Marc Henrard - Multi-curve framework

The European Commission has announced in a press release that the EU institutions have decided to delay the entry into force of some regulation related to critical benchmarks and to third-country benchmarks by two years. Some rules have been delayed to 31 December 2021. This delay will in particular apply to EURIBOR, EONIA, LIBOR and STIBOR. For LIBOR it will apply irrespective of the Brexit result. Given the importance of this announcement, in particular for the derivatives collateralized at EONIA (with the mandatory clearing and UMR, this is almost all EUR derivatives), it is surprising that this announcement appears as a single paragraph in a press release on " Sustainable finance: Commission welcomes agreement on a new generation of low-carbon benchmarks ".  The paragraph of significant importance for the many trillion large EUR derivative markets is: Separately, the EU institutions also agreed to grant providers of “critical benchmarks” — interest rates such as ...

Two recent press articles have attracted my attention Risk: Libor may linger as regulators ‘change tune’ International regulators appear to be coming round to the idea that Libor may have to be kept alive to avoid chaos in some loan and bond markets after the end of 2021. Not a surprise there. My opinion, expressed for several years on this blog, is that " Change of benchmark [...] index is a difficult task " (Sep 2014). One possibility for the Fallback, would be to write "multi-stage fallback" procedures. Some of them are described in my quant perspective on fallback . Related to the potential chaos for some loans and bonds, one could imagine the following approach: fallback triggers for derivatives that are more sensitive than the extreme "discontinuation of publication". One such trigger could be a "FCA verdict" as described in FCA: ‘We can be Libor fallback trigger’ (subscription required). Once we know that the derivatives will tr...

LCH has announced that it will merge two steps in the long five step process transition from EFFR to SOFR. The transition as described by the ARRC  included a step (Step 4) where CCP would offer the option to trade (USD) swaps with either EFFR or SOFR PAI (at the member choice). With the EFFR version available only to reduce the exiting exposure. The last step would have been to accept only SOFR collateralised trades and to transfer the remaining trades from EFFR to SOFR collateral. The announced decision that will take effect in 2020 (no precise date yet) will merge those two steps. LCH will use SOFR PAI for all new trades and at the same time transfer all existing (USD) trades from EFFR to SOFR PAI. My understanding is that the existing OIS indexed on EFFR will stay on EFFR for coupon computation purposes but move to SOFR for PAI (and the associated collateral valuation). A value transfer compensation (positive or negative) will be paid to all members and clients for this c...

An update on my basis position inspired by fallback expected spread adjustment fallback procedure and value transfer. I took the position one month ago (29-Nov) 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 of the trade was at 13.45 bps. First an update on the different spreads (as of Thursday 31 January), with in order, the figures before the announcement, the analysis predictions, the figures on the date I took the position and the figures today Name Announcement Prediction Position Today Libor 3M - SONIA 22.50 9 to 18 19.65 18.40 Libor 6M - Libor 3M 5.90 8 to 16 7.60 7.50 Libor 6M - Libor 1M 12.20 14 to 25 13.80 13.70 In all cases the spreads continue to move in the direction predicted by the analysis. For my position, the spread converge slowly but surely to the expe...