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Showing posts from July, 2019

The Fed Manipulated SOFR: the explanation (or not)

On 5 June, I published a post titled The Fed Manipulated SOFR . On 6 June, Risk.Net published an article titled A mystery: Why did the NY Fed use a survey to get SOFR? (subscription required). The Fed corporate communications has published a comment in Risk.Net that is supposed to be a rebuttal of those analysis . I was expecting rebuttal to be an argument on the quality of the market infrastructure put in place but I only heard " you cannot sue us for this issue ". It is true that the information on the production of SOFR is available in the Fed Website . But when the Risk.Net article was published, " A spokesperson for the New York Fed declined to comment. ", proof that it was not obvious even for the Fed; the "comment" referred above was published only on 18 July (more than one month and an half after the data); the CRO of a large bank when asked at an industry conferences said that he had no idea what happened. All those small items are evidences

Thanks for reading!

One of my original papers on the multi-curve framework has now attracted more than 4,000 downloads on SSRN. The first paper was published in July 2007, before the start of the crisis and was titled The Irony in the Derivatives Discounting . The second one, posted shortly after the crisis, was naturally called The Irony in the Derivatives Discounting Part II: The Crisis . My papers posted on preprint servers (RePEc and SSRN) have now attracted more that 50,000 downloads (and my multi-curve blog that you are reading now, more than 86,000 visits). Thanks for reading my Irony !

Answer to the ISDA consultation on LIBOR fallback

My answer to the May 2019 ISDA consultation titled " Supplemental Consultation on Spread and Term Adjustments for Fallbacks in Derivatives Referencing USD LIBOR, CDOR and HIBOR and Certain Aspects of Fallbacks for Derivatives Referencing SOR " is now available. The document has been posted on SSRN with abstract ID 3415930 . It has not been "reviewed" yet but is already available. Comments are welcome! This answer is a follow-up on my answer to the July 2018 consultation on similar subjects .

Holiday effect on SOFR?

On those first day of the summer holiday season and waiting for the 4th of July we can ask ourselves if lenders are all on holiday. As usual, the month-end print of SOFR was higher that other days of the month. The end-of-month, including a week-end, had a rate of 2.50% while Fed Funds were are 2.40%; a 10 bps difference. Nothing unusual. On the first day of the month, SOFR was 3 bps higher that Fed Funds. Nothing unusual. But the 99 percentile rate was 3.85%, 143 bps above the median. This is very unusual. 1% of the notional traded on that day, which amounts to roughly 12 billions, was above 3.85% Who borrowed those 12 billions secured paying so much? On the second day of the month, the print was 2.51%, this is 11 bps above Fed Funds and 1 bp above month-end. This is relatively unusual. The 99 percentile was at 3.10%, 59 bps above the median. This is also very unusual. What will be the print over the 4th July? Should I be ready to incorporate the 4th of July as a seasonal effect i

LIBOR Fallback: is physical settlement an alternative? - Financial fiction

This could be classified as another episode of finance fiction! In this period of consultation related to the LIBOR fallback, I would like to describe an option which, to my knowledge, has not been mentioned yet: physical settlement. It is not new by itself and not a panacea for the fallback, but maybe it could have a couple of niche applications. To introduce that approach, I will take the case of caps/floors. If the fallback mechanism is based on compounding setting in arrears (1), as it is envisaged today, the cap/floor optionality changes dramatically. The current LIBOR caps are European options with expiry on the LIBOR fixing date; the post-fallback caps would become Asian options on the composition of overnight rate between the start accrual date and the end accrual date. This is a significant change in term of complexity and valuation mechanism. By luck, I wrote a formula that can price those instruments in a simple one-factor model more than 10 years ago in Henrard (2007).