Consultation on IBOR fallbacks: Question 1

On 12 July 2018, ISDA has published a Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR,1 CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW.

I'm preparing a quant perspective on IBOR fallback proposals that I will publish in the coming days.

In the mean time, by reading the consultation document, I have a certain number of questions related to the clarification of the wording or the formulas proposed. I'm sending the questions to the ISDA email associated to the consultation and I'm also posting them here. I will update the post when I have an answer or a clarification. This is

Game of Benchmarks: Season 2



Game of Benchmarks: Season 2 - Episode 1: Compounded Setting in Arrears Rate question

 

Question related to Option 3: Compounded Setting in Arrears Rate

 

The three dates that characterise a IBOR fixing are its fixing date, the effective date of the underlying deposit and the maturity date of the same deposit. When used in derivatives, the effective and maturity dates of the underlying deposit are theoretical dates as no actual deposit takes place. Derivatives payments are themselves characterised by four dates: the fixing date, the start accrual date, the end accrual date and the payment date.

The consultation document indicates "The fallback could be to the relevant RFR observed over the relevant IBOR tenor and compounded daily during that period.” A formula is provided in Annexe A.

It is not clear if the “period” referred in the text (T to T+f in the annexe) is the IBOR theoretical deposit period or the derivative period.

If the period refers to the IBOR theoretical deposit period: How would the RFR for the period been know if the payment takes place before the end of the said deposit period. This would be the case for FRA with “FRA discounting” settlement (settlement in advance), for IBOR with fixing in-arrear or for vanilla floating coupons on coupons after a period with end accrual date on a non-good business day.

If the period refers to the derivative period: Does that mean that the same IBOR fixing will fallback on different values depending in which derivative it is referred and the consistency between rates fixing on the same date will be broken? What would be the period for a FRA that settles on the fixing date (e.g. GBP-LIBOR)?

Edit on 6-Oct-2018:

I have received an answer from ISDA regarding the above question:
This is an issue that we are going to need to look into for each of the relevant currencies as we move to implementation (if we move to implement the compounded in arrears rate).  The likely answer is the IBOR theoretical period with an adjustment for the payment date but it would be helpful if you could point out this issue in your response and explain the implications.


Season 2: The questions

 

Question 1: Question related to Option 3: Compounded Setting in Arrears Rate

Question 2: Question related to: Description of Fallbacks - Triggers

Question 3:  Description of Adjusted RFR - Timing

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