Marc Henrard - Multi-curve framework

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.