Answers to the ISDA consultation on IBOR fallback

The Japan Banker Association (JBA) has published its Comments on the Consultation on Interbank Offered Rate (IBOR) Fallbacks for 2006 ISDA Definitions.

Their comments are similar to the ones I mentioned in my Quant Perspective on the major issues:

Forward-looking term rates

we believe that ISDA should carefully consider how the development of forward-looking term rates will have impacts on the fallbacks for derivatives

This is in essence equivalent to my Option X1: OIS Benchmark but expressed in a different way.

The existence of the working group on GBP end EUR on the specific subject of the term rate RFR was already an indication that the decision of ISDA of not including the option in its consultation is not the first choice by all market participants. We have now also a similar opinion on the JPY side.

Not achievable option


There may be some cases (for example, in LIBOR in arrears swap) where it is unable to complete the fixing in time for floating rates payment.

This is essentially my point on dates indicating that the "street favorite" option of Compounding Setting in Arrears is not achievable, again expressed in a different way. If one is unable to complete the fixing, even for one single instrument, it means, based on equality or coherence between fixings, that the option is not achievable and cannot be proposed as a practical fallback.

This is the first time that I have seen an explicit opinion that support the issue I have highlighted since the first version of my quant perspective in April.

Second consultation?


The feedback reinforces my opinion that a second consultation would be necessary. Some important options have been ignored in the first version and practical achievability of one of the major options has still to be demonstrated.

Other answers


Other answer and articles related to the fallback are:

Article in Risk: Japan dealers unhappy with all Libor fallback options (subscription needed):
https://www.risk.net/derivatives/6130946/japan-dealers-unhappy-with-libor-fallback-options

Answer by the European Financial Congress:
https://www.efcongress.com/sites/default/files/answers_of_the_efc_ibor_fallbacks.pdf

Comments

Post a Comment

Popular posts from this blog

Multi-curve framework book: new edition in progress

Image
Subject: Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, and Implementation It has been more than 10 years since I wrote the first edition of the multi-curve framework book. What happened in those 10 years? Why did it take me so long to start a new version? It took me roughly 10 years to write the first edition. The reason it took so long at that time, was that I did not know that I was writing it! I thought I was writing a couple of pages on an obscured and theoretical idea that there was not a `` one curve to rule them all '' but multiple curves. It turned out that it became the actual practice for very clear and important reasons. That was the excuse for the first edition, what is the excuse for the second edition? Since the first edition, many things happen, in particular: March 2015: BCBS - IOSCO: margin requirements for non-centrally cleared derivatives and mandatory variation margin July 2017: The future of LIBOR -- actually it...
Read more

Rigged: part 1 - Will there be a part 2?

Image
I have been reading book “Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial” (Andy Verity, Flint, June 2023) for some time. It was published several month ago, but I just finished it. To my defence, I have to say that I don’t feel comfortable reading fiction where the “bad guys” are systematically winning by cheating. The book is the story of the miscarriage of justice done in the LIBOR manipulation story. The book content did not surprise me. For anybody having worked on a (swap) trading desk, it is clear that what was described by the accusation was impossible. It is not possible for some middle level trader to create a multi-year, multi-desk, multi-bank international conspiracy over open lines, broker lines, on open offices etc. without all around them, including compliance and senior management to be fully aware of what is going on. Moreover the regulators cannot be ignorant of the situation, except pleading complete in...
Read more

Treasury / Swap spreads are negative. And what?

In recent weeks there were several news articles related to the negative treasury/Swap spread. This is in particular the case of a Bloomberg article and a Zero Hedge blog . Some of the “information” in those notes are Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields […]  is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. It’s hard to overstate how illogical it is when swap spreads are inverted. That’s because it suggests that governments are less creditworthy than the very financial institutions they bailed out during the credit crisis just seven years ago. Let’s be clear, to me, those claims are purely wrong , nothing is “ illogical ” in negative swap spread. But why do I rant about that in the “multi-curve framework” blog? Because it is exactly the same that ...
Read more