Making money on LIBOR fallback (end of part 1)

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 range for the fallback spread." My analysis was not perfect as the final spread came at 3.26 bps. It is even better than what I was hoping for. That means a profit of more than 10 bps (almost without risk) on the position. Let's use a 20 PVBP for the 30 year swap to obtain a 200 bps profit on the notional. For each million on the position, the profit is 20,000. If you, as a hedge fund trader, have entered into the position with a notional of 1,000,000 GBP cleared at a CCP, your IM was around 100,000 GBP and your profit around 20,000 GBP. A nice 20% return on the IM over a couple of years. There was some extra P/L due to the carry as explained in some of the previous blogs, but I leave it as a tip to the readers!

This is the end of "Part 1" of the "Making money on LIBOR fallback". There are other parts in the making!

Feel free to contact me for similar analysis or to discuss positions to take advantage of the fallback.


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