Marc Henrard - Multi-curve framework

Three weeks after I asked a couple of questions to the EU president related to the regulation on CHF-LIBOR, questions that were also posted on my blog , I have received an answer from DG FISMA Unit C.3 - Securities Markets. The answer is posted below (minus the introduction and the signature) The policy intention with this replacement was to ensure that the cessation of CHF LIBOR does not cause large-scale contract frustration for contract parties and holders of financial instruments in the EU. In accordance with the conditions for the exercise of the powers, set out in the Benchmark Regulation, the Commission has taken into account the recommendations made by the National Working Group on Swiss Franc reference rates, has conducted a public consultation in the spring of this year[1] and has published a draft of the implementing act for feedback in August[2]. To the extent we understand your detailed queries, the elements of the implementing act concerned were present in the draft act ...

When I created my consulting firm, I called it muRisQ (standing for management of Risk by Quantitative methods). This was before SARS-CoV-2 escaped from Wuhan. In the mean time, the WHO has changed its naming convention for variants and is using the Greek Alphabet and not the place of original detection anymore. After the original Wuhan Coronavirus, we had the Kent, South Africa and India variants; they are now called Alpha, Beta and Delta. Now there are so many variant that the letter " mu " as been reached at the end of August. Luckily for muRisQ, mu is a " Variant of Interest ". It could have been worst with mu being a " Variant of Concern ". But it could have been better if I had called the firm nuRisQ or xiRisQ. For some reasons that escape me, the WHO has skipped those two letters and has jumped to " Omicron " recently. Without risk of libel, I can now write that the WHO is an analphabet organisation: "Analphabet: Characterized by i...

Open letter to Ursula VON DER LEYEN in relation to REGULATIONS COMMISSION IMPLEMENTING REGULATION (EU) 2021/1847 of 14 October 2021 on the designation of a statutory replacement for certain settings of CHF LIBOR Dear Ursula, I read with interest your REGULATION (EU) 2021/1847. If you don't mind, I would have a couple of simple questions regarding the text. I'm certain the numerous consultations you indicate you have done have already answered those questions, so it should just take you a couple of minutes to answer them. Ambiguous definitions (rate) The text indicates 1-month CHF LIBOR is replaced by 1-month SARON compound Rate, as observed over the 1 month period preceding the interest period; What is the meaning of " 1 month period preceding ". From my experience, this is not a trivial question in finance. The first ISDA consultation, published in July 2018, had a similar issue. It indicated " observed over the relevant IBOR tenor and compounded daily dur...

LIBOR transition is involving large value transfers between market participants. In the past, I offered to my faithful readers the possibility to make money on LIBOR fallback (see the series starting here ). The money making machine required to take some "spread positions" and trust that the LIBOR cessation process would complete in a time frame of a couple of years. The LIBOR cessation completed on 5 March 2021 with the announcement regarding the forthcoming cessation. The term "position" above is in between inverted commas because the point was that it was not really a spread position from a market risk perspective, only from a name perspective. It turns out that there is a little bit of market position in the trade as described in Fallback transformers: gaps and overlaps and the following muRisQ's blogs. The position I proposed In November 2019 has made more than 10 bps in rates . Now that you have made some money with hard work, I propose a mechanism to lo...

Almost three years ago, on 30 November 2018, just after the results of the first ISDA fallback consultation were published, I explained " how to make money on LIBOR fallback ". There were many episodes to the series (see list below) but I never concluded on that first part. The conclusion came in March 2021 with the publication of the ISDA/Bloomberg fallback spreads. Those spreads have transferred huge amount of money between market participants. I hope you were on the receiving end of the value transfer. What is the order of magnitude of the money transfer? I don't know, as I don't now the positions of the different market participants. But at least I can tell you how much money you would have made if you had followed my advise from November 2018. Then I indicated that " I enter into a basis swap where I pay LIBOR-1M v receive SONIA + spread on a 30-year tenor for a notional of 1m. The current spread is at 13.45 bps. My analysis gives me a 4 to 8 basis points ...

We are living in strange times. Most of the conferences, which used to be a good places to meet with like minded people and listen to interesting talk, are now online. Some of them are starting again to plan some physical presence. By moving online, we have lost the " meeting people " part of the conferences, but we can still hope to keep the " interesting talk " part. The traveling time to conference is reduced, but content quality should not decrease. The price of the conference is reduced as the local catering (room, food, etc.) has almost disappeared. But I'm surprised that many conference organizers use the "on-line" excuse to cancel speaker fees. I receive many invitations to the "main" quantitative finance conferences indicating that "speaker budget has been cut due to the pandemic" and that there are only "sponsored" talked at those conferences. It means that the only speakers they have are biased sponsored spea...

Good to see that the Yield Futures design that I proposed almost 10 years ago is finally trading. CME has announced a “strong liquidity on launch day” for its Treasury Yield Futures . Some notes on the design I proposed are available as a blog: Risk-based futures and a working paper for the overnight-linked version: Risk-based overnight-linked futures - innovative design . Originally the design was proposed with several variants for the underlying (LIBOR swaps, OIS, bond/treasury) and delivery mechanism (cash settled or physical settled, notional based or risk based delivery). All the variants have the same mechanism as their main feature: quoted in yield and PV01/risk based daily settlement.  In some sense it was not even an original design as the fixed PV01 mechanism was already used for LIBOR futures. But the extension to other products was new and the idea of smooth risk at delivery was also new. Unfortunately the smooth risk feature has not be retained by CME. The futures a...

SOFR First started on 26 July. We now have two weeks of data. The result is somehow mixed. On the LCH front, the volume has decrease significantly last week with respect to the previous one (SOFR First initial week).  The volume is roughly the same as in end of May. On the ISDA figure side (from US regulatory figures), the absolute volume is slightly up but the proportion of SOFR with respect to LIBOR is down; it is below 8%. Still far away from SOFR First !

No change on the EUR side at LCH. The volumes have not really moved in the last 5 months. I could not find volume figures on EUREX site (let me know if those figures are public somehow), so I don't know if a significant part of the volume is now trading at EUREX rather than at LCH. As mentioned last month, LCH has changed its reporting mechanism and does report only below 2Y numbers and does not split it any more in below 1Y and 1Y to 2Y. This is really unfortunate as the different OIS term rates are in discussion. Those term rates are based on liquid quotes for 1-month, 3-month and 6-month periods. It is of great importance to see the actual liquidity in those buckets. Removing the split is removing a very interesting piece of information in relation to the transition. On the CHF side, there was a significant increase over July. But it is only a small victory in the sense that it is only the first time that the volume is above the February 2020 volume (18 months ago). Good incr...

In August 2017, I started a series called " Game of Benchmark: Season 1 " with a catch-line Game of Benchmarks: a no-fantasy series with no blood and no sex but plenty of greed, manipulation and money. The Episode 1 was titled " the king is dying " and I asked "Where is the successor?" In the mean time, the king has proved to be more resilient than expected and his death has been delayed to July 2023. The grace period has been accompanied with new announcements that may partly answer to the question I asked four years ago: Where is the successor? With the slow king death in the background, some foreign powers have tried maneuvering to push a new officer in power. In this context the term foreign should be understood in part as meaning of a different country but also belonging to another area. The other country is obviously referencing to the UK FCA that, not so subtlety, tried to interfere with the USD market. But maybe more importantly the LIBOR was a mar...

 ISDA has published a consultation on the fallback for ICE Swap rates . The situation related to ICE swap rates is complex and no trivial solution exists. But this situation was predictable and has been predicted for several years. The issues under discussions where already present in my first answer to ISDA consultations in 2018. The proposals in the ISDA consultations are based on approximate spread for GBP and USD LIBOR swap rates versus OIS rates. Those approximations have been proposed by the Sterling working group and ARRC. Some approximations are necessary due to the early decision taken by ISDA and regulators on the transition. Unfortunately the working papers proposed by the working groups hide significant issues and do not propose a balanced analysis of the problem. From public documents available one can infer that the working groups had information indicating that their working papers did not provide all relevant information and did not include them. At ISDA's request, ...

This time I have also included the CHF figures. I will start there. The year-to-date (YTD) figures at LCH are LIBOR IRS at 1,670 bn and SARON OIS at 505 bn. LIBOR swaps represent still more than 75% of the notional (we have not included the FRA in the LIBOR part). Unfortunately PV01 figures are not available on LCH site, but one can guess that they would be worst for SARON. From the ISDA Clarus RFR adoption indicator (May 2021 as the June one is not available yet), it seems that globally the portion of SARON is below 15%. (*) Note that LCH has changed his volume report, with volume below 2Y as one bucket (instead of 2: <1Y and 1Y-2Y) and volume above 5Y as 3 buckets. In USD, the SOFR usage is increasing steadily but is still at relatively low levels. Over the month of June, 2,179 bn have been cleared at LCH; an increase of 23% form the previous record level in April. But the SOFR figures are still well below the LIBOR or even the Fed Funds levels. YTD, the LIBOR swap level at LCH...

Monthly review of ESTR and SOFR volumes. No progress in SOFR, no progress in ESTR. In May, the LCH SOFR volumes are barely above 70% of the April's ones. In volume, SOFR swaps are still below 3% of LIBOR swaps according to ISDA figures. With the decision by CCPs to steer away from ISDA's fallback and convert LIBOR swaps to OIS with spread, one could argue that LIBOR swaps and SOFR-OIS are the same products. Nevertheless given the uncertainty on the exact conversion mechanism and the non-fungibility due to spreads, I would be very reluctant to trade LIBOR swaps at this stage. Clearly the market majority disagrees with me and thus I'm wrong (but I don't know why)! EONIA is disappearing at the end of the year, in seven months, and the bulk of the OIS is still EONIA-linked.

Monthly review of ESTR and SOFR volumes. Decent progress in SOFR, no progress in ESTR. It seems that we can not get one month with increase in both. ESTR volumes decreasing with respect to March. EONIA is disappearing by 1 January 2022 with an unmanageable fallback process but the bulk of the EUR OIS volume is still in EONIA! The SOFR volume (ISDA figures based on US regulatory reporting) still indicates less than 3% SOFR/LIBOR ratio.

Monthly review of ESTR and SOFR volumes. Decent progress in ESTR, no progress in SOFR (opposite of last month). The ESTR swap volume over the month has jumped from 250 billions to 557 billions (USD equivalent). The SOFR volume is is slight decrease in March with respect to February. The monthly volume has decrease down to 1181 billions from 1310 billions. The ISDA figures (based on US regulatory reporting) are also stable. SOFR volumne is less than 2% of LIBOR volume.

Over the last months there have been many discussion about the fallback (or more precisely the absence thereof) of cleared LIBOR swaps. The CCPs are planning another "big bang". Having been interested by astronomy since I was young, I thought there is only one "Big Bang" possible, but I'm not an expert. Maybe we should rename the LIBOR transition "bangs" as SME (Small and Medium-size Explosions). This new SME would cancel all existing LIBOR swaps before the cessation of LIBOR and create OISs with slightly modified payment dates. The solution is certainly one that I'm in favor of, having push for it by opposition to the ISDA Frankenstein-like fallback. I have suggested to my clients for many month to do something similar (see here and here ). The ISDA fallback is unmanageable from a market risk perspective as described in previous blogs: Fallback transformers: gaps and overlaps and here . Probably those public analysis have been used by CCPs to co...

After some financial fictions, here is a food fiction. Following price manipulation and decrease of volume in cookies, the cookie market is going through a reform. There are always tough cookies. To deal with them, the Factory Cookie Authority (FCA) has decided to ask for more power to the parliament. The proposed power would allow the FCA to impose synthetic prices on cookie contracts. The cookie prices will be based on the flour price plus a fixed spread. The spread has been decided by the International Cookie Dealer Association (ICDA) after a public consultation answered by a less than 100 people, mostly ICDA members. The spread is a fixed number for the next 50 years and is not based on cost of other cookie ingredient, like sugar, eggs, salaries, taxes, but is based some on historical figures selected by ICDA mixing (pun intended) flour, sugar and rotten (i.e. in-arrears) eggs over different periods. Should the MPs vote for such a tough cookie power? Wouldn't that be a tough co...

Some random comments about the LIBOR cessation announced on 5 March 2021. The IBA decision (forced by the panel banks) is now public . LIBOR with cease on 31 December 2021: all but USD tenors below 30 June 2023: USD-LIBOR ON, 1, 2, 3, 6, 12 M. All LIBOR are expected to stay representative to the last date. Interesting that FCA can assert that they are confident that USD-LIBOR will stay representative for more than 2 years while a couple of months ago they said that they would provide information about non-representativeness in 2021 by the end of 2020. A potential "synthetic LIBOR" may be decided after those dates (depending on the FCA getting the power from the lawmakers). But this would not be a true LIBOR from an economical or quantitative perspective. The potential synthetic LIBORs by FCA are for GBP, JPY and USD 1, 3 and 6 months. The debate about pre-cessation trigger that was considered as " essential " a year or so ago turn out to be a nothing-burger. The a...

Monthly review of ESTR and SOFR volumes. Decent progress in SOFR, no progress in ESTR The notional for ESTR is still below December. On the SOFR side the LCH volume is at record level. The ISDA figures show a small increase, but nothing really dramatic. In relative terms, SOFR is still only a couple of percent of LIBOR. Notional outstanding at LCH is LIBOR IRS: 59.2 trn, OIS: 16.4 trn and SOFR: 3.8 trn. Even for OIS, SOFR is still the minority of outstanding volume. Note that this means that there is 12.6 trn of Fed Fund OIS that are discounted at SOFR and hence need a "convexity adjustment" in their valuation and not straight forward use of Fed Fund pseudo-discount factors (see my paper Derivative Pricing with Two Collateral Rates (February 2021, preliminary version) for more details). For more details about the SOFR related volumes, see the Clarus blog: SOFR Futures and Swaps – Feb 2021 .

LCH has published a new circular related to the transformation of LIBOR related contracts at cessation . I commented earlier on the issues in my post Wow! - LCH plans Libor swap switch to RFRs and CME steers away from ISDA fallback . With the further document published by LCH, a further discussion on the subject appears timely. Before discussing the LCH solution, we should review why we are there. The need of a "solution" is because the fallback proposed by ISDA is ill-conceived from a risk management perspective. This is not a surprise. The different consultations and analysis have probably been done from a legal point of view but from the start the risk and valuation aspect has been neglected. I have been one of the first, but certainly not the only one, to point to those issues. My blog from 26 July 2018 ( Consultation on IBOR fallbacks: Question 1 ) already points at the issues that will lead to the need of a "solution" from LCH. After that original fallbac...

The Working Group on Sterling Risk-Free Reference Rates has proposed a document on the transition for GBP LIBOR ICE Swap Rate . Such a transition discussion has been required for a long time. See for example my post from 2019: ICE Swap Rate fallback?   and ICE Swap Rate fallback? What is proposed is in line with what I explain to clients over the last years on what could happen.  The proposal by the working group is a simplified approach as it try to approximate a complex situation where conventions are not the same between OIS and LIBOR swaps. Below is a slide from my standard presentation on the issue. Anything in red is different between the two world, i.e. every thing is different in term of dates and accrual factors. The only parts that are the same are the generic symbols for sums, forwards and discount factors. Unfortunately, once more, "LIBOR means LIBOR" cannot be considered as a true statement. The proposal by the working group is a workaround due to a situ...

Monthly review of ESTR and SOFR volumes. Both are a little bit underwhelming with no new height in volume for either of them. The notional for ESTR is down more than 20% with respect to December. The January 2021 volume is barely above January 2020 (less than 15% increase). ESTR OISs are less than 5% of EONIA OISs. Less than one year to go to adulthood for ESTR, but still barely a toddler. This is not due to a general shift to EUREX as the figure there for December 2020 are around 95 bn EUR (see Practice Insight article , subscription required), which is roughly 40% of the ESTR market. On the SOFR side the LCH volume is up from December (+16%) but down from November (-11%). The ISDA figures show a similar "not increasing" picture with SOFR outrights representing well below 2% of USD-LIBOR. The CHF story does not represent a better picture. SARON OIS volume is around 17% of CHF-LIBOR IRS and even as low as 11% if we include FRA on the CHF-LIBOR side.

Risk published today an article titled " Cherry-picking fears [...] Isda protocol and traders warn of gaming the system " Some extracts of the article are: "[...] may have realised that signing left them in a difficult commercial position as they’d effectively made a free offer for their counterparties to adhere to [...] if and when it suits them,” says [...]. “Yet those banks couldn’t force anyone to adhere or agree bilaterally to [...] – so the protocol was operating on a one-way basis [for them].” this means the signed-up banks have essentially given clients a free option that allows them to cherry-pick by working out if they’re going to win by adhering to the protocol or not. “Imagine you have a large portfolio involving two counterparties who are hedging each other, and your risk-sensitivity exposure is at zero. You have $1 billion coming in on one side and $1 billion coming out on the other side. You’re thus perfectly hedged – until one counterparty suddenly stops ...

Over the last couple of years, I have publish several technical working papers and opinion about the LIBOR fallback. The proposed ISDA fallback mechanism is composed on two parts: a floating rate and an adjustment spread. As demonstrated for a long time, the floating rate mechanism is ill-designed. I refer to my post on CCPs steering away from it . I have also for a long time warned about the spread in the LIBOR fallback, e.g. in an opinion published in Risk.Net: Signing the LIBOR fallback protocol: a cautionary tale . The spread is a technical mechanism to have a rate, but is certainly not fair in any sense of the term for legacy contract. Unfortunately up to now it was difficult to have a direct reference to make the spread more fair in USD. In EUR one could refer to EUR-EURIBOR and in JPY one could refer to JPY-TIBOR. In USD there is since a couple of years the IBA Bank Yield Index but it is not yet an official benchmark, only an indicative information. Today, Bloomberg has announ...