For each currency SDX Interest Rates builds a distinct Yield Curve for the standard index.
However, in many currencies, floating legs based on an index other than the standard index (e.g., in USD the 6M LIBOR rather than the 3M LIBOR) are not par instruments. That is, basis swaps between non-standard index tenors and the standard index tenor do not trade as breakeven with a zero spread. These spreads are caused by, and change in response to, several factors including supply and demand, the perceived speed of central banks’ easing or tightening of credit conditions, and liquidity concerns.
Accordingly, for the following currencies SDX Interest Rates also builds distinct yield curves for each non-standard index in addition to the yield curve for the standard index:
USD
EUR
GBP
AUD
JPY
CHF
NZD
DKK
NOK
SEK
KRW
TWD
SGD
HKD
MYR
How does SDX Interest Rates do this? For each of these currencies SDX Interest Rates first builds a yield curve for the standard index. This curve is used for projecting cashflows based on the standard index tenor and for discounting all cashflows.
Then separate projection curves for non standard indexes are built so that when pricing basis swaps using the appropriate curves, the market quoted basis swap spreads are re-priced correctly.
The separate projection curves for non standard indexes are built using market data from instruments with that non standard index and the market data basis spreads from the standard index (for example, for USD 6m libor curve SD uses the USD 6m libor cash point and 6m FRAs and use market data basis spreads for the 6m based swap rates).
For example, when pricing a USD swap if you have a leg based on a non-standard index, the rates used for it will now come from the relevant derived yield curve, rather than from the yield curve for the standard tenor. So if you enter into a floating-floating USD vanilla swap with one leg based on 3M LIBOR and one leg based on 6M LIBOR, the leg based on 3M LIBOR will use the yield curve created for the standard index, i.e., the 3M LIBOR, and the other leg will use the yield curve created for the 6M LIBOR, while projected cashflows for both legs will be discounted on the standard index curve.
For each of these currencies for the swap tenors you can see the basis spreads between the standard index and each non-standard index. The basis spreads (which are displayed in basis points) are displayed in the Basis Spreads tab in the Yield Curve page.
In the Basis Spreads tab you can also edit the displayed basis spreads between the standard index and each non-standard index, or define any that are not displayed (such as for KRW or TWD). To do this, see Editing the Basis Spreads Between a Standard and Non-standard Index.