Marc Henrard - Multi-curve framework

IBOR transitions (mainly LIBOR transition for the moment) is a huge undertaking for the derivative markets. It implicates many market participants, from large dealer/broker to small end users. Everybody want the transition to be perceived as " fair ". Reading trough the regulator published notes, FAQ and letters, I notice that I don't have the same definition of " fair " than some regulators. This leads to my question in the title: How low is the regulators' bar? To illustrate my point, I will take two examples, one from the FCA and one from the CFTC . The italic texts below are extracts from the regulators and ISDA documents, the regular text are my comments. FCA The FCA published a " Questions and answers for firms about conduct risk during LIBOR transition ". Treating customers fairly when replacing LIBOR LIBOR discontinuation should not be used to move customers with continuing contracts to replacement rates that are ...

This is pure fiction. Any resemblance to real events, situations, or persons, past, present, or future may or may not be purely coincidental. Any resemblance to fictional characters is intentional! Pharaohs and Gods At the time, Egypt was ruled by Pharaohs. When becoming Pharaohs, the human beings were also becoming Gods. They joined the gods like Isis, Horus, Ra, and others. For some time they were both human beings and gods. When their human being bodies died, they were buried but they stayed god forever. The disturbance of the bodily remains of those gods induces well documented curses: the curse of the Pharaohs . Whoever open the God's tombs was cursed for life, usually a very short life. Libor: universal God The curse stroked back three millennia later when a new God emerged: Libor. By opposition to the Pharaohs, Libor was not born in a human body to become god. Libor was fully immaterial, a pure number; even if its representation by human started on a specific date ...

A year ago, I was reporting A two cent arbitrage - free options . When the minister in charge (the minister was then Kris Peters , now member of the European Parliament - Kris Peters ) of "financial products" and financial regulators ( FSMA ) is not a quant, you know you are heading for financial troubles. To make a long story short, since 1 December 2019, in Belgium for each retail transaction, you have a free option. If you pay in cash, the total price is rounded to the nearest 5 cents, if you pay by card, the total price is not rounded (it is a little bit more complex than that but for the sake of a short story, this is good enough). The arbitrage strategy is easy. If the total price of the purchases is ending by 1, 2, 6 or 7 cents, pay by cash and get a 1 or 2 cents discount. If the total price ends by 3, 4, 7 or 9 cents, pay by card and pay the exact price. In case of 0 or 5, do whatever is most convenient. With this strategy, on average (if the last figure of ...

Winter weather in Belgium, but good winter weather! Dry and warm enough for a reinvigorating 18 holes golf. And on top of the good air cake, my best score ever. Started on the hole 1 with an eagle and finished 17 holes later with a gross score of par +1. Enjoying my winter!

A recent blog of mine was titled " Compounded rate out of favour: what now? " In this post, I try to answer my own question by proposing some solution for the loan market. I believe it can accommodate both sides of the issue: having interest rate based on overnight compounding in arrears and at the same time fixed amounts known at the start of the period. Suppose that you had previously a one year loan with floating rate based on LIBOR-3M with payment of interest every 3 months and potential repayment of part of the notional after each of the 3 months periods. What does the bank want: overnight based market risk. What does the bank accept: loan term credit risk on the end user for the stated notional. What does the end user want: floating rate with amounts paid at the end of each 3-month period known at the beginning of the period. Those requirements may appear contradictory but they are not as described here. At the start of the first period, a temporary fixed rate i...

BMR update has been published on 27 November 2019; its main effect that were to take effect one month later have been delayed by 2 years. The full text is available on EUR-lex: https://eur-lex.europa.eu/eli/reg/2019/2089/oj The natural question here is: Marc, have you been asleep since 27 November that you did not notice this very important piece of legislation being published? The answer is: Yes, I have been asleep part of the time, usually at night. Actually I had read the title of that piece of legislation but I deemed it to be of no importance for interest rate benchmark transition. As a (weak) defense to my failure to see the significance of this piece of legislation, I will only present the title of the document published on the Official Journal of the European Union: REGULATION [...] amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks . Yes you read that correctly. A...

This morning I was reading the article in Risk.Net titled Compounded rate out of favour, finds Japan survey published yesterday. My reaction was: I have heard that before, what now? Let me explain this with a little bit more details. For this I need to quote a couple of sentences from the article that are part of the "I have heard that before": A majority of market participants in Japan want to use forward-looking term rates instead of compounded risk-free rates as a reference for new loans and floating rate notes. Similar findings had been obtain for EUR fallback (including derivatives) when the forward-looking term rates were included in the option list. The article then indicates: The preference for forward-looking rates, two dealers say, is due to a lack of familiarity with Japan’s designated risk-free rate, Tonar, coupled with an ignorance of the challenges in developing a robust forward-looking benchmark. This is taking the problem the wrong way. The quest...

The Federal Reserve Bank of New York has requested comments on its Proposed Publication of SOFR Averages and a SOFR Index . The proposal and the request for comments is available on their website at https://www.newyorkfed.org/markets/opolicy/operating_policy_191104 . My comments are reproduced below. SOFR Averages In general, I consider that the publication of official numbers related to payments to be made by end users in financial markets is to be encouraged. In the context of the transition of some financial products to more usage of overnight rates, proposing a ready made composition / average would be beneficial in certain circumstances. Unfortunately the proposed 30, 90, 180-day periods do not correspond to any existing or planned financial product (except in unlikely cases when 1, 3 or 6 month exactly cover that round number of days). The introduction of averages published by an official institution but that do not cover exactly and in all circumstances the requirements of t...

Summary of a recent quanty discussion about LIBOR fallback. How to price a LIBOR payment with the current fallback: Estimate the expectation of the discounted values of question marks. How to price a LIBOR payment with the planned new fallback: Estimate the expectation of the discounted values of the median of future values of question marks strongly impacted by market misestimations. No doubt, we are making good progress!

At the end of November 2018, I took a GBP (paper) position on my view that LIBOR fallback approach will allow better informed participants to make money (transfer value from) the end-users. I have reported on a regular basis about that position in the first six months (see list of episode at the post bottom). One year later, what happen to that view and to my position? I'm happy to report that Saint Nicolas brought me a very nice present ( Saint Nicolas is an important day in Belgium for good kids like me ;)). On 29 November 2018, I wrote The horizon for my position is 29-Nov-2019. Target profit is 5bps x ~2000 GBP/bps = ~10,000 GBP. I cut the position on the earliest of when the market has reached 8.5 bps or on 29-Nov-2019. I'm also expecting a little bit of carry as the current level of realised spread (1 to 3 bps) is below the market basis spread. Where do I stand today? According to my figures, in term of spread convergence, the spread has decrease by 4.5 basis poi...

According to the recent ISDA consultation, the fallback spread above RFR will be based on median historical spread over a lookback period of 5 years. One issue that I did not raised in my answer to the consultation is the definition of median (it was so obvious to me that a median would not be selected, that I did not bother; I know, I was wrong again). The median of a random variable is (see for example the Wikipedia definition ) is any real number m that satisfies the inequalities P( X ≤ m ) ≥ 0.5 and P( X ≥ m ) ≤ 0.5. The tricky part is in the " any " for discrete distribution (like an historical distribution). If there is an even number of days in the 5-year lookback period (the exact meaning of 5-years is still unclear), there are infinitely many of such numbers. With the 7 decimals on LIBOR (5 decimals when expressed in percent) and the composition on many days on irregular period for the overnight part, it is very unlikely that the two numbers in the mid...

EU BMR is in forced since 2018 (with some transition period to 2020/2022). Different rate transitions are expected in the coming years: new fallback definitions, CCP discounting big bang and GBP FRN conversions. For each of those transitions I have questions about the compliance of the proposed solution with EU Benchmark Regulation. I have not received or seen clear indications, e.g. an explicit message from regulators, about the compliance. I have asked those questions in different context, including directly to the regulators in some cases, but have not receive answers. I post the question here in the hope to receive answers. I will add the answers if and when I receive them. 1) Fallback language In the proposed ISDA new definition, a spread based on the historical data computed on the announcement date using 5 year median is used. Are the full 5 years of historical data EU BMR compliant? LIBOR is compliant since 2018, SOFR has been published since April 2018, SONIA has been refo...