ICE Swap rate fallback!
Following my blog post on "ICE Swap rate fallback?", Risk.net has published an article on the question titled Evolution or extinction: Ice swap rate’s post-Libor quandary (subscription required). I'm expecting more articles on the subject in the coming weeks.
Some minor points about the article:
A fixed income trading head is quoted to have said "It’s going to be very difficult and shows that benchmark reform is a much heavier lift than anyone estimated. I agree with the "difficult" part, but not with the "anyone". Maybe it is heavier than most estimated, but to my opinion the "anyone" term is inappropriate. Those issues have been anticipated and documented from day one by some. I will just refer to my July 2017 post LIBOR is dead, the Game of Thrones can start!
The article also indicated: "It is understood that the benchmark’s administrator – Ice Benchmark Administration – discussed the issue with industry participants earlier this month." Only this month, after my blog on the question, not in July 2017, just after Andrew Bailey speech on "The Futures of LIBOR"? Really?
The discussion of the ICE Swap Rate is somehow in contradiction with the current ISDA consultation on LIBOR fallback. The Swap rate natural replacement or fallback would be a OIS benchmark rate with a methodology similar to the current LIBOR swap rate, i.e. rates captured at a given time on SEF or MTF. But making such a proposal implicitly acknowledge that the swap rate methodology is viable also for the short tenors (1M, 3M, 6M) where there is more liquidity than in the current swap rate tenors (1Y, 2Y, 5Y, 10Y 30Y). If there is a case for creating those rates in the fallback of ICE swap rates, why are they not in the consultation for LIBOR fallback? I don't see ISDA officially consulting on the ICE Swap rate fallback as long as the LIBOR fallback is not concluded. That would open the Pandora box, which, to my opinion, should be open in any case.
Like for the LIBOR fallback, it is important to distinguish between new products and the fallback. The fallbacks require a replacement with a rate of a similar type (term rate for LIBOR, swap rate for ICE Swap Rate) but for new transactions, new type of products based on new types of underlying could become standard.
Some minor points about the article:
A fixed income trading head is quoted to have said "It’s going to be very difficult and shows that benchmark reform is a much heavier lift than anyone estimated. I agree with the "difficult" part, but not with the "anyone". Maybe it is heavier than most estimated, but to my opinion the "anyone" term is inappropriate. Those issues have been anticipated and documented from day one by some. I will just refer to my July 2017 post LIBOR is dead, the Game of Thrones can start!
The article also indicated: "It is understood that the benchmark’s administrator – Ice Benchmark Administration – discussed the issue with industry participants earlier this month." Only this month, after my blog on the question, not in July 2017, just after Andrew Bailey speech on "The Futures of LIBOR"? Really?
The discussion of the ICE Swap Rate is somehow in contradiction with the current ISDA consultation on LIBOR fallback. The Swap rate natural replacement or fallback would be a OIS benchmark rate with a methodology similar to the current LIBOR swap rate, i.e. rates captured at a given time on SEF or MTF. But making such a proposal implicitly acknowledge that the swap rate methodology is viable also for the short tenors (1M, 3M, 6M) where there is more liquidity than in the current swap rate tenors (1Y, 2Y, 5Y, 10Y 30Y). If there is a case for creating those rates in the fallback of ICE swap rates, why are they not in the consultation for LIBOR fallback? I don't see ISDA officially consulting on the ICE Swap rate fallback as long as the LIBOR fallback is not concluded. That would open the Pandora box, which, to my opinion, should be open in any case.
Like for the LIBOR fallback, it is important to distinguish between new products and the fallback. The fallbacks require a replacement with a rate of a similar type (term rate for LIBOR, swap rate for ICE Swap Rate) but for new transactions, new type of products based on new types of underlying could become standard.
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