Duration indices

SEK 5Y, 10Y, 12Y, 15Y, 20Y

Nordea Duration Index provides an investor with the return of quarterly rolling a long position in an interest rate swap. On each roll the maturity of the interest rate swap is reset to match the index tenor, and the Index therefore gives a swap exposure with stable maturity and stable duration. This removes the rebalancing need that normally occurs in an interest rate swap portfolio.

Investors are offered the Duration Indices in a Total Return Swap (TRS) in which they will receive (pay) the positive (negative) total return of the index less the accrued standard money market (Stibor) over the life of the contract (typically traded as a one year contract).

The investor will incur a cost in the index rebalancing which is deducted from the index performance on each rebalancing date. The cost is fixed and has been based on the tenor and liquidity of the underlying interest rate swap of the respective index. The cost for each trades of the Index product can be individually adjusted based on the volume and maturity of the derivative contract traded.

The index and total return swap are both denominated in SEK. Index values (with one day lag) and historical performance can be found in Bloomberg and Thomson Reuters with the following tickers:

Index Bloomberg Tickers: NDEASK05Y Index; NDEASK10Y Index; NDEASK12Y Index; NDEASK15Y Index; NDEASK20Y Index

Index Reuters Tickers: .NDEASK05Y; .NDEASK10Y; .NDEASK12Y; .NDEASK15Y; .NDEASK20Y

Rationale for investors (pension plans):

  1. A “live” pension plan not in run-off typically has a forward cash flow profile that does not shorten over time. Therefore, risk management tools based on an index with a similarly constant duration will reduce manual rebalancing, and therefore also reduce operational risk.
  2. The new swap-based regulatory discounting curve in SEK will increase the need for exposure to longer maturity swap curve tenors, where pension liabilities typically are the most sensitive to interest rate changes. The Duration Index will maintain the exposure to the desired tenor and thereby maintaining the effectiveness of the hedge.
  3. Irrespective of whether a pension fund performs its interest rate risk management in-house or out-sourced, it will be faced with performance risk in the execution of the required hedge rolls, i.e. they will not be able to measure if the execution is done well or not. The Duration Index eliminates such performance risk as the cost in each quarterly roll is calculated using a predetermined fixed spread versus Nordea valuation curves taken from market quotes at CET 11:00 on the roll day.
    • Duration Index can therefore also be used as performance benchmark to assist in the evaluation of in-house or outsourced risk management mandates.
    • Similarly, asset management firms are able to accept such passive risk management mandates while applying a minimum of resources towards meeting the performance requirements, and instead focus its efforts towards active mandates.
  4. TRS based on Nordea Duration Indices are currently not expected to be subject to mandatory clearing under EMIR.
    • Therefore, the TRS will be executed under a bilateral agreement (e.g. ISDA) between the pension fund and Nordea and any counterparty exposure will be collateralized in accordance with each party’s respective risk appetite.
    • Typically a CCP cleared derivative will be subject to an initial margin requirement. If a Duration Index TRS is executed under a so called golden CSA then both parties will post daily variation margin to each other to cover any exposures. There will be no initial margin posted if we disregard haircut applied to some bond collateral.
    • This will continue to be the case for the pension fund provided that the currently proposed BIS/IOSCO thresholds for OTC initial margin requirements will be enforced.
    • The difference in initial margin requirement between vanilla IRS and the Duration Index TRS can provide a potentially large cost saving and improve asset allocation flexibility for the pension fund.

Index statistics
Product name Last YTD % chg
1 year % chg 5 year % chg
Duration Index SEK 5Y 170,30 2,14% 2,56% 17,92%
Duration Index SEK 10Y 181,26 3,54% 1,03% 20,05%
Duration Index SEK 12Y 178,94 3,84% -0,01% 18,66%
Duration Index SEK 15Y 179,40 4,28% -0,70% 17,89%
Duration Index SEK 20Y 175,83 5,00% -1,31% 15,05%

Quotes last updated 20.03.2014. Source: Bloomberg.
Historical return is not a guarantee for future return.

Source: Bloomberg.
Historical return is not a guarantee for future return. 

View the index in Nordea e-Markets and Analytics

For more details about the index, please feel free to read the following documents