SOFR: multiple basis

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:
  1. LIBOR leg with EFFR collateral (LCH, CME, bilateral)
  2. OIS-EFFR leg with EFFR collateral (LCH, CME, bilateral)
  3. OIS-SOFR leg with EFFR collateral (LCH, bilateral?)
  4. LIBOR leg with SOFR collateral (CME in basis swaps)
  5. OIS-EFFR leg with SOFR collateral (CME in basis swaps)
  6. OIS-SOFR leg with SOFR collateral (CME)
  7. Futures-LIBOR with 0 collateral (CME)
  8. Futures-EFFR with 0 collateral (CME)
  9. Futures-SOFR with 0 collateral (CME, ICE)
Hopefully, we will be soon able to add the Risk-based OIS futures, which present a mixture of zero collateral in their futures phase and overnight collateral in their cleared OTC phase.

In theory that would be enough information to calibrate convexity adjustment models for change from one collateral to another. In practice, there is not enough liquidity yet to obtain meaningful results. We are entering an interesting era where the answer to the question:


Multi-curve framework: double or quits?


is more and more:
Double!


Comments

Post a Comment

Popular posts from this blog

Multi-curve framework book: new edition in progress

Image
Subject: Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, and Implementation It has been more than 10 years since I wrote the first edition of the multi-curve framework book. What happened in those 10 years? Why did it take me so long to start a new version? It took me roughly 10 years to write the first edition. The reason it took so long at that time, was that I did not know that I was writing it! I thought I was writing a couple of pages on an obscured and theoretical idea that there was not a `` one curve to rule them all '' but multiple curves. It turned out that it became the actual practice for very clear and important reasons. That was the excuse for the first edition, what is the excuse for the second edition? Since the first edition, many things happen, in particular: March 2015: BCBS - IOSCO: margin requirements for non-centrally cleared derivatives and mandatory variation margin July 2017: The future of LIBOR -- actually it
Read more

Rigged: part 1 - Will there be a part 2?

Image
I have been reading book “Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial” (Andy Verity, Flint, June 2023) for some time. It was published several month ago, but I just finished it. To my defence, I have to say that I don’t feel comfortable reading fiction where the “bad guys” are systematically winning by cheating. The book is the story of the miscarriage of justice done in the LIBOR manipulation story. The book content did not surprise me. For anybody having worked on a (swap) trading desk, it is clear that what was described by the accusation was impossible. It is not possible for some middle level trader to create a multi-year, multi-desk, multi-bank international conspiracy over open lines, broker lines, on open offices etc. without all around them, including compliance and senior management to be fully aware of what is going on. Moreover the regulators cannot be ignorant of the situation, except pleading complete in
Read more

A personal statement on the IOSCO Statement on Alternatives to USD Libor

IOSCO has issued a document called “Principles for Financial Benchmarks” in 2013. As such it acted as an (unofficial/unelected) lawmaker. On 3 July 2023, the same IOSCO issued a “ Statement on Alternatives to USD Libor ”. The Statement looks like a tribunal judgement from a trial with no public hearing, no witness, and no defense right from a tribunal with no mandate to judge. And publish on the day before Independence Day! Some personal comments on the document. Transparency The statement indicated “Administrators should consider whether to improve the transparency of their rates". The IOSCO document lack minimum transparency. It does not indicate in any way the “varying degrees of vulnerability of concern“ of the analysed benchmarks. The name of the benchmark are not even indicated. This creates a culpability by association to all non-SOFR benchmarks. The statement refers to a Review of Alternatives to USD Libor ; to my knowledge, the review itself is not available. The st
Read more