade date; 10% of the estimated revenue is factored on the trade date and the remaining 90% of the estimated revenue is factored equally over the next 60 calendar days. Should you choose to unwind the transaction early within the first 60 calendar days, the transaction will be unwound for fair market value in accordance with the market price at the time of the unwind. Should you choose to unwind the transaction early but after the 60th calendar day, or keep the transaction open until the expiration date, we will factor 100% of the estimated revenue into the valuation used for the Unwind Mark.