Marc Henrard - Multi-curve framework

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, ...

The UK government and the FCA have announced their intention to enhance the FCA powers in relation to benchmarks. Those powers would allow the FCA to artificially extend the shelf live of LIBOR for tough legacy contracts. This is really an announcement about "The future of LIBOR" while the 2017 announcement by A. Baily should have been called "The lack of future of LIBOR". Extending the life of LIBOR means increasing the difference between the legacy ISDA LIBOR definitions (and other LIBOR definitions) and the new ISDA LIBOR definitions. This is really the goal of this proposal targeting "tough legacy". This enhanced power by regulators enhanced the difference between legacy and new definition and thus enhanced the valuation difference between contracts subject to the different fallback procedures. This statement on regulatory powers should be complemented by a statement on caution. The effects that I described in my Risk.net column Signing the LIBOR Fallb...

The FCA has indicated that they could make an announcement related to LIBOR survival as early as the end of this year. This announcement has created surprises in the market as reported in Risk.net: Shifting Libor fallback window jolts basis market . Announcement date has always been the reference date for spread computation mentioned by ISDA. Personally, I would not have selected that date, but there was never ambiguity about it from the ISDA side. All my presentations related to spread computation have always included those details. The graphs I have presented (see here , where there is clearly 4 announcement date scenarios, and here , with up to 5 bps impact) included scenario analysis on the announcement date. Moreover I have also emphasized the announcement options by FCA, IBA and panel banks (see  Spread, transition period, cliff-effect and manipulation ). Each decide of some elements of the announcement date, so to some extend they decide of the spread. The formulas about...

Our intention is that, at the end of this period, it would no longer be necessary for the FCA to persuade, or compel, banks to submit to LIBOR.  It would therefore no longer be necessary for us to sustain the benchmark through our influence or legal powers. Andrew Bailey, July 2017, The future of LIBOR The FCA welcomes the Government’s announcement today that it intends to bring forward legislation to amend the Benchmarks Regulation (BMR) to give the FCA enhanced powers. FCA, June 2020, FCA statement on planned amendments to the Benchmarks Regulation Those two statements from the same institution, just a couple of years apart, should be testimony that it has never really understood the game it was playing with LIBOR (and fire). LIBOR is not, will not and has never been perfect. But because of history, in which regulators, in particular the Bank of England, has played a significant role, transitioning from LIBOR is more difficult than creating a world without LIBOR if LIBOR ha...

Every record has been destroyed or falsified, every book rewritten, every picture has been repainted, every statue and street building has been renamed, every date has been altered. And the process is continuing day by day and minute by minute. History has stopped. Nothing exists except an endless present in which the Party is always right. George Orwell, 1984

In a recent speech a FCA representative indicated that " announcements about the discontinuation from the end of 2021 of Libor settings could come as early as November or December this year " (see Libor death notice could be served this year – FCA ). In the article, the following sentence is attributed to Edwin Schooling Latter, FCA. The alternative to signing the Isda protocol, if you do have derivatives that are subject to Isda documentation, [is that] you simply don’t know what will happen to that book of derivatives when Libor ceases or becomes unrepresentative. This is clearly and objectively incorrect on two aspects: the "don't know" and "unrepresentative". First, the ISDA protocol is only one possibility, doing nothing is another, but they are many more. In particular it is possible to sign a bilateral agreement to the same intent as the protocol but with effect on one bilateral relation only. This is what I have been recommending for a while (...

Risk.Net published a new article on conduct risk related to LIBOR transition: Conduct risks stalk banks in Libor transition The journalist called me for background information related to the transition, spread computation and  and the conduct risk in particular, even if I'm not explicitly quoted in the article. Some extracts from the article: " The protocol is not a panacea [for legacy trades] " (Sharon Freeman, Antevorta). This is basically what I said in my " Signing the ISDA fallback protocol: a cautionary tale " comment in the same Risk.Net. “ If you have lawyers advising, ‘Get the protocol signed’, and you haven’t done the analysis to explain all the impacts to that client and neither have they, you could be heading towards litigation. ” (Sharon Freeman). See my " Serious questions" about FCA warning! " As I wrote previously in a LinkedIn comment, I don't advise the derivative users to "lawyer up" but to "quant up" a...

EONIA is a derivative of ESTR and EONIA will not be published anymore as of January 2022. The new definition of EONIA, since October 2019, is ESTR + 8.5bps. EONIA does not add any financial advantage, but add legal risks. The fixed spread is often described as trivial. To my point of view it is not so trivial in practice as a 8.5 bps spread on the overnight rate is not the same as a 8.5 bps spread on the swap rates. There is a tradition of OIS with spreads, but the spread is on the final (compounded) rate, not on each fixing. The situation is different for LIBOR swaps, where there are composition with spreads (the famous straight, flat, spread exclusive and none, compounding methods). Similar issues are probably true with collateral. From a system perspective, ESTR + 8.5 bps is not the same as EONIA. As of 15 June, around 43,946 bn USD equivalent of EUR OIS have been cleared at LCH year-to-date. That correspond to roughly 8,000 bn a month. As end of may, there were 492.75 bn USD e...

CME has proposed a couple of webinar related to the collateral and discounting big bang planned for October 2020 . The general process is based on cash and discounting risk compensation. The discounting risk compensation involves the booking of EFFR-SOFR basis swaps in the accounts of all participants (members and clients). They clients can sell those basis swaps through an auction process (at their risk and cost). In this post, I look at some elements related to the auction as presented by CME in its recent webinars. Some elements of the discounting risk compensation Cash and discounting risk compensation based on the position and market levels as estimated by CME on Friday 16 October (EOD) Basis swaps obtained using DV01 of the portfolio for 6 tenors (2Y, 5Y, 10Y, 15Y, 20Y, 30Y), 6 trades are booked in all accounts with clearing date Monday 19 October Basis swap restore approximate pre-transition DV01. There are 3 sensitivity types (EFFR, SOFR, LIBOR). At most one can be restored. To...

The collateral transition from EFFR to SOFR as planned by LCH and CME in October 2020 generates an exotic convexity adjustment on USD-LIBOR payments with respect to the absence of collateral transition. This convexity adjustment is already incorporated in the cleared swap pricing. This adjustment leads to many questions. Some of them are What inverse convexity should be introduced to price OTC bilateral LIBOR swaps from cleared LIBOR swaps? Why was this adjustment not described by CCPs in their transition documents and no compensation for it was proposed? What is the order of magnitude of the convexity adjustment? In some sense, the third question may contain an answer for the first two. If the order of magnitude is negligible in practice, the answer to the first two question probably is: we don't care! I have submitted a paper proposing a (relatively simple) theoretical computation of the convexity adjustment and an estimate of the order of magnitude. The results indicate that the...

ISDA has published yesterday a fact sheet called " Understanding IBOR Benchmark Fallbacks ". I did my personal fact-check about the fact sheet. Q: " What is benchmark fallback? " A: " benchmark becomes unavailable ". True. " FCA has stated that it will not compel banks to make LIBOR submission after the end of 2021 ." True, but almost irrelevant . This power to compel banks is very new (EU BMR, 2016), has never been used and has never been a factor since 1986. The only thing that FCA is saying is that it will not use its newly acquired EU regulation based power that has never been used in history, nothing more, nothing less. " In was determined that the fallback will the adjusted versions of the RFR. " Partially true. True : It has been determined by ISDA (and others) that this will be the only fallback appearing in ISDA definition. Partial : But other market players have decided/determined that they will use other fallbacks....