Salomon Swapco Inc
To Our Clients
insurance which we have obtained to protect Swapco against the largest of those
exposures, and,
not least, an expanded program of stress testing and exposure analysis which provides us with
tools to anticipate and manage large exposures.
Swapco has, for some time, performed detailed stress tests of its portfolio on a quarterly basis.
Those tests, which are now run every month, reprice the portfolio for relevant economic
sensitivities. For each market risk "factor" which we stress (for example, a level shift in U.S.
interest rates), we reprice each trade for a range of upward and downward movements, from
moderate to quite extreme. In all, we calculate hypothetical portfolio values for more than 400
distinct market movements. For each result, we determine the impact on Swapco's capital
requirement and on the Company's liquidity.
Stress test results also provide data which allow us to manage the volatility of Swapco's customer
portfolio. Swapco's entire book is kept precisely market neutral through the use of offsetting
trades with Swapco's parent, SBHC. Swapco always holds collateral from SBHC, over and
above the current exposure, sufficient to protect against a three-standard-deviation eight-day
market movement. Using stress test results, we are able to negotiate customer trades which
reduce the volatility of the net Swapco/SBHC mark, thus reducing Swapco's potential credit
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