2017-09-23

More EUR adjustments?

The ECB has decided to published a new unsecured overnight interest rate benchmark. The press released was posted on its website a couple of days ago. No name has been proposed yet for the new benchmark.

This would be a new benchmark on top of the existing EONIA and STOXX GC Pooling Index.
Those two benchmarks are already the underlying of some derivatives. It is expected that the new index, planned to be published by 2020, will also be used in some derivatives.

That would mean three competing overnight benchmarks in EUR all of them with associated derivatives. That would means twelve (12) possible ON derivatives types. One type for each of the benchmarks used as underlying in combination with each of the benchmarks used for the computation of interest on the mandatory VM amounts, to which you have to add futures, which are equivalent to derivatives with a collateral rate of 0. And you have to add the potential difference in capital treatment for the settle-to-market feature.

The multi-curve framework is definitively not dead, even if LIBOR is dying. Interest rate modelling will continue to be extremely important for all financial markets users. Even if the so-called exotic derivatives have decreased in important since the crisis, the modelling techniques developed for them are becoming more an more important.

I'm working on different research works related to the modelling of the potential impact of the LIBOR disappearance. I will probably take another couple of months to have publishable results, but certainly the changes in the market continue to provide material for academic research and advisory business. Don't hesitate to contact me about any of them.

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