Clean Valuation Framework for the USD Silo

TL;DR

This paper introduces a straightforward valuation framework for USD-denominated collateralized trades within the new ISDA SCSA, detailing initial structure construction and linking CCS basis spreads to swap rates.

Contribution

It provides a novel, simple valuation approach for the USD silo and clarifies the relationship between CCS basis spreads and swap rates.

Findings

Framework simplifies valuation under USD silo

CCS basis spread expressed as swap rate difference

Detailed procedures for initial term structure construction

Abstract

In the forthcoming ISDA Standard Credit Support Annex (SCSA), the trades denominated in non-G5 currencies as well as those include multiple currencies are expected to be allocated to the USD silo, where the contracts are collateralized by USD cash, or a different currency with an appropriate interest rate overlay to achieve the same economic effects. In this paper, we have presented a simple generic valuation framework for the clean price under the USD silo with the the detailed procedures for the initial term structure construction. We have also shown that Cross Currency Swap (CCS) basis spread can be expressed as a difference between two swap rates.