Marc Henrard - Multi-curve framework

The letters " IB " in LIBOR stand for InterBank . The LIBOR fixings are suppose to represent the rate in the interbank market, with its pure interest rate component and its credit risk component. The spread between the LIBOR of a given tenor and the OIS rate for the same tenor can be viewed as a proxy for the credit quality of banks. In the August to October period, the spread GBP-LIBOR-6M/OIS-SONIA-6M has been between 17 and 19 basis points. From the end of October to today, the spread has increase from 19 basis points to 30 basis points. On the 3M side, the spread had been between 9 and 11 basis points and increased from 11 to 20 basis point in the same two-month period. In the same period the stock market was tumbling (the FTSE 100 lost more than 10% in the same period) and CDS indices spiking. That make sense as there is a high correlation between low stock prices, high credit spreads and higher default rate. But what happened to the basis spread for 30Y-tenor swaps LIBO...

Four documents related to the IBOR fallback have been published a couple of days ago: - Anonymized Narrative Summary of Responses to the ISDA Consultation on Term Fixings and Spread Adjustment Methodologies prepared for ISDA by The Brattle Group - LCH’s position in respect of ISDA’s recommended Benchmark Fallback Approaches - CME Group Supports ISDA’s LIBOR Fallback Provisions - Second public consultation by the working group on euro risk-free rates on determining an ESTER-based term structure methodology as a fallback in EURIBOR-linked contracts Those documents are welcome as they clarify the results of the ISDA consultation and the CCP positions. I will start with the CCP side. To my knowledge, this is the first time CCPs provide an explicit document related to the fallback. Up to now there were only informal " ISDA is liaising with the CCPs ". The content of CCP notes can be summarized as CCPs will adopt the new rules, but reserve the right not to do it and if a ...

More than 10 years ago, I proposed a (slightly) exotic product that I called Floored Instrument on Rolled Deposit , abbreviated with the eye catching name of FIReD. If the ISDA Fallback procedure is decided as announced recently with the adjusted RFR based on compounded overnight setting in arrears, my fictional FIReD will become a very common product. All IBOR cap-floors will be on FIReD. To explain this statement, I need to step back a little bit. FIReD A first version of the working paper describing the details of the product was published in 2005 ( SSRN: https://ssrn.com/abstract=888484 ). A related article was published in Journal of Risk ( Skewed Libor Market Model and Gaussian HJM explicit approaches to rolled deposit options , The Journal of Risk , 9 (4), Summer 2007). The idea of the product is the following: Money is invested at a given benchmark rate, let say overnight, for a long period with capital plus interest reinvested (compounded) at the end of each benchm...

A quick update on my basis position. I took a position on a basis swap where I pay LIBOR-1M v receive SONIA + spread on a 30-year tenor for a notional of 1m. The spread is at 13.45 bps. First an update on the different spreads (as of Friday 14 December), with in order, the figure before the announcement, the analysis prediction, the figure on the date I took the position and the figure today Name Announcement Prediction Position Today Libor 3M - SONIA 22.50 9 to 18 19.65 19.35 Libor 6M - Libor 3M 5.90 8 to 16 7.60 8.00 Libor 6M - Libor 1M 12.20 14 to 25 13.80 14.20 In all cases the spreads continue in the direction predicted by the analysis. For my position, there is not a very large movement yet. From 13.45 to 13.15, only 0.3 basis points gained. This is on top of the 2.75 bps that would have been the profit if I had open the position on the d...

"It is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product." Richard J. Sullivan United States Circuit Judge 30 November 2018 This is an interesting statement from the judgement in the United States in the case "CFTC versus Wilson and DRW" ( full text available here ). The text of the judgement provide a (surprisingly?) good explanation of derivatives market, including convexity effect on futures. The judgement relates to IDEX 3-month futures. Those futures are not traded anymore since 2011. The text includes consideration about variation margin, basis risk, PAI, convexity adjustments, and futures design. The background is a badly designed swap futures where some participants notice the bad design and its implications while others didn't. The marketing of the futures claimed that " IDEX IRS futures are designed to be economi...