Marc Henrard - Multi-curve framework

The Federal Reserve has manipulated SOFR again. This time not by replacing the actual trade data by a survey of dealers but by directly trading will dealers at off-market prices. The bail-out trades (overnight repo operation) have resulted, as intended, in lower reported SOFR rates. It is true that the rates were originally distorted higher due to government intervention, and the Federal Reserve, an other government body is intervening to distorted the rates lower. The results of all those interventions and distortions is that we don't know where the market really is. And the regulators are pushing for this heavily distorted number to be the base of the interest rate market. What could go wrong with such a system? As I'm at it, the CCPs are pretending that they can summarised all those distorsions into a big bang change from EFFR to SOFR for collateral PAI and discounting using a simplistic valuation mechanism for compensation. And ISDA is asking how to compute the sprea...

CCPs have announced their plans regarding ESTR swap clearing. Some plans are described in a Risk.Net article titled " LCH sets €STR swap clearing launch date " (subscription required). Some of the claims there exhort me to react: 1. On the valuation and margining side, the fixed 8.5 basis point spread between Eonia and €STR means that we think it’s possible to use Eonia as a proxy for €STR as a risk factor. Whitehurst says. For the valuation, I agree: in October, EONIA will be equal to ESTR+8.5bps, so you can convert from one to the other. For the margin side (initial margin), it seems that they use logic in the wrong direction. You can use ESTR history (that does not exists yet) to predict the future of EONIA (that will soon stop to exists but in the mean time is related to ESTR). You cannot use the EONIA history (that was not linked to ESTR) to predict the future of ESTR (that will start to exists in October). I don't say that it is ...

One of my recent papers related to the LIBOR fallback has been accepted for publication in Wilmott Magazine LIBOR: Don't fallback, step forward The paper will be published in the November 2019 issue. I will present the main results at a CQF Institute seminar on 18 September 2019 . Abstract There is a general consensus that LIBOR's publication will be discontinued in the coming years. The best preparation for the discontinuation is to transition all trades, new and legacy, to different benchmarks. The option of last resort is to rely on the fallback language of existing contracts. The language for derivatives is currently not fit for purpose and is in the process to be reworded. In recent months several fallback-related consultations have taken place. The theme of this article is the fallback proposals. To the author point of view, the proposals are not satisfactory; the main proposal is not achievable in practice and a fundamental revision of the fallback's foundati...