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Who pays wins: a reply to Mark Capleton

Julian D. A. Wiseman

Abstract: An essay dated 18th November 2008 by Mark Capleton of The Royal Bank of Scotland entitled Who pays wins (in several ways), refers several times to an essay by this author, Gilt Asset Swaps: DMO Should Profit, dated October 2008. Between the lines of our broad agreement are the various disagreements discussed below.

Publication history: Only here. Usual disclaimer and copyright terms apply.

On 18th November 2008 Mark Capleton of The Royal Bank of Scotland published a research essay Who pays wins (in several ways)†1 referencing, and mostly agreeing with, this author’s essay Gilt Asset Swaps: DMO Should Profit. However, there were several disagreements, overt and implicit, minor and major, old and new.

But we agree that the DMO should fund short (even if we disagree on how short), and pay long.

Julian D. A. Wiseman
New York, November 2008


†1: Who pays wins (in several ways) (alas an RBS client password needed), Mark Capleton, 18th November 2008.

†2: A better match, as discussed in On The Plotting of Yields, would be the ratio of true Macaulay convexity to true Macaulay duration, but that detail isn’t important here.

†3: See A Better Auction Mechanism, And Why Governments Should Sell Futures Rather Than Debt, written as long ago as December 1997 having been first discussed with the Bank of England in April 1995.

†4: Pencil in 2010 as the start of recovery from the recession, Professor Charles Goodhart, Telegraph, 31st August 2008.

†5: Debt management policy is in need of adjustment, Lombard Street Research, Financial Times, 7th November 2008.

†6: The Implementation of Monetary Policy: The Next Attempt, published in early November 2008.

†7: The complexity of floaters has form, as described by a 1994 Bank of England Press Notice: “The Floating Rate gilt, first issued in March 1994 with a further tranche in June, pays interest at 1/8% below the London Interbank bid rate for three-month deposits. The rate is reset every three months. By mistake, the interest payment to be made on 9 September was set on the wrong date, on 10 June rather than on 9 June. The error came to light when the next payment was being set, in September. Had the rate been correctly set, it would have been 0.01562% higher and the recipients of the interest payment on 9 September would have received an extra 0.39 pence per £100 nominal of stock. These persons are being individually notified and extra amounts are being paid with interest. The Bank is also contacting holders of the stock at the time the incorrect rate was announced who subsequently sold stock and may have suffered loss. The Bank regrets this mistake.      20 October 1994”. Obviously the Bank hadn’t done its private Libid fixing on the correct day, so must have estimated the answer: note that 3-month GBP Libor dropped 1.563bp between the 9th and 10th. Floaters are needless complexity; whereas swaps are easy because SwapClear does all the work.

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