Marc Henrard - Multi-curve framework

Market is moving out of Forward Rate Agreements (FRA) with FRA Discounting settlement method to Single Period Swaps (SPS). Some statistics about this market move can be found in a recent blog by Clarus: Toxic FRAs, Fallbacks and Single Period Swaps I'm glad to see that my warning from two years ago about the inadequacy for ISDA fallback for FRAs has made its way to an important market development. Early warning were published on this blog, in Consultation on IBOR fallbacks: Question 1 and later in quantitative finance on-line repositories and reported in the press in FRAs won’t work with standard Libor fallback, experts say . This development is coming in parallel with the push by CCPs to move to OIS directly instead of ISDA-designed fallback. That proposal has been reported recently in the press and commented in a previous blog: Wow! - LCH plans Libor swap switch to RFRs . Those those changes of market behavior is a further prove that the ISDA-designed fallback is not fit for p...

French Christmas song adapted to this year: Mon beau Libor, roi des indices Que j'aime ta simplicité Quand par ISDA, contrats et accords Sont dépouillés de leurs attraits Mon beau Libor, roi des indices Tu gardes ta droiture Original text: Mon beau sapin

Wow! LCH plans Libor swap switch to RFRs Wow! (I repeat myself) Funny that is what I have suggested for some time. Not later than yesterday I was telling to a client: don't sign the protocol, don't go through the fallback, this is a unmanageable Frankenstein (see my post about Fallback transformers: gaps and overlaps ). My advise, in the same presentation was Fallback does not create OIS-like exposures. Better to repaper existing LIBOR swaps to OIS (even if with same spread). Remember that the main argument for pre-cessation trigger in ISDA consultation was that " this is the only way to have bilateral trades in line with cleared trades ". There was a general believe that CCP would adopt the ISDA protocol. But in the same client discussion yesterday I said: " CCPs do whatever is the easiest for them, not what is right for the market. We still have to read the details of the CCP fallback "! CCPs have full discretion on how to incorporate fallback. mu ...

There are multiple discussions about bilateral IM for FX forwards and FX options, specially with category 5 coming into play next September. See for example the recent Risk article Margin rules snare FX options user (subscription required). Personally, I never understood why deliverable FX spot and FX forward were excluded from the framework, except perhaps that they had better lobbyists. I don't understand the " spirit " behind that rule. One propose workaround proposed to include some deliverable FX forwards is to use zero collar options to hedge the delta risk, in a way similar to what is done for IR swaps. There is another method that, to my knowledge, has not been publicly discussed before and which is to my taste nicer. And it does not involve options. Instead of a physically settled forward, one can trade a pair of forwards with one non-deliverable forward at the same date and rate one physically settled forward, the strike of which is set on the non-deliverable f...

Good new for those who have not signed ISDA fallback protocol: the value of your option is increasing. For this you have to thank the 1,791 firms that have signed already (figure provide in a Risk article - subscription required). 1,791 I have explained the option value of the fallback in previous blogs, e.g. Signing the LIBOR fallback protocol: a cautionary tale (again) . More other firms sign it, more the value of your options is increasing. For this post, I have put the option in a formula. The slide below is extracted from a recent workshop on " Benchmarks in transition " It uses the type of notation I have introduce for the fallback in a Risks article on LIBOR Fallback and Quantitative Finance .  Don't hesitate to contact me for potential work on valuing your fallback options .

I watched the ISDA Video Interview: Why Should I Update the Fallbacks in My Derivatives Contracts? I found it more balanced than previous ISDA's publications. I provide below some quotes and comments: They [fallbacks] are a one size fits all approach. You risk management requirements are not " one size fits all ". Spend as much time as necessary to analyze if the proposed size is a good fit for you. Plenty of different sizes, colors, models are available. Don't succumb to holiday season advertisement for them. Advertisement may be fine for cookies, not for long term risk management. One signature on a protocol is for ever, but it may not be diamond! They may not result in the best outcome for all market participants and all products. Some of those issues have been highlighted in several independent documents over the last 2 years. It would be good to have ISDA expanding a little bit on this. Maybe providing a forum for independent analysis to be published and a com...

I'm glad to read that my call for " caution about Signing the LIBOR fallback protocol " have been heard by the Bank of England.  And if you determine the protocol is not the right approach for your particular circumstances, you will need to make clear alternative plans to mitigate the risks. Andrew Hauser, Executive Director for Markets 09 December 2020 Note that the emphasis/bold on " not " in the above sentence is not mine but from the BoE website This message has to be compared to a message from a couple of months ago. So, I hope the message on the importance of signing this protocol is clear. Edwin Schooling Latter, Director of Markets and Wholesale Policy 14 July 2020 BoE and FCA are slowly coming to a message closer to mine: Something should be done. The protocol is one possible choice but not the unique one. You should analyze your particular circumstances before signing. On my side, I would add: There is no urgency in signing the proto...

  United Kingdom: UN expert calls for immediate release of Assange after 10 years of arbitrary detention GENEVA (8 December 2020) The UN Special Rapporteur on torture, Nils Melzer, today appealed to British authorities to immediately release Julian Assange from prison or to place him under guarded house arrest during US extradition proceedings. Details available on the United Nation Human Rights website under the title United Kingdom: UN expert calls for immediate release of Assange after 10 years of arbitrary detention

Monthly review of ESTR and SOFR volumes.  ESTR not really moving. SOFR increasing slowly The ISDA swap info data (based on US regulatory reporting) does not show the same pick-up in volume between October and November than the LCH data.

Since the publication of my latest blog on the ISDA fallback and the associated protocol, I had several discussions about my views and many articles and opinions have been published. In this blog I detail further my (biased) views and also comment on some quotes I have read recently. Preliminary version (2020-11-15). This post is longer that the traditional one because Je n'ai fait celle-ci plus longue que parce que je n'ai pas eu le loisir de la faire plus courte. Blaise Pascal - Les provinciales, lettre 16 (1656) There is a lot to say about LIBOR potential disappearance and associated fallbacks. The need of a better fallback that the one currently in the ISDA definition is acknowledged by all. The current (as of November 2020) ISDA definition fallback is not fit for purposes. ISDA has proposed new definitions that will be effective next year. It also proposed a protocol that would allow market participants to voluntarily change the definition of the legacy contracts (i.e. c...

 A monthly follow-up on the "Where is ESTR?" posts.  Previous installments are Where is ESTR? , Where is ESTR? (2) , Where is ESTR? (3) , Where is ESTR? (4) and Where is ESTR? (5) . Increase in the volume, but still below the January and February levels. With the recent big bang from EFFR to SOFR for collateral (and discounting) at LCH and CME, how is the volume of SOFR related swaps doing? The volume has been increasing to reach more than 600 billions from a previous maximum of less than 400 billions the previous month. But October was the "big bang" month. Part of that volume may (or may not) be related to the auction and be a one-off increase. For USD-SOFR, I have also added (weekly) figures from ISDA Swap Info . Those figures are related only to transactions disclosed under US regulation, hence only a very partial (in both sense of the term) view of the figures. We see also an increase of SOFR volume (in yellow), but this has already decreased significantly s...

The new fallback supplement has been published by ISDA ( Supplement 70 in Supplements to the 2006 ISDA Definitions ). It is 107 pages long! It is very long but does not contain any information about the fallback mechanism itself!! Moreover the fallback mechanism can be changed at the caprice of a third party (or actually a fourth party) and it will cost you USD 20,000 or more a year!!! Even after reading it, I still don't understand what the fallback mechanism is!!!! Before going through the different points, a little graph. If the meaning of the graph and its relevance to the fallback supplement is not obvious to you, I would advise you to read the supplement more carefully (or you can read here )! 107 pages long This is a very long document. It contains many repetitions, for each currency and rate option, it is written in "legalese". One good point is that is contains some "fallback of fallback", i.e. what is happening if the planned fallback (like SOFR...

We are approaching the publication date for the new ISDA definition related to the IBOR fallback and the related protocole. Questions related to their impact are becoming more and more urgent. I was interviewed once more by Risk about those issues. Some quotes will probably appear in a Risk article in the coming days or weeks. Here is a more extensive summary of my comments. I'm starting with a graph without comment. If the meaning of the graph and its relevance to the protocol signature is not obvious to you, I would advise not signing the protocol! See my first cautionary tale about signing the LIBOR fallback protocol . A robust fallback is important, the fallback embedded in the current ISDA definitions is not robust. Something need to be done about it, preferably before January 2022. Where I disagree with the marketing barrage in favor of the ISDA protocol that we have seen recently is that the ISDA proposed fallback is the only one that is possible. I even disagree ...

 This is a follow up on previous post on Where is ESTR? , Where is ESTR? (2) , Where is ESTR? (3) and Where is ESTR? (4) . It has been more than two months since the main CCPs have switch their PAI to ESTR in EUR and it should be the standard now. What do we see in the LCH data? Almost nothing! The monthly volume for ESTR OIS was less than 70 bn (USD equivalent), just  above 1/3 of what is was in January and February (see graph below). Not a very positive trend. The only positive trend, if I really have to find one, is that the volume for maturity above 2Y is increasing. With a notional of 23 bn, this is the highest since the start of ESTR.   This means a total volume for ESTR OIS of 774 bn since the start of the year. This is in contrast with the 62 trn in all OIS (EONIA and ESTR). ESTR-linked products are only 1.25% of all overnight-linked products (unchanged with respect to last month).   Were are only a little bit more than a week away from the EFFR to...

This is a follow up on previous post on Where is ESTR? , Where is ESTR? (2) , and Where is ESTR? (3) . It has been more than a month that the main CCPs have switch their PAI to ESTR in EUR and it should be the standard now. What do we see in the LCH data? Almost nothing! The monthly volume for ESTR OIS was less than 72 bn (USD equivalent), just  above 1/3 of what is was in January and February (see graph below). Not a very positive trend. Figure 1: Monthly ESTR volume at LCH. This means a total volume for ESTR OIS of 705 bn since the start of the year. This is in contrast with the 56 trn in all OIS (EONIA and ESTR). ESTR-linked products are only 1.25% of all overnight-linked products. This lack of volume confirms my previous analysis that the change of collateral rate would have no impact on the market volume. With the fixed spread, there is no more incentive to switch now that there was two months ago. One can easily hedge the new discounting with the old rate, or the old d...

Recently ISDA, ARRC and regulators have started a joined marketing barrage to convince market participants to adhere to the ISDA Fallback Protocol “in escrow”. I have commented on the Protocol signature many times before in seminars and on LinkedIn but not directly in a post. I have tried to summarize some of my arguments below. Before doing that, I have to repeat that I agree that a robust fallback is required. The current ISDA definitions do not contain a robust fallback and something needs to be done. Where we disagree is that the ISDA proposed fallback is the only one that is possible. I even disagree that the ISDA proposed fallback is actually robust, but that is another story that I have already discussed in many other posts (for example Fallback compounding in arrears won't work ). Even if someone today believes that the protocol is the best alternative for him, there is no advantage in early adherence. The adherence is like a pure American option, i.e. whenever you exercise...

This is a follow up on previous post on Where is ESTR? and Where is ESTR? (2) In the mean time, the main CCPs have switch their PAI to ESTR in EUR and it should be the standard now. The July data includes one week in the new regime. What do we see in the LCH-cleared OTC data? Almost nothing! The monthly volume for ESTR OIS was 76 bn (USD equivalent), just  above 1/3 of what is was in January and February (see graph below). Not a very positive trend. Figure 1: Monthly ESTR volume at LCH. This means a total volume for ESTR OIS of 640 bn since the start of the year. This is in contrast with the 53 trn in all OIS (EONIA and ESTR). ESTR-linked products are only 1.2% of all overnight-linked products. The ISDA SwapsInfo weekly provides different figures, which are related to trade disclosed under US regulation only. In the last week, there were 20 new trades, this is around 20% of the number of trades since the beginning of the year. A big relative increase, but an increase from a...

Risk.Net published a recent article about the confusion related to the fallbacks in the cross-currency swap market. The article is " Cross-currency confusion stalks FCA announcements " (subscription required). Confusion and winner and loser have been the common component of the fallback process up to now. I certainly don't disagree with the article but as I have said in a similar context recently, I'm surprised by the surprise . One of the elements put forward in the article is " opposing legs of a cross-currency swap could be fixed up to a year apart ". One of the main cross-currency market is USD-LIBOR/EUR-EURIBOR, and in that case, the opposite legs could fix 5 or more years apart. In the cross-currency case, I'm not impressed by one year. In the single currency case, opposite legs of basis swaps may fix at the same time, but will fix on data from different periods. The periods will be obtained with the most recent 5 year period for which the ON in ar...

Jour de fête nationale en Belgique. J'ai la naiveté de croire à la conscience individuelle des élus, a la séparation des pourvoirs et une compréhension minimale de la logique élémentaire par les décideurs publics. Ces croyances ont été détruites en quelques lignes reçues dans un email d'un parti politique. J'ai écrit un mail a l'adresse "info@ps.be" à propos de choix politiques fait par les parlementaires affiliés au PS (Parti Socialiste). Le sujet de ce mail est sans importance pour la suite de ce post, le seul point a mentionner est qu'il était adressé au élus PS de la majorité au parlement Wallon à travers l'adresse email générique du parti. La réponse que j'ai reçue a été: On 21 Jul 2020, at 13:16, Info PS <info@ps.be> wrote: Cher Monsieur,   Votre mail nous est bien parvenu et nous vous en remercions. Le Gouvernement et le Parlement étant des pouvoirs distincts, et par respect pour la séparation de ceux-ci, nous vous invitons à vous ad...

The title of this post is the title of a note by three Fed authors: How Correlated is LIBOR with Bank Funding Costs? From the title and the resources available to the authors, especially in term of data, I was expecting something good. I have been disappointed. The disappointment is about what is said by also what is not said. The note is based on " funding cost ". For a quant like me, it is not very clear what their number means exactly. It is described as " annualized total interest expense/total liabilities ". As it is from official reporting (FR Y-9C) this may be based on accounting/accrual interest and notional amounts, not on real daily MTM and actual interests. My understanding is that a long term funding with fixed coupon bond would have the same " funding cost " for their full life. The cost would probably not include any hedging that the bank would have done for its interest rate risk. Moreover those cost seems to be measured on a quarterly basi...

A couple of weeks ago, I asked "Where is ESTR?". That question resonated with a legal journal. The blog and a subsequent interview were the starting point of an article in Practice Insight - IFLR. Practice Insight is a " news service for lawyers, tracking how financial institutions are implementing Europe's capital market rules " (subscription required). Since then the clearing volume for June have been published by LCH . The volume was around 72 bn, i.e. barely a third of what is was in January and February. With a couple of weeks to go to the "big bang", one has to wonder what will happen then. The volume since the creation of ESTR is reported in the graph below. No upward trend is visible. Note that the EONIA = ESTR + 8.5 bps is true only to end of 2021. This means that the market data for OIS EONIA swaps with maturities beyond that data, i.e. OIS 2Y to 30Y, cannot be used to infer the market data for ESTR. I still wonder how CCPs will obtai...

A recent comment in Risk describes some consequences of the selected fallback mechanism. The article is titled Beware of cliff edge in Libor fallbacks (subscription required). The comments can be split in several parts. One describes some issues related to LIBOR fallback that have previously been discussed with more details in my blogs and relates to the distribution of historical data and the median effect: LIBOR Fallback: a median in a crisis and Updates on LIBOR/ON spread . The second one is related to the impact of the discontinuation date. It is important to insist that the so called "cliff effect" is coming from the choice of the discontinuation date and happen on the announcement date, not the optical jump in fixing rate on the discontinuation date . Once the discontinuation date is known, there is no cliff-effect anymore, even if the fixing jumps (from LIBOR to fallback). That was described in Spread, transition period, cliff-effect and manipulation . As also disc...

ISDA has published a second "Fact Sheet" on IBOR fallbacks . Following a post on the previous version , I'm adding one post on this version. Calculations to be published [by Bloomberg] are: Adjusted RFR, Spread Adjustment, Fallback Rate
. No problem with that. Bloomberg is allowed to publish those calculations as I have been allowed to do the same for more than two years. A License is required from Bloomberg for the re-distribution or usage of the Adjusted RFRs, the Spread Adjustments and the Fallback Rates. I'm not sure what that means exactly. Does that means that a license from Bloomberg is required for re-distribution or usage of Bloomberg data or that a license is required to re-distribution or usage of any data? In the first case, I would not disagree, if someone wants to pay Bloomberg, he is free to do so. In the second case, I have a strong disagreement. You cannot hold a license or copyright on facts or ideas. The RFR data, mostly published by central banks, ...