ISDA consultation on ICE Swap Rate fallback

 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, The Battle Group has done a review of those papers, unfortunately the review is even weaker than the the papers themselves. Its start with the hypothesis that what is proposed in good in principle, without justification, and then just say that "something" is "necessary". There is no analysis that what is proposed is "sufficient", or even that what is proposed is the best that can be done within the restrictive hypothesis that they arbitrarily decided to impose.

If I was head of model validation for a financial institution using ICE Swap Rate and I was receiving such a report, I would sent it back. It sounds like what a master student would do for a homework, not an in depth analysis on which the market can rely on for such an important issue. In their defense, they indicate "Readers of this report should seek independent expert advice [...]" and that is the part of the report that I agree the most with.

The natural question is who will provide the independent advise if all the documents presented by ISDA are biased?

You can ask me ;) I cannot promise a perfect solution, but I can promise that I will do better than the above mentioned documents.

I have answered the ISDA consultation and my answer can be find attached. My answer should not be read a model review of what is proposed, but as an analysis that such a review is necessary and the proposed documents do not fulfill the requirements.

Answer to ``2021 Consultation on Fallbacks for GBP LIBOR ICE Swap Rate and USD LIBOR ICE Swap Rate'' issued by ISDA

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

Treasury / Swap spreads are negative. And what?

In recent weeks there were several news articles related to the negative treasury/Swap spread. This is in particular the case of a Bloomberg article and a Zero Hedge blog . Some of the “information” in those notes are Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields […]  is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. It’s hard to overstate how illogical it is when swap spreads are inverted. That’s because it suggests that governments are less creditworthy than the very financial institutions they bailed out during the credit crisis just seven years ago. Let’s be clear, to me, those claims are purely wrong , nothing is “ illogical ” in negative swap spread. But why do I rant about that in the “multi-curve framework” blog? Because it is exactly the same that ...
Read more