A Quant Perspective on IBOR Fallback Proposals

A month ago, ISDA launched a consultation on IBOR fallbacks. The question of the fallback in case of a benchmark discontinuation has obviously legal background. Parties to the derivatives contracts have to ask themselves: What is the meaning of what I signed? Is it really what I want? The answer to the last question is probably: "no, it is not what I want!" This is why most of the derivatives users agree that a change in the fallback language is required.

Once you are convinced that what you have is not what you want, you have to review the alternatives. I have published a note with a personal review of the alternatives from a "quant" perspective. Even if personally I would prefer to the called it a "qualitative analysis" as before assessing the quantities associated to the alternatives, you have to check their qualities against a set of qualitative criteria.

The note gives some background for the Season 2 of Game of Benchmarks: The Questions!

The note is available on SSRN:

A Quant Perspective on IBOR Fallback Proposals

Abstract

With the increased expectation of some IBORs discontinuation and the increasing regulatory requirements related to benchmarks, a more robust fallback provision for benchmark-linked derivatives is becoming paramount for the interest rate market. Several options for such a fallback have been proposed. This note describes and analyses some of those options. The focus is on the quantitative finance impacts. None of the options that have been proposed fits all of the criteria for a good fallback provision. It appears that some of the options that have gained traction failed even the achievability criterion. The note concludes with the author's personal preference.

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

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