Benefits and drawbacks of standardization

Traditional markets use a variety of conventions to standardize swaps. One convention is to standardize maturity to foot to IMM dates, in what are called MAC (market agreed coupon) swaps. Because of the standardization of settlement and payment dates, MAC swaps offer the benefit of fungibility and can be tracked as a collective, simplifying position keeping, accounting and risk management. Another method of standardization is the so-called standard par swap, where payment terms and tenors are standardized. Standard par swaps are not as standardized as MAC swaps: On any trading day, par swaps are initiated with fixed rates that may vary across all of the different par rates that prevailed at the times of the trades. Furthermore on all following days, the settlement and maturity dates of new swaps of a given tenor will change as well.

The drawbacks of standardization include large ticket sizes, which preclude smaller investors from utilizing them, as well as the fact that standardized settlement dates may not exactly match the period the investor is looking to hedge, creating periods where risk is not effectively managed.