Marc Henrard - Multi-curve framework

Vers un certificat PEB obligatoire pour tous les logements en Belgique ? ” Tel est la question posée dans un article de la RTBF  sur base d’un avis du “ Conseil central de l’économie ” (CCE). Le texte du CCE est disponible à https://www.ccecrb.fgov.be/p/fr/1296/renovation-de-logements-un-besoin-urgent-de-sensibilisation-d-informations-claires-et-de-regles-uniformes/10 Ceux qui me connaissent savent que j’ai déjà une réaction quand je lis “conseil central”. Et quand je lis la proposition d’un certificat PEB obligatoire, je ne peux m’empêcher de penser “ loi de Campbell ” Plus un indicateur social quantitatif est utilisé comme aide à la décision en matière de politique sociale, plus cet indicateur est susceptible d'être manipulé et d'agir comme facteur de distorsion, faussant ainsi les processus sociaux qu'il est censé surveiller. et “ loi de Goodhart ” Toute régularité statistique observée tend à perdre toute crédibilité dès qu'elle est mise sous tension à des fins d...

" La Banque nationale de Belgique s'attend à une perte de 3,7 milliards en 2024 " S'attend? Nous sommes le 17 janvier 2025, l'année 2024 est finie depuis longtemps, d'où vient l'incertitude? Je sais que les prévisions sont difficiles, surtout quand elles concernent le futur. Mais ici on parle du passé. Quand j’étais trader sur un desk de taux, il y a plus de 15 ans, les profits (P/L) on les calculait chaque soir avant de quitter le desk et on vérifiait avec le rapport de middle-office le matin. La puissance de calcul a-t-elle tellement diminué depuis? Il faut plus de temps pour faire les multiplications et additions? Exactement le même titre et le même texte dans les 2 journaux belges francophone principaux – “par Belga”. Pas une analyse, pas un journaliste qui fait une remarque, pas de quatrième pouvoir! Si ce n’est ce blog insignifiant que vous êtes en train de lire? Journalism is printing what someone else does not want printed; everything else is pu...

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 ...

Dans un récent article de l’Echo ont lit “S'exprimant dans l'émission "The Market" de la VRT, Pierre Wunsch, le gouverneur de la Banque nationale explique que les banques disposent encore d'une marge financière pour augmenter leurs taux d'épargne. Et d'ajouter: "Elles le feront, pas à grande vitesse. [...] "Emprunter de l'argent coûte aujourd'hui aux banques 4%. Nous ne cessons de répéter qu'elles ont des prêts hypothécaires dans leur bilan et qu'elles ne peuvent donc pas offrir un taux d'épargne de 3 ou 4 % à tout le monde." Les paroles du gouverneur mènent à une conclusion: il est incompétent comme banquier ou il est incompétent comme régulateur (ou logique, non-exclusif). Il reste aussi la possibilité qu’il soit malhonnête intellectuellement et qu’il mente, mais je ne peux personnellement envisager une telle hypothèse. Il est possible qu’il soit incompétent comme banquier et il ne comprends pas la gestion ALM d’un...

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...

The most boring, but the most read, document I ever wrote was the Interest Rate Instruments and Market Conventions Guide . The document is more than 10 years old and requires a serious update. One thing that does not require an update is the convention for money market deposit in EUR. The convention is as always ACT/360 simple interest. The official ECB rates are at 4.00%, which means that if you invest today for one year a notional of 100,000 EUR, you get an interest from 15 November 2023 (T+2) to 15 November 2024 equal to 4,066.67 EUR (2024 is a leap year). If a bank wants to trick a retail customer, he can claim that you can get an interest of 4.0556% without telling you that he is using an ACT/365F convention. The amount is the same (up to the rounding) but it sounds a lot better. You will naturally tell me that this is too much of a misleading trick and that consumer protection agencies will see that immediately and remind the bank about transparency and fair advertisement. A di...

IOSCO has issued a document called “Principles for Financial Benchmarks” in 2013. As such it acted as an (unofficial/unelected) lawmaker. On 3 July 2023, the same IOSCO issued a “ Statement on Alternatives to USD Libor ”. The Statement looks like a tribunal judgement from a trial with no public hearing, no witness, and no defense right from a tribunal with no mandate to judge. And publish on the day before Independence Day! Some personal comments on the document. Transparency The statement indicated “Administrators should consider whether to improve the transparency of their rates". The IOSCO document lack minimum transparency. It does not indicate in any way the “varying degrees of vulnerability of concern“ of the analysed benchmarks. The name of the benchmark are not even indicated. This creates a culpability by association to all non-SOFR benchmarks. The statement refers to a Review of Alternatives to USD Libor ; to my knowledge, the review itself is not available. The st...

If you read this, it means that the world has not ended! Good to know the world can exist without LIBOR. Actually some GBP-LIBOR fixing will still be published to the end of March 2024 and some USD-LIBOR will still be published to the end of September 2024 due to FCA use of “Article 23A benchmarks”. Maybe I penciled the wrong “end of the world date” in my calendar! New “real” LIBOR (by opposition to the one invented by FCA) fixings are not published anymore, but old fixings still exists. We can see almost 10 trillions of it in the LCH data of Outstanding IRS. In number for 30 June 2023 on USD 3-month tenor: LIBOR fixing 5.54543 CME SOFR Term Rate: 5.26936 ISDA Spread: 0.26161 “Synthetic” LIBOR: 5.54543 There is a 1.546 bps gap somewhere! Where would that be? According to market rumours, both LIBOR and CME SOFR Term Rate are representative market rate as of 30 June 2023. We can only conclude that ISDA Spread is not a representative market rate. Why it will be used fro...

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...

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...

After some financial fictions, here is a food fiction. Following price manipulation and decrease of volume in cookies, the cookie market is going through a reform. There are always tough cookies. To deal with them, the Factory Cookie Authority (FCA) has decided to ask for more power to the parliament. The proposed power would allow the FCA to impose synthetic prices on cookie contracts. The cookie prices will be based on the flour price plus a fixed spread. The spread has been decided by the International Cookie Dealer Association (ICDA) after a public consultation answered by a less than 100 people, mostly ICDA members. The spread is a fixed number for the next 50 years and is not based on cost of other cookie ingredient, like sugar, eggs, salaries, taxes, but is based some on historical figures selected by ICDA mixing (pun intended) flour, sugar and rotten (i.e. in-arrears) eggs over different periods. Should the MPs vote for such a tough cookie power? Wouldn't that be a tough 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...

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...

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...

There are multiple discussions about bilateral IM for FX forwards and FX options, specially with category 5 coming into play next September. See for example the recent Risk article Margin rules snare FX options user (subscription required). Personally, I never understood why deliverable FX spot and FX forward were excluded from the framework, except perhaps that they had better lobbyists. I don't understand the " spirit " behind that rule. One propose workaround proposed to include some deliverable FX forwards is to use zero collar options to hedge the delta risk, in a way similar to what is done for IR swaps. There is another method that, to my knowledge, has not been publicly discussed before and which is to my taste nicer. And it does not involve options. Instead of a physically settled forward, one can trade a pair of forwards with one non-deliverable forward at the same date and rate one physically settled forward, the strike of which is set on the non-deliverable f...

I'm glad to read that my call for " caution about Signing the LIBOR fallback protocol " have been heard by the Bank of England.  And if you determine the protocol is not the right approach for your particular circumstances, you will need to make clear alternative plans to mitigate the risks. Andrew Hauser, Executive Director for Markets 09 December 2020 Note that the emphasis/bold on " not " in the above sentence is not mine but from the BoE website This message has to be compared to a message from a couple of months ago. So, I hope the message on the importance of signing this protocol is clear. Edwin Schooling Latter, Director of Markets and Wholesale Policy 14 July 2020 BoE and FCA are slowly coming to a message closer to mine: Something should be done. The protocol is one possible choice but not the unique one. You should analyze your particular circumstances before signing. On my side, I would add: There is no urgency in signing the proto...

  United Kingdom: UN expert calls for immediate release of Assange after 10 years of arbitrary detention GENEVA (8 December 2020) The UN Special Rapporteur on torture, Nils Melzer, today appealed to British authorities to immediately release Julian Assange from prison or to place him under guarded house arrest during US extradition proceedings. Details available on the United Nation Human Rights website under the title United Kingdom: UN expert calls for immediate release of Assange after 10 years of arbitrary detention

Since the publication of my latest blog on the ISDA fallback and the associated protocol, I had several discussions about my views and many articles and opinions have been published. In this blog I detail further my (biased) views and also comment on some quotes I have read recently. Preliminary version (2020-11-15). This post is longer that the traditional one because Je n'ai fait celle-ci plus longue que parce que je n'ai pas eu le loisir de la faire plus courte. Blaise Pascal - Les provinciales, lettre 16 (1656) There is a lot to say about LIBOR potential disappearance and associated fallbacks. The need of a better fallback that the one currently in the ISDA definition is acknowledged by all. The current (as of November 2020) ISDA definition fallback is not fit for purposes. ISDA has proposed new definitions that will be effective next year. It also proposed a protocol that would allow market participants to voluntarily change the definition of the legacy contracts (i.e. c...