Marc Henrard - Multi-curve framework

The move to the use of overnight benchmarks as the main interest rate benchmarks is progressing. After the wave of new overnight-linked futures in the last months by CME, ICE and CurveGlobal, we now have a large overnight-linked bond issuance. The EIB has successfully issued a one billion 5-year SONIA-linked bond. The coupon payment is based on the backward-looking overnight SONIA composition plus a spread of 35 basis points (Maturity 2023-06-29, quarterly payments, ISIN XS1848770407). Note that a small 2 millions bond had been issued in January (quarterly SONIA + 25 bps, maturity 2023-03-20, ISIN XS1889459713). Thanks to an acute observer of the market for pointing that to me. Backward-looking overnight is viable. Certainly for some issuers and investors. There was never a doubt about it for some market participants. This does not prove it is viable for all market participants , and this is where the question lies. Note that the coupon will be paid with a five-day lag after the

I will be at the University of Cape Town for an academic project with the African Institute of Financial Markets & Risk Management . I will there the two first weeks of July.

This blog entry is a reaction to the column by Bakkar and Brigo in Risk titled Model risk in the transition to risk-free rates . While I agree with most of the column, there is a secondary issue, which is close to my heart, I would like to react to. And I certainly concur with the last sentence of the column which starts with "This should involve the quant community in an active role" as this has also been my opinion for a long time. I would nevertheless like to present a different perspective on some side elements of their argument. To my opinion, the expanded use of overnight benchmarks will (should) not reduce the multi-curve complexity. The pre-2007 single curve " simplicity " was coming from a combination of error and domination . Error in confusing two effects, the (pseudo-)discounting and the reference benchmark. This error was helped by the domination of a rate family: the IBOR benchmarks — the LIBOR king. The crisis emphasised the difference between