■ The hedging strategy adopted by LCR achieved the objectives of a specific mandate to mitigate exposure to interest rates, given:
a) the net swap profile required for the anticipated residual cash profile in the Central Case;
b) the absence of any views on rates other than implied by the yield curve at the time;
c) the assumption of equal probability of a fall in floating rates as a rise;
d) the products used would be limited to vanilla swaps without up-front premia;
e) the selection of a maximum 2011 maturity on the swaps.
■ Execution of the hedging strategy by two banks who had prior knowledge of the transaction does not appear to have limited competitive pressure.
■ We believe the swap banks were put at risk of losing substantial sums during this process.
■ Funding through the Floating Rate Note market may have simplified the hedging process but the additional cost of such bond issues could have been greater than any savings on the hedge.