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.