Fallback: ISDA video

I watched the ISDA Video Interview: Why Should I Update the Fallbacks in My Derivatives Contracts?

I found it more balanced than previous ISDA's publications. I provide below some quotes and comments:

They [fallbacks] are a one size fits all approach.

You risk management requirements are not "one size fits all". Spend as much time as necessary to analyze if the proposed size is a good fit for you. Plenty of different sizes, colors, models are available. Don't succumb to holiday season advertisement for them. Advertisement may be fine for cookies, not for long term risk management. One signature on a protocol is for ever, but it may not be diamond!

They may not result in the best outcome for all market participants and all products.

Some of those issues have been highlighted in several independent documents over the last 2 years. It would be good to have ISDA expanding a little bit on this. Maybe providing a forum for independent analysis to be published and a compensation mechanism for the analysis. Large amounts of money has been spent on legal advise. How much has been spent on "quant" advise for the good of the derivative community and on model validation?

The transactions may be economically different, sometimes significantly different.

Remember my "Has value transfer in LIBOR fallback started?" from November 2018, the day after the publication of the first ISDA consultation results? I wish that ISDA had been more forthcoming on the value transfer impacts up front, in its September 2018 consultation document. 

For bilateral trades, it is not too late to refuse the value transfer to your counterparty. For that you need to be cautious with signing the ISDA protocol and have expert opinion on the actual value of your trades without the new definitions. Don't hesitate to refer to the LIBOR transition page from muRisQ for suggestions.

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