Marc Henrard - Multi-curve framework

Today, Andrew Bailey , chief executive of the FCA , delivered a speech related to the future of LIBOR - not to futures on LIBOR ;) The main message was that the FCA will support LIBOR up to 2021 but not beyond and encourage the market to start the transition to alternatives today. Ending the publication of LIBOR by 2021 may be possible. Replacing it in earnest by something else by that date is a completely different task. Swaps have maturities up to 50Y; if you stop publishing LIBOR, parties to the contracts have to use the fall back in the contracts. If you want to replace LIBOR by one new benchmark, you need the agreement of all the parties involved, it means each party to each and every single contract referencing LIBOR has to agree individually. There seems to be an agreement with this in the terms of the speech. I was happy to see that the terms "challenging " and "extremely difficult" were used in relation to the change of benchmark. Even if the "L...

Another look at my forthcoming book cover: the book's title.

A first look at my forthcoming book cover: the book's spine.

As discussed six months ago in my blogs ( here and here ), new benchmark indices mean new trades, new trades mean mandatory margin. If the interest rate benchmark indices like LIBOR, EURIBOR, SONIA, Fed Fund Effective or TOIS are modified or replaced, the contracts referencing them need to be adapted. Those contracts include the CSA referencing those indices as interest rate for cash collateral. Each contract need to be modified individually after agreement of each of the parties in the contract. If a contract is modified, it is considered as a new trade for the regulation related to mandatory margin. For all new trades, a mandatory daily Variation Margin (VM) applies for all counterparties and mandatory segregated Initial Margin (IM) applies for large derivative users, with more and more users falling in that category over time. The logic of the consequence of reorganizing the market infrastructure for benchmarks seems to have finally reached the "lawyers". A recent art...

[...] libraries should be open to all—except the censor. We must know all the facts and hear all the alternatives and listen to all the criticisms. Let us welcome controversial books and controversial authors. John F. Kennedy 29 October 1960

I first discussed collateral square in my 2013 paper Multi-Curve Framework with Collateral . The name collateral square itself had been suggested by Damiano Brigo during discussion on the paper first draft. To my knowledge, the theory behind the pricing of derivatives collateralised by assets that can themselves be repoed was first described in the above paper. It is also described in my multi-curve framework book. The origin of the term "collateral square", which reminds the CDO square terminology, is that the bonds are provided as collateral to the derivative and then the bond is provided a second time as collateral to obtain the required cash; the collateral to the derivative is provided as collateral to a term deposit. A recent article in Risk , titled The price is still wrong: banks tackle bond CSA discounting , describes the recent evolution in the EUR market in which the ON repo rates (for high quality bonds) are well below the EONIA rate, up to 40bps and even severa...