Marc Henrard - Multi-curve framework

The two main clearing houses for USD OTC interest rate contracts (LCH and CME) have announced that they will start clearing SOFR indexd swaps in the third quarter of 2018. The announcement was discussed in the following Risk.net article: LCH and CME to start clearing SOFR swaps in third quarter . Even if the clearing of SOFR swaps becomes available, users will have to wait a while for the full effects of the new rate to appear in the market. As envisaged by the Alternative Reference Rates Committee (ARRC), the Fed Funds rate will continue to be used to calculate the price alignment interest, i.e. to pay the interest on the variation margin. This means that for the moment, one would not be able to price and risk manage SOFR OIS without having a full term structure of the Fed Funds OIS. The SOFR OIS will move from the status of non-existence to the status of second class citizen of the OTC market world, but not yet to first class citizen. This is not a surprise as the transition...

With the recent changes in market infrastructure and in the regulatory framework the importance of overnight benchmarks has increased in the last years and is expected to increase further. With that increased importance, the market will look for source of liquidity for overnight based derivatives beyond the traditional OIS. In its document on SONIA as the RFR, the The Working Group on Sterling Risk-Free Reference Rates calls for the development and promotion of interest rate derivative products which reference the RFR, including the design of a futures contract . At a couple of days interval, CurveGlobal and CME have announced their plans to launch new overnight benchmark based futures. In the case of CurveGlobal, the futures is called Three month SONIA futures. The launch is planned for Q2 2018. In the case of CME the futures is called CME Three-Month SOFR Futures. The launch is planned for 7 May 2018. The CME futures is based on the Secured Overnight Financing Rate (SOFR). The SOFR...

The Secured Overnight Financing Rate (SOFR) has now been published by the Fed New York for a week. Time for an early analysis. The data published does not only consists of the benchmark rate itself which is a median rate of the data collected, but also the 1, 25, 75 and 99% percentiles. From that information, we can see that 50% of the rates captured are outside a 10 basis points band around the published rate. For the Effective Fed Fund Rate (EFFR), the 50% band is only 2 bps. What is the origin of this larger dispersion of rates for the SOFR rate? Maybe the daily publication of the figures will increase transparency in that particular market which will lead to the narrowing of the dispersion? We will see if this is the case in a couple of months. Another type of explanation for a larger diversity of rates could be the existence of a bid-offer in the SOFR underlying data. The Effective Fed Fund Rate is calculated on overnight federal funds transactions, which means that the transacti...

The first value of the Secured Overnight Financing Rate (SOFR) benchmark has been published today by the New York Fed. The page for the rate is: https://apps.newyorkfed.org/markets/autorates/sofr A new benchmark that is expected to play a role in the Games of Benchmarks . The first value of the benchmark, for overnight rates between Tuesday 2 April and Wednesday 3 April, has been fixed at 1.80%. For the same period, the Fed Fund Effective rate has been fixed at 1.68%. This means that the secured rate is 12 basis points above the unsecured rate! Note that like for some other overnight rates,  the new benchmark is based on rates for trade on the start of the overnight period but only published the next day. It is difficult to understand why, in this era of real time and supercomputers, it takes so long for the publication of the rate. Even LIBOR that is probably not a paragon of virtue was published as soon as computed, around 11:00 a.m. London time. Note that SONIA, when it ...

A couple of years ago, I have posted a blog called Continuous dividend v cash flows . With the generalisation of Variation Margin (VM) collateral, the derivative world is not driven anymore by discrete cash flows but by continuous dividend. Due to practical constraints, the VM is paid with a one day delay. This delay reduces significantly the effectiveness of the margin process as credit risk exposure reduction mechanism around the trade cash flow payments. The above blog presented an efficient and simple approach to bring back the effectiveness of the VM process even around trade flows dates. The approach is based on the usage of a forward valuation in the VM computation process. Since then, the research related to the spike of counterparty exposure has earned to its authors the Quant of the Year award. In the award winning paper ( Does initial margin eliminate counterparty risk? ), the authors have introduced my proposal in one of the conclusion paragraph. In its Guide on assessmen...