Marc Henrard - Multi-curve framework

In my previous episodes on "Making money on LIBOR fallback", I focused on GBP data. For this fourth episode, 4 months after the ISDA consultation results, I will show figures in USD. The situation is not as clear in USD, due to the Fed Funds / SOFR change and the lack of liquidity in SOFR swaps. But at the same time, the spreads are larger and have moved more, and more value has been transferred. The graphs below all refer to USD-LIBOR-3M and Fed Fund rates. I start with the historical data of LIBOR-3M and Fed Funds compounded setting in arrears. The data is provided in the graph below, with the X-axis indicating the LIBOR-3M fixing date. The data last point is end of December, corresponding to the last LIBOR for which we can compute the equivalent overnight compounding setting in arrears at the end of March. The spread is indicated in red. We have also reported the running mean and median for two hypothesis on the look-back period: 10-year and 5-year. As a hypothesis...

The Financial Stability Board (FSB) has send a letter to ISDA about " derivative contract robustness to risks of interest rate benchmark discontinuation . The letter is public and available on the website of the FSB: http://www.fsb.org/2019/03/fsb-letter-to-isda-about-derivative-contract-robustness-to-risks-of-interest-rate-benchmark-discontinuation/ I would like to point to a couple of extracts of the letter than corroborate elements than I have mentioned in previous post. Those elements concern the process that lead to the changes in the fallback definition, and in particular those who have a value transfer impact. In this regard, we encourage ISDA to consult [...] on the key technical details that ISDA’s Board Benchmark Committee will need to decide on before implementation can begin (including the parametrisation of the historical mean/median look-back, and the details of how the credit spread will be calculated and applied over the compounded rate). The importance of t...

For more than a year I have been saying that " compounding fixing in arrears " is not an acceptable fallback mechanism for IBOR rates. In the answers to the ISDA consultation, it appears that I was the only respondent to indicate that he was totally opposed to this methodology. My answer to the consultation can be found on my advisory site. I have published a blog about my question on the mechanism when the consultation was announced in July 2018 and detailed the problems in my quant perspective on IBOR fallback consultation results . Since then I have blogged about it and spoke about it at different seminars and conferences. To date, no public (or private that I'm aware of) comment indicating that there is actually a plan or a workaround to solve the important issues I'm demonstrating have been provided. Following my presentation at the Quant Summit last Wednesday , Risk.net has published yesterday an article on the subject. From the article, I gather that the ...

The results of the ECB-led consultation on term-rates for the EURIBOR fallback have been published . There were no surprise with the results, they were in line with the working group analysis. The most trusted version of the overnight derivative based term rate is the OIS quote version and the majority of the respondent believe that such a term-rate benchmark is not only feasible, but " essential " or " desirable ". This results may be seen as in opposition to the results of the ISDA consultation on IBOR fallback where a compounding setting in arrears was selected. To my opinion, there is no clash in the answers, only clash in the questions! The ISDA questions were, even if not explicit in the questions but implicit in the document, conditional to ignoring the main drawback of the option that was selected by the majority and conditional to proposing a limited selection of options, in particular excluding one of the natural approaches that was the subject of the...

An update on my basis position inspired by fallback expected spread adjustment fallback procedure and value transfer. I took the position three months 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 28 February), 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 17.75 Libor 6M - Libor 3M 5.90 8 to 16 7.60 7.60 Libor 6M - Libor 1M 12.20 14 to 25 13.80 13.50 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 e...