Marc Henrard - Multi-curve framework

A couple of weeks ago, CME announced that they cleared their first SOFR-linked swaps . The first trades where cleared by BNP Paribas, Credit Suisse, J.P. Morgan, Morgan Stanley and NatWest Markets. The total notional was USD 200 million without details on the type of swaps or their maturity. The main difference between the SOFR-linked swaps cleared at LCH and those cleared at CME is the Price Alignment Interest (PAI)/collateral rate. For LCH it is EFFR while for CME it is the SOFR itself. Both CCPs accept OIS (Fixed v SOFR) and basis (LIBOR v SOFR and EFFR v SOFR). Also LIBOR, EFFR and SOFR futures are traded. This means that now we have the full spectrum of legs types, PAI and adjustments: LIBOR leg with EFFR collateral (LCH, CME, bilateral) OIS-EFFR leg with EFFR collateral (LCH, CME, bilateral) OIS-SOFR leg with EFFR collateral (LCH, bilateral?) LIBOR leg with SOFR collateral (CME in basis swaps) OIS-EFFR leg with SOFR collateral (CME in basis swaps) OIS-SOFR leg w...

The ISDA Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW closed yesterday. I have send my answer to the consultation last week. The document of my answer can be found below. Marc Henrard answer to ISDA consultation on IBOR fallbacks.

The deadline for the responses to the ISDA Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW has been extended. The date has been changed from Friday 12 October to Monday 22 October 2018. You still have the week-end to read the documents and answer to the consultation.

I will start with my usual rant about " risk free ". SONIA is based on unsecured transaction and is credit risky. Not risk free on the credit side. A term rate is, as its name says, fixed for a term and the value of a term instrument changes when the market changes during that term. Not risk free on the market side. I cannot understand why this incorrect terminology of " risk free " is so widely used while plenty of correct and more meaningful terminology are available: collateralised rate , overnight-linked rate , overnight-indexed rate , derivative term rate , alternative rate (I don't like alternative rate too much either, it opposes the current name to a previous approach instead of positively describing the present, but it is better than risk free), IBA (ICE (InterContinental Exchange) Benchmark Administration; I like those acronyms based on acronyms) is launching a "ICE term RFR" . The term rate is based on futures prices. The first version ...

I have received numerous feedbacks on my " Quant Perspective on IBOR Fallback Proposals " document. I have updated the document and a version 1.1 is now available on SSRN: https://ssrn.com/abstract=3226183 Don't hesitate to contact me for discussion about the subject. Convexity adjustment for Option 1: Spot Overnight Rate. See the note for the details.

The US Fed has hiked rates several times in the last year. What was the market's expectation for those hikes six or twelve month before they happened? To estimate that, you can ask many market participants about their expectations every day and then average the answers. This is the polling approach. Instead of asking where their mouth is, you can also look where their money is. Interest rate derivatives are the most liquid financial instruments, worth a lot more than many mouths. How do you read the market expectation in derivatives? The overnight-indexed swaps (OIS) are linked to the Effective Federal Fund Rates (EFFR). Those swaps are liquid and usually trade with standard tenors like 1, 2, 3-months. It is possible to extract from those instruments the market expectation about futures rates. This can be done in a systematic way using curve calibration on those OIS with interpolation mechanism that imply constant rates between FOMC meetings and allows for jumps on those dates. ...

Some years ago I proposed an innovative design for risk-based swap futures. I worked with ASX to adapt it to the AUD BBSW swap market and a product based on that design has been traded on the exchange since 2016 (even if it has not attracted a lot of trading activity). With the new importance of overnight benchmarks, the ETD market has to find a product that could be used for price discovery and risk management of the full term structure of interest rate. I have detailed a version of the generic futures design to match the overnight conventions and OTC markets. The product has been presented to the main interest rate futures exchanges in Europe and the USA. We will see if it takes a new life. The technical details are now available in the form of a note. The document can be downloaded from SSRN at https://ssrn.com/abstract=3238640 . In the graph below I have displayed the convexity adjustments between the ETD futures and the OTC swaps that can be obtained with this design (i...

Game of Benchmarks: Season 2 Game of Benchmarks: Season 2 - Episode 3: Timing   Question related to: Description of Adjusted RFR - Fixing timing The simplest option for adjusted RFR in the ISDA IBOR fallback consultation is Option 1: Spot Overnight Rate. The option simply replaces an IBOR fixing on a given date by an Overnight fixing on the same date. Even this simplest option has to be assessed carefully in term of practical achievability. The overnight rate are known only at the end of the fixing date or the next day in the morning while the IBOR fixing are known shortly after 11:00 am. Is there some provisions in some derivative contracts that would require to know the fixing by 11:00 am? For example the cap/floor are exercised — even if it is automatic exercise — at 11:00 am. Can the exercise mechanism be delayed to the end of the day or even the next day? The fallback provision should describe what would happen to the contracts that have a tied schedule linked t...

The market infrastructure for interbank lending and derivatives has dramatically changed over the last ten years. The interbank lending is done now mainly on a secured basis. Derivatives are margined daily with variation margin guaranteeing the full present value of the trades. The world of interest rate benchmarks is also rapidly changing with the possible discontinuation of the IBOR benchmarks that have reigned on the benchmark kingdom over the last 30 years and the emergence of secured rate overnight benchmarks. All derivative users are now well aware of the difference between overnight-indexed swap (OIS) rates and term LIBOR deposit rates even if its discovery may have been sudden to some market participants in 2007. When we combined the secured term lending, the collateralised derivatives and the secured benchmark, what is left of the OIS-term deposit difference? This is the question I try to answer in a brief note now available on SSRN at https://ssrn.com/abstract=3258690 U...