IBOR Fallback: Compounded Setting in Arrears

I continue my quest related to the IBOR fallback issue. I still fail to understand the precise meaning of the "Compounded Setting in Arrears" option for derivatives subject to the fallback.

I have contacted several people at ISDA (as reported here) and others that are mentioning this option. I have not yet received a clear answer to the issues I have reported in my "Quant perspective on IBOR fallback" and in my answer to the ISDA consultation. The dates between the IBOR underlying deposit and the derivatives do not match in all cases. How do you pay an amount before you know how much you have to pay (the time difference can be as long as the IBOR tenor)?

The answers I received are some version of "To be decided", "The impacted trades will mature before the discontinuation", or "The term sheets will change in the mean time". All of those answer do not answer the content of the question:
  • To be decided: No! The details have to be described before the consultation, before the user sign a contract, not after.
  • The impacted trades will mature before the discontinuation: No! FRA traded today may mature before 2022, but between now and the discontinuation many new FRA will be traded. The ones that will be traded the day before the discontinuation need to be taken into account in today's fallback definitions. Moreover the impact is also on vanilla swaps. Some have a maturity of more than 50 years; discontinuation will take place before 2068!
  • The term sheets will change in the mean time: Maybe! But if you thing so, show me the proposal for ISDA definitions that include those changes. They should be included before the fallback amendments, not after.

To repeat myself:
The term rate fallback problem is a term rate problem, not an overnight problem; even if the fallback is overnight-linked, a term rate is required for the solution.
I prefer a clean fallback based on imperfect term benchmark than a dirty fallback based on a perfectly compliant overnight benchmark.

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

Pertes de la BNB: c’était prévu et nous payons!

La BNB: 3 milliards de pertes et encore 6 milliards à venir. Voir par example l’article de l’Echo: La perte de la BNB a dépassé 3 milliards d'euros en 2023 . 1) C’était le but! C’était prévu! 2) Quis custodiet ipsos custodes? 3) Quatrième pouvoir? 1) C’était le but! Les achats d’obligations gouvernementales avaient pour but de diminuer le coût des emprunts pour les États concernés. Il y a bien sur la fiction que ce n’est pas du financement des états parce que les obligations sont achetées dans le marché secondaire aux banques commerciales. Une fiction car les banques commerciales; achètent ces obligations sur le marché primaire à un prix surévalué uniquement parce qu’elles savent qu’elles peuvent les revendre à un prix encore plus surévalué aux banques centrales. C’est d’une certaine façon un “pump and dump”. Si ce n’est que dans le “pump” le seul pompage est par les banque centrales et le reste sait que ce pump n’intervient que pour soutenir un actif de moindre qualité. Et
Read more