Marc Henrard - Multi-curve framework

Following recent regulatory guidance in the US , announcement by Barclays that it had reduced its regulatory assets by USD 113 billions , and last year switch by UBS that saved USD 300 millions in capital, I though it would be useful to give it a quant perspective to the settle-to-market question. The centre of the question is to know if the VM mechanism in cleared derivatives is a “ settle-to-market ” or a “ collateral ” process. This is only a wording question, but what is the quantitative finance perspective? In both cases, the valuation fall in the generalised collateral framework. I use my “ Multi-Curve Framework with Collateral ” paper from 2013 as a representative example of that framework (also described in my multi-curve framework book). It’s starting point is, in all cases, The price process is constant at 0. That is a perfect example of settle-to-market. The continuous dividend/pay-off is a mixture of change of value dV t and payment linked to a benchmark c t V t ...

Many articles have been published recently about what could happen to the interest rate market if LIBOR is discontinued or at least is not the main rate benchmark anymore. A list of some of those articles is provided below, in no particular order. I link to those articles because I believe it is important to have an open discussion about the subject. It does not mean that I agree with everything that is written in those articles.   The future of LIBOR (FCA, 2017-07-27) No Room for Error: A Misstep in Creating an Alternative to Libor Could Be Costly to Investors (PIMCO, 2017-08) Looking Past Libor: What’s Next for Investors? (PIMCO, 2017-07-27) Bidding A Farewell To LIBOR (Seeking Alpha, 2017-07-30) LIBOR Replacement Plans Bring Regulatory Considerations for Derivatives (Skadden, 2017-08-15) Don't hesitate to add more references in the comments.

What are the qualities required from an interest rate benchmark? What would a great pretender to the benchmark throne look like? The qualities should include (in no particular order)     •    Un-manipulable     •    Observable     •    Tradable     •    Relevant     •    Transparent Un-manipulable This does not need a lot of explanation. If you have to pay for something, you don’t want that a someone else is able to decide how much you have to pay without your say. Observable By opposition to a random number, the benchmark should be based on real economically meaningful items that can be observed by the general public and not only the benchmark administrator. A guess by a self-selected group of benchmark setter, is not an acceptable approach. The best would be to base the benchmark on public information. But there is only...

What are the alternatives to LIBOR?   Sensu stricto : none! LIBOR is a measure of the interbank unsecured lending rates between London banks in different currencies. The reason why the LIBOR benchmarks are replaced, beyond the past history of manipulation, is that the interbank unsecured lending has reduced dramatically. The reduction has reached such an extend that some of the indices do not really make sense anymore. The indices measure daily the average rate experienced by multiple banks for borrowing from their peers at a single point of time (11:00 am). In some cases, the mechanism that is measured take place only once a week or less. If no tree falls in the forest and everybody is listening intently, how do you best describe the average sound? There is almost no way to create a new interbank index due to the lack of underlying market. To the best of my knowledge, nobody is actually trying to propose an alternative interbank term benchmark. In some sense you could argue ...

The first section of my multi-curve framework book is called 9 August 2007. The reason for using such a title for the first section can be visualized in the book's Figure 1.1; the interest rate derivatives world changed on that day. Today it has been 10 years since that day.

Over the last years, I have reported different initiatives around the changes of benchmark interest rate indices. With the announced death of Libor recently accelerated by FCA’s CEO , it is probably a good time to discuss what a good index would be and how the replacement of the current indices could take place. I will present my opinion and suggestions regarding the interest rate benchmarks in a series of blog. Several episode are in the making, and certainly more than one season will be required before the drama unfold fully! The script of the next seasons still has to be written, by the current readers maybe. The series is titled Game of Benchmarks. Game of Benchmarks: a no-fantasy series with no blood and no sex but plenty of greed, manipulation and money. Season 1 - Episode 1: The king is dying. The most important number in the world that nobody knew existed — The king is dying — Where is the successor? The most important number in the world! LIBOR has been ...