106. We believe that there is one major area where the constraints imposed upon the banks may have limited their ability to achieve the best prices. This swap package was unusual in its size. We should, therefore, normally expect the banks involved to be given considerably more time to organise their books to manage the transactions in the most cost effective way. We have found no evidence of evaluation of the potential cost/saving of a gradual process of market-size hedge transactions, over a longer period of time, versus the need for confidentiality. We should expect the market to have an idea of what was going on, even if efforts were made to keep the arrangements confidential.
107. Nevertheless, given market conditions at the time and the complexity of the arrangements, we do not think any material competitive advantage would have been gained if more than two banks had been brought into the process. We also have some sympathy with the view that it was sensible to use banks who were familiar with the project and could therefore transact on a timely and efficient basis.
108. We concur with Schroder's opinion that the hedge transactions were being executed in relatively difficult market conditions, especially given the size. A number of decisions were taken to police and keep control of the process. These included:
■ limiting the transacting banks to only two;
■ imposed parameters regarding screen sources;
■ imposing limits on acceptable bid/offers outside screen indications;
■ Schroders overseeing the execution.
These were realistic measures to put in place.
109. We have been unable to determine the factors used in the choice of the two swap counterparties beyond their prior involvement with the project. Typical means of deciding on a choice of counterparty would include:
■ credit rating of the counterparty;
■ capabilities in the currency or product required (here GBP interest rate swaps);
■ involvement in the overall transaction. Award of swap business is frequently used to reward a bank for related work.
110. The area which seems inconsistent with the above related to the assessment of the capability of the counterparties. The absence of a sterling clearer (three of which are consistently ranked in the top five GPB counterparties) is surprising.
111. One way to reduce the costs of the hedge would have been to deliver the Gilts being sold by investors buying the 2010 GGBs on a switch basis to the swap counterparties to satisfy their positions arising from the hedge. We have been unable to fully verify the extent of this benefit (if any). We have also been unable to verify whether any possibility existed for influencing screen source pricing.