Marc Henrard - Multi-curve framework

Monthly review of ESTR and SOFR volumes. Decent progress in SOFR, no progress in ESTR. It seems that we can not get one month with increase in both. ESTR volumes decreasing with respect to March. EONIA is disappearing by 1 January 2022 with an unmanageable fallback process but the bulk of the EUR OIS volume is still in EONIA! The SOFR volume (ISDA figures based on US regulatory reporting) still indicates less than 3% SOFR/LIBOR ratio.

Monthly review of ESTR and SOFR volumes. Decent progress in ESTR, no progress in SOFR (opposite of last month). The ESTR swap volume over the month has jumped from 250 billions to 557 billions (USD equivalent). The SOFR volume is is slight decrease in March with respect to February. The monthly volume has decrease down to 1181 billions from 1310 billions. The ISDA figures (based on US regulatory reporting) are also stable. SOFR volumne is less than 2% of LIBOR volume.

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...

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...

Monthly review of ESTR and SOFR volumes. Decent progress in SOFR, no progress in ESTR The notional for ESTR is still below December. On the SOFR side the LCH volume is at record level. The ISDA figures show a small increase, but nothing really dramatic. In relative terms, SOFR is still only a couple of percent of LIBOR. Notional outstanding at LCH is LIBOR IRS: 59.2 trn, OIS: 16.4 trn and SOFR: 3.8 trn. Even for OIS, SOFR is still the minority of outstanding volume. Note that this means that there is 12.6 trn of Fed Fund OIS that are discounted at SOFR and hence need a "convexity adjustment" in their valuation and not straight forward use of Fed Fund pseudo-discount factors (see my paper Derivative Pricing with Two Collateral Rates (February 2021, preliminary version) for more details). For more details about the SOFR related volumes, see the Clarus blog: SOFR Futures and Swaps – Feb 2021 .

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...