EU BMR and rate transitions

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 reformed in April 2018. Are the data for those now compliant benchmarks for dates before their compliance date compliant? Are the pre-SOFR data compliant?

2) CCP discounting big bang

The CCPs planned to have a big bang transition for the discounting in EUR and USD. The big bang will result in amount payable based on the CCP curves. The computation of those amount payable are clearly a use of benchmark in the sense of Articles 3, 1 (3) and 3, 1 (7) of the regulation. CCP are exempt from EU BMR compliance for benchmark used for risk management and settlement purposes (Article 2, 2(c)). But the cash compensation is neither of those and is explicitly an amount payable (cash adjustment that is equal and opposite to the resultant net present value). Do the curves used for cash compensation computation need to be EU BMR compliant?

3) FRN transition

In recent example of bond (FRN) conversion from GBP-LIBOR to SONIA, the bondholder accepted transition is often done based on LIBOR/OIS swap basis (at LCH). Those spreads are used to set the coupon and thus the bond's amounts payable. Are the rates of those basis swaps under the EU BMR? Are they EU BMR compliant? If not who is responsible for the non-compliance: the issuer, the arranger of the conversion or the bondholders (including those that have not voted for the conversion)?


If only you knew how many question marks are in Marc's head, you would not ask Marc questions but provide him answers!

Comments

Post a Comment

Popular posts from this blog

Multi-curve framework book: new edition in progress

Image
Subject: Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, and Implementation It has been more than 10 years since I wrote the first edition of the multi-curve framework book. What happened in those 10 years? Why did it take me so long to start a new version? It took me roughly 10 years to write the first edition. The reason it took so long at that time, was that I did not know that I was writing it! I thought I was writing a couple of pages on an obscured and theoretical idea that there was not a `` one curve to rule them all '' but multiple curves. It turned out that it became the actual practice for very clear and important reasons. That was the excuse for the first edition, what is the excuse for the second edition? Since the first edition, many things happen, in particular: March 2015: BCBS - IOSCO: margin requirements for non-centrally cleared derivatives and mandatory variation margin July 2017: The future of LIBOR -- actually it...
Read more

Rigged: part 1 - Will there be a part 2?

Image
I have been reading book “Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial” (Andy Verity, Flint, June 2023) for some time. It was published several month ago, but I just finished it. To my defence, I have to say that I don’t feel comfortable reading fiction where the “bad guys” are systematically winning by cheating. The book is the story of the miscarriage of justice done in the LIBOR manipulation story. The book content did not surprise me. For anybody having worked on a (swap) trading desk, it is clear that what was described by the accusation was impossible. It is not possible for some middle level trader to create a multi-year, multi-desk, multi-bank international conspiracy over open lines, broker lines, on open offices etc. without all around them, including compliance and senior management to be fully aware of what is going on. Moreover the regulators cannot be ignorant of the situation, except pleading complete in...
Read more

Treasury / Swap spreads are negative. And what?

In recent weeks there were several news articles related to the negative treasury/Swap spread. This is in particular the case of a Bloomberg article and a Zero Hedge blog . Some of the “information” in those notes are Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields […]  is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. It’s hard to overstate how illogical it is when swap spreads are inverted. That’s because it suggests that governments are less creditworthy than the very financial institutions they bailed out during the credit crisis just seven years ago. Let’s be clear, to me, those claims are purely wrong , nothing is “ illogical ” in negative swap spread. But why do I rant about that in the “multi-curve framework” blog? Because it is exactly the same that ...
Read more