Who Holds the Bermudan Termination Option in a Cleared Cancellable Swap?

Summary

The document raises a valuation question about a cleared cancellable interest rate swap with Bermudan-style early termination rights. The term sheet does not identify which party owns the termination option, and the questioner asks whether the option holder can be ignored because the swap is cleared. It also asks how valuation differs between cleared and bilateral versions of the trade.

No answer, pricing method, or market evidence is included. The central point for valuation is that optionality depends on who has the right to terminate and under what terms; clearing does not by itself specify that right or make its economic value irrelevant. A sound analysis would need the contractual exercise rights and relevant clearing, collateral, and discounting terms. Because those details are absent, the document cannot establish a value or explain a particular clearing house convention. It serves as a prompt to clarify the trade terms before selecting a valuation approach.

Key ideas

• The swap includes Bermudan-style early termination optionality.
• The term sheet, as described, does not identify which party holds the option.
• Clearing status alone does not specify the contractual exercise rights.
• The document provides no valuation method or answer to the question.
• Valuation requires clear terms and relevant clearing and collateral details.

Tags

# Valuing cleared cancellable swap


# Valuing cleared cancellable swap












I have a cancellable swap to value, with the float leg payer being a clearing house.

The cancellable term sheet states the interest rate swap has a Bermudan style optionality for early termination but doesn't specify which party is long the option. Hence I cannot value this swap. The owner of this swap suggested that this is not relevant given it is a cleared swap - and i don't understand why.

What is the difference in valuation approach to a cleared and non-cleared cancellable swap?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.