Marc Henrard - Multi-curve framework

In my previous blog , I indicated that I was surprised by ISDA decision to use ‘historical mean/median approach’ for the spread adjustment. I also indicated that this fallback method will create some value transfer between the different sides of the existing trades. To my opinion, that value transfer will not take place at the discontinuation announcement date but at the fallback methodology announcement date, which is now. The full details of the exact spread computation methodology have not been announced yet, but we can already check some ballpark figures. I have looked at the GBP figures. The reason is that in USD there is no historical data for SOFR (not the multi-year history required by the methodology) and no liquid SOFR-OIS trading and in EUR, the new benchmark is not even published yet. I start with the LIBOR-3M/SONIA spread has this is the most liquid SONIA spread in trading. My analysis start from the hypothesis that the LIBOR will be discontinued on 1-Jan-2022. The an...

ISDA has published Preliminary Results of Benchmark Consultation . As expected, the majority of respondents preferred the ‘compounded setting in arrears rate’ for the adjusted risk-free rate (RFR). This is to my opinion an error, as detailed in my Quant Perspective . The proponent of the method have not yet detailed how it would work in practice for instruments that require an immediate settlement (FRA, IBOR in arrears, range accrual, etc.; a minority of trades but not a small amount) and vanilla instruments with non-good business day adjustments (the majority of trades). The ISDA statement indicates that " as part of that decision, the ISDA Board Benchmark Committee will set out the details related to the adjusted RFR and spread adjustment that remain outstanding ". Hopefully, the details related to the dates question I have mentioned in my answer to the consultation will be provided. The second part of the consultation provided an answer that I was not expecting. The sp...

Mandatory arbitrage Belgium is now imposing mandatory arbitrage in retail. I concede that this is a 2 cents (0.02 EUR) maximum arbitrage by transaction, but an arbitrage nevertheless. The arbitrage is imposed on retailer by forcing them to issue free option with each retail transaction. There is no limit to the number of transactions by customer and retailers cannot refuse the transaction (and the arbitrage). The mandatory free option was proposed by a Belgium vice-premier and minister of Economy ( Kris Peeters ; one of the top 5 minister in Belgium) and approved by the Council of Ministers. Obviously the minister press release does not describe his decision like I did. It is presented as a simplification measure without impact. The press release even indicate that "on average the consumer will pay the same amount". According to the press release, the ECB shares the analysis (I would like to see the analysis). The press release (in French) can be found here: http://ww...

In the IBOR fallback issue, there are different criteria we would like to impose in order to obtain a clean fallback. Among those criteria are the absence of value transfer and the coherence (IBOR is IBOR). The fallback procedures proposed in ISDA consultation rely on the replacement of each IBOR fixing by an RFR-linked rate plus an adjustment spread. The existence of CCP basis (and bilateral to CCP basis) which is potentially different between LIBOR products and OIS products leads to the following paradox: if we want to achieve the absence of value transfer, we need to select an adjustment spread that is different for the same IBOR and RFR depending on the clearing location, which is a violation of the coherence criterion. If we keep coherence, we have the same spread and consequently there is a value transfer. Where is the paradox coming from? I would say that it is coming from a misunderstanding of the OIS discounting formula. The formula is written as (see Formula 8.6, based ...

The Japan Banker Association (JBA) has published its Comments on the Consultation on Interbank Offered Rate (IBOR) Fallbacks for 2006 ISDA Definitions . Their comments are similar to the ones I mentioned in my Quant Perspective on the major issues: Forward-looking term rates we believe that ISDA should carefully consider how the development of forward-looking term rates will have impacts on the fallbacks for derivatives This is in essence equivalent to my Option X1: OIS Benchmark but expressed in a different way. The existence of the working group on GBP end EUR on the specific subject of the term rate RFR was already an indication that the decision of ISDA of not including the option in its consultation is not the first choice by all market participants. We have now also a similar opinion on the JPY side. Not achievable option There may be some cases (for example, in LIBOR in arrears swap) where it is unable to complete the fixing in time for floating rates payment....

Yes, I said decreasing . Nowadays nobody is interested by real time news. Receiving yesterday news today in the morning is what is required. A least that is the impression I get when looking at the RFR new benchmarks and their publication dates. Old New Currency Name Lag Name Lag USD EFFR T+1 SOFR T+1 GBP SONIA T Reformed SONIA T+1 EUR EONIA T ESTER T+1 Why publishing the result related to data collected immediately when one can sleep on it overnight? There is obviously the risk that insider information can be used in the mean time, but we would stay up at night for such a triviality? Chacun sa méthode... Moi, je travaille en dormant et la solution de tous les problèmes, je la trouve en rêvant. (Personal translation: Each his own method... Myself, I work sleeping and the solution to all problems, I find it dreaming). Drôle de drame (1937) - ...

I continue my quest related to the IBOR fallback issue. I still fail to understand the precise meaning of the " Compounded Setting in Arrears " option for derivatives subject to the fallback. I have contacted several people at ISDA ( as reported here ) and others that are mentioning this option. I have not yet received a clear answer to the issues I have reported in my " Quant perspective on IBOR fallback " and in my answer to the ISDA consultation. The dates between the IBOR underlying deposit and the derivatives do not match in all cases. How do you pay an amount before you know how much you have to pay (the time difference can be as long as the IBOR tenor)? The answers I received are some version of " To be decided ", " The impacted trades will mature before the discontinuation ", or " The term sheets will change in the mean time ". All of those answer do not answer the content of the question: To be decided : No! The details h...

Risk published an article on the different initiatives related to the term RFR rates: Search for term Libor replacement hits twin barriers (subscription required). I was interviewed by Risk a month ago on the subject of the term RFR rates and the IBA "ICE term RFR" based on SONIA. I also posted a blog on the subject a month ago: ICE Term Risk Free Rates . Risk magazine quoted me saying (yes this is me quoting someone quoting me): “The futures have a fixed start date and end date; say from 1st of month to 1st of next month. What we need for term benchmarks is from today to today plus one month or three months, for example, from November 11 to December 11. How do we extract that information from the futures? We have to get part of the information from the November 1 to December 1 futures and part from December 1 to January 1. How this is done is subjective and depends on information that is not visible in the futures market,” says Marc Henrard, head of quantitative research ...

I'm proud to announce that my appointment as Visiting Professor in the University College London -  Department of Mathematics has been extended to May 2021.