American option on protocol signature

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 Fallback protocol: a cautionary tale are increased. Less and less, the protocol signature can be considered as a "fair" treatment. The implied value transfers are increasing. A new strategy will emerge: not doing anything about legacy LIBOR contracts for part of the "wind-down period" for tough legacy and decide on signing the protocol or not during that period. The FCA proposal is changing the protocol signature European option feature (sign or not a cessation) into a signature American option (decide to sign or not in a given period).

This transition is really becoming fun. More the laymen try to solve the problem, more the experts will have options to make money.

I would like to take the occasion of this column to thank ISDA and FCA for providing so much material for future quant work.

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

A personal statement on the IOSCO Statement on Alternatives to USD Libor

IOSCO has issued a document called “Principles for Financial Benchmarks” in 2013. As such it acted as an (unofficial/unelected) lawmaker. On 3 July 2023, the same IOSCO issued a “ Statement on Alternatives to USD Libor ”. The Statement looks like a tribunal judgement from a trial with no public hearing, no witness, and no defense right from a tribunal with no mandate to judge. And publish on the day before Independence Day! Some personal comments on the document. Transparency The statement indicated “Administrators should consider whether to improve the transparency of their rates". The IOSCO document lack minimum transparency. It does not indicate in any way the “varying degrees of vulnerability of concern“ of the analysed benchmarks. The name of the benchmark are not even indicated. This creates a culpability by association to all non-SOFR benchmarks. The statement refers to a Review of Alternatives to USD Libor ; to my knowledge, the review itself is not available. The st
Read more