Marc Henrard - Multi-curve framework

On Monday and Tuesday I was in Warsaw presenting a workshop related to the content of my soon to be published book " Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, Transition, and Implementation ". In the book's subtitle, there is "Transition". I knew that the Polish market was in a transition phase between WIBOR and POLSTER. Nevertheless, I was surprised that the WIBOR benchmark administrator announced while I was there that WIBOR will cesse to be published on 1 January 2037 (to my knowledge, no casual relation between my presence and the announcement). That is a 10-year period between announcement and actual cessation! That is a world record!!! Congratulation to Poland for that world record. Now you have to live with it! In particular have a look at Section 6.6.4 of my book and my blog posts LIBOR Fallback Transformers - Risk transition , LIBOR fallback transformers - forward discontinuation and LIBOR discontinuation and curve ...

The real USD-LIBOR disappearance came at the end of June 2023. As the discontinuation was clumsily implemented a “synthetic” LIBOR was required and was published until 30 September 2024. To our opinion, this was a fundamental mistake as we explained in the post “ Synthetic LIBOR, genuine manipulation ". Now that the synthetic LIBOR period has ended, the real legal legacy for LIBOR can start. It seems that once more the court battle is rigged in favour of power in place by opposition to financial reality. We referenced the Bank of England rigging the LIBOR setting and later the trials of those involved in the setting in our post “ Rigged: part 1 - Will there be a part 2? ” Now it appears that a discussion between private individuals (ISDA) about a new convention for new derivative trades is becoming a law for all on previously issued securities. The story is described in a Reuters article “ StanChart welcomes 'clarity' from UK court ruling over replacement rate for Libo...

The FCA, one of the UK regulators, is consulting on synthetic USD LIBOR . I have expressed my opinion about synthetic LIBOR on many occasions in the last couple of years, in conferences, seminars, informal discussions, etc., but I have not directly posted anything substantial on this blog. This post uses as an example the USD LIBOR to be created next June but applies in similar manners to GBP and JPY LIBOR created at the beginning of this year. I already mentioned synthetic LIBOR in my first blog after the official announcement of LIBOR discontinuation: “ Alea iacta est: LIBOR non est ”. For a transition that was announced by the same FCA in its ill-titled “the future of LIBOR” speech more than 5 years ago and that was described as at a date that `` is far enough away ”, if the need for a synthetic LIBOR sounds like a failure it is because it is. What is synthetic LIBOR? It means continuing to publish a rate, still call LIBOR, in the way and with the mechanism used for LIBOR, but n...

I will be speaking at the @CQFInstitute’s Annual Quant Insights Conference on 2–3 November. Join me and other quant finance experts as we explore the latest industry innovations. You can book your free ticket here https://www.qiconference.com/november-2022/  

Three weeks after I asked a couple of questions to the EU president related to the regulation on CHF-LIBOR, questions that were also posted on my blog , I have received an answer from DG FISMA Unit C.3 - Securities Markets. The answer is posted below (minus the introduction and the signature) The policy intention with this replacement was to ensure that the cessation of CHF LIBOR does not cause large-scale contract frustration for contract parties and holders of financial instruments in the EU. In accordance with the conditions for the exercise of the powers, set out in the Benchmark Regulation, the Commission has taken into account the recommendations made by the National Working Group on Swiss Franc reference rates, has conducted a public consultation in the spring of this year[1] and has published a draft of the implementing act for feedback in August[2]. To the extent we understand your detailed queries, the elements of the implementing act concerned were present in the draft act ...

Open letter to Ursula VON DER LEYEN in relation to REGULATIONS COMMISSION IMPLEMENTING REGULATION (EU) 2021/1847 of 14 October 2021 on the designation of a statutory replacement for certain settings of CHF LIBOR Dear Ursula, I read with interest your REGULATION (EU) 2021/1847. If you don't mind, I would have a couple of simple questions regarding the text. I'm certain the numerous consultations you indicate you have done have already answered those questions, so it should just take you a couple of minutes to answer them. Ambiguous definitions (rate) The text indicates 1-month CHF LIBOR is replaced by 1-month SARON compound Rate, as observed over the 1 month period preceding the interest period; What is the meaning of " 1 month period preceding ". From my experience, this is not a trivial question in finance. The first ISDA consultation, published in July 2018, had a similar issue. It indicated " observed over the relevant IBOR tenor and compounded daily dur...

LIBOR transition is involving large value transfers between market participants. In the past, I offered to my faithful readers the possibility to make money on LIBOR fallback (see the series starting here ). The money making machine required to take some "spread positions" and trust that the LIBOR cessation process would complete in a time frame of a couple of years. The LIBOR cessation completed on 5 March 2021 with the announcement regarding the forthcoming cessation. The term "position" above is in between inverted commas because the point was that it was not really a spread position from a market risk perspective, only from a name perspective. It turns out that there is a little bit of market position in the trade as described in Fallback transformers: gaps and overlaps and the following muRisQ's blogs. The position I proposed In November 2019 has made more than 10 bps in rates . Now that you have made some money with hard work, I propose a mechanism to lo...

Almost three years ago, on 30 November 2018, just after the results of the first ISDA fallback consultation were published, I explained " how to make money on LIBOR fallback ". There were many episodes to the series (see list below) but I never concluded on that first part. The conclusion came in March 2021 with the publication of the ISDA/Bloomberg fallback spreads. Those spreads have transferred huge amount of money between market participants. I hope you were on the receiving end of the value transfer. What is the order of magnitude of the money transfer? I don't know, as I don't now the positions of the different market participants. But at least I can tell you how much money you would have made if you had followed my advise from November 2018. Then I indicated that " I enter into a basis swap where I pay LIBOR-1M v receive SONIA + spread on a 30-year tenor for a notional of 1m. The current spread is at 13.45 bps. My analysis gives me a 4 to 8 basis points ...

In August 2017, I started a series called " Game of Benchmark: Season 1 " with a catch-line Game of Benchmarks: a no-fantasy series with no blood and no sex but plenty of greed, manipulation and money. The Episode 1 was titled " the king is dying " and I asked "Where is the successor?" In the mean time, the king has proved to be more resilient than expected and his death has been delayed to July 2023. The grace period has been accompanied with new announcements that may partly answer to the question I asked four years ago: Where is the successor? With the slow king death in the background, some foreign powers have tried maneuvering to push a new officer in power. In this context the term foreign should be understood in part as meaning of a different country but also belonging to another area. The other country is obviously referencing to the UK FCA that, not so subtlety, tried to interfere with the USD market. But maybe more importantly the LIBOR was a mar...

 ISDA has published a consultation on the fallback for ICE Swap rates . The situation related to ICE swap rates is complex and no trivial solution exists. But this situation was predictable and has been predicted for several years. The issues under discussions where already present in my first answer to ISDA consultations in 2018. The proposals in the ISDA consultations are based on approximate spread for GBP and USD LIBOR swap rates versus OIS rates. Those approximations have been proposed by the Sterling working group and ARRC. Some approximations are necessary due to the early decision taken by ISDA and regulators on the transition. Unfortunately the working papers proposed by the working groups hide significant issues and do not propose a balanced analysis of the problem. From public documents available one can infer that the working groups had information indicating that their working papers did not provide all relevant information and did not include them. At ISDA's request, ...

Over the last months there have been many discussion about the fallback (or more precisely the absence thereof) of cleared LIBOR swaps. The CCPs are planning another "big bang". Having been interested by astronomy since I was young, I thought there is only one "Big Bang" possible, but I'm not an expert. Maybe we should rename the LIBOR transition "bangs" as SME (Small and Medium-size Explosions). This new SME would cancel all existing LIBOR swaps before the cessation of LIBOR and create OISs with slightly modified payment dates. The solution is certainly one that I'm in favor of, having push for it by opposition to the ISDA Frankenstein-like fallback. I have suggested to my clients for many month to do something similar (see here and here ). The ISDA fallback is unmanageable from a market risk perspective as described in previous blogs: Fallback transformers: gaps and overlaps and here . Probably those public analysis have been used by CCPs to co...

Some random comments about the LIBOR cessation announced on 5 March 2021. The IBA decision (forced by the panel banks) is now public . LIBOR with cease on 31 December 2021: all but USD tenors below 30 June 2023: USD-LIBOR ON, 1, 2, 3, 6, 12 M. All LIBOR are expected to stay representative to the last date. Interesting that FCA can assert that they are confident that USD-LIBOR will stay representative for more than 2 years while a couple of months ago they said that they would provide information about non-representativeness in 2021 by the end of 2020. A potential "synthetic LIBOR" may be decided after those dates (depending on the FCA getting the power from the lawmakers). But this would not be a true LIBOR from an economical or quantitative perspective. The potential synthetic LIBORs by FCA are for GBP, JPY and USD 1, 3 and 6 months. The debate about pre-cessation trigger that was considered as " essential " a year or so ago turn out to be a nothing-burger. The a...

LCH has published a new circular related to the transformation of LIBOR related contracts at cessation . I commented earlier on the issues in my post Wow! - LCH plans Libor swap switch to RFRs and CME steers away from ISDA fallback . With the further document published by LCH, a further discussion on the subject appears timely. Before discussing the LCH solution, we should review why we are there. The need of a "solution" is because the fallback proposed by ISDA is ill-conceived from a risk management perspective. This is not a surprise. The different consultations and analysis have probably been done from a legal point of view but from the start the risk and valuation aspect has been neglected. I have been one of the first, but certainly not the only one, to point to those issues. My blog from 26 July 2018 ( Consultation on IBOR fallbacks: Question 1 ) already points at the issues that will lead to the need of a "solution" from LCH. After that original fallbac...

The Working Group on Sterling Risk-Free Reference Rates has proposed a document on the transition for GBP LIBOR ICE Swap Rate . Such a transition discussion has been required for a long time. See for example my post from 2019: ICE Swap Rate fallback?   and ICE Swap Rate fallback? What is proposed is in line with what I explain to clients over the last years on what could happen.  The proposal by the working group is a simplified approach as it try to approximate a complex situation where conventions are not the same between OIS and LIBOR swaps. Below is a slide from my standard presentation on the issue. Anything in red is different between the two world, i.e. every thing is different in term of dates and accrual factors. The only parts that are the same are the generic symbols for sums, forwards and discount factors. Unfortunately, once more, "LIBOR means LIBOR" cannot be considered as a true statement. The proposal by the working group is a workaround due to a situ...

Risk published today an article titled " Cherry-picking fears [...] Isda protocol and traders warn of gaming the system " Some extracts of the article are: "[...] may have realised that signing left them in a difficult commercial position as they’d effectively made a free offer for their counterparties to adhere to [...] if and when it suits them,” says [...]. “Yet those banks couldn’t force anyone to adhere or agree bilaterally to [...] – so the protocol was operating on a one-way basis [for them].” this means the signed-up banks have essentially given clients a free option that allows them to cherry-pick by working out if they’re going to win by adhering to the protocol or not. “Imagine you have a large portfolio involving two counterparties who are hedging each other, and your risk-sensitivity exposure is at zero. You have $1 billion coming in on one side and $1 billion coming out on the other side. You’re thus perfectly hedged – until one counterparty suddenly stops ...

Over the last couple of years, I have publish several technical working papers and opinion about the LIBOR fallback. The proposed ISDA fallback mechanism is composed on two parts: a floating rate and an adjustment spread. As demonstrated for a long time, the floating rate mechanism is ill-designed. I refer to my post on CCPs steering away from it . I have also for a long time warned about the spread in the LIBOR fallback, e.g. in an opinion published in Risk.Net: Signing the LIBOR fallback protocol: a cautionary tale . The spread is a technical mechanism to have a rate, but is certainly not fair in any sense of the term for legacy contract. Unfortunately up to now it was difficult to have a direct reference to make the spread more fair in USD. In EUR one could refer to EUR-EURIBOR and in JPY one could refer to JPY-TIBOR. In USD there is since a couple of years the IBA Bank Yield Index but it is not yet an official benchmark, only an indicative information. Today, Bloomberg has announ...

The Bachelier Finance Society has published today its BFS-Newsletter Vol. 13 No. 1 I had the honor to be invited to write the Leading Article for the newsletter: Failures in Benchmark Transitions

Below are my answer to the "Public consultation by the working group on €STR-based EURIBOR fallback rates". As previously mentioned, I  believe that the consultation was deeply flawed with incorrect statements and unproven claims. Some technical analysis of one of the incorrect technical description of one of the conventions is available in a working paper available on a preprint server: Description of overnight floaters with principal adjustment and its advantages . An earlier version of the document has been sent to the official ECB email address related to the RFR working group. No answer has been received yet, which I presume means that the agree with the analysis but do not wish to comment about it. The answer to the consultation had to be provided in an Excel sheet. This means that the answers are difficult to write and difficult to read. Moreover the mechanism limited the potential answers to some of the questions to a restrictive predetermined set. I have done my bes...