Marc Henrard - Multi-curve framework

Everybody is familiar with the option exercise mechanism ... expect fictional Belgian lawmakers. A (real) judge once said: "it is not illegal to be smarter than tax collectors". To be precise, what he actually said, was "It is not illegal to be smarter than your counterparties [...]" , but in tax matters, the tax collector is your counterparty. What we explore in this financial fiction blog, is to assess if it is possible to make money out of the ignorance of fictional lawmakers. This is a work of fiction. Characters, places, and events are products of the author’s imagination. Any likeness to real people, living or dead, or actual events is by chance almost everywhere.(1) This blog does not contain any financial or tax advice. The taxation of options is done in the following way: if an option is bought then sold or the opposite, the profit or loss on the buy/sell is taxable. If an option is exercised, the option price is ignored for tax purposes, but the transa...

The FCA, one of the UK regulators, is consulting on synthetic USD LIBOR . I have expressed my opinion about synthetic LIBOR on many occasions in the last couple of years, in conferences, seminars, informal discussions, etc., but I have not directly posted anything substantial on this blog. This post uses as an example the USD LIBOR to be created next June but applies in similar manners to GBP and JPY LIBOR created at the beginning of this year. I already mentioned synthetic LIBOR in my first blog after the official announcement of LIBOR discontinuation: “ Alea iacta est: LIBOR non est ”. For a transition that was announced by the same FCA in its ill-titled “the future of LIBOR” speech more than 5 years ago and that was described as at a date that `` is far enough away ”, if the need for a synthetic LIBOR sounds like a failure it is because it is. What is synthetic LIBOR? It means continuing to publish a rate, still call LIBOR, in the way and with the mechanism used for LIBOR, but n...

I will be speaking at the @CQFInstitute’s Annual Quant Insights Conference on 2–3 November. Join me and other quant finance experts as we explore the latest industry innovations. You can book your free ticket here https://www.qiconference.com/november-2022/  

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 ...

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...

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...

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...

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...

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...

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...

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...

We are approaching the publication date for the new ISDA definition related to the IBOR fallback and the related protocole. Questions related to their impact are becoming more and more urgent. I was interviewed once more by Risk about those issues. Some quotes will probably appear in a Risk article in the coming days or weeks. Here is a more extensive summary of my comments. I'm starting with a graph without comment. If the meaning of the graph and its relevance to the protocol signature is not obvious to you, I would advise not signing the protocol! See my first cautionary tale about signing the LIBOR fallback protocol . A robust fallback is important, the fallback embedded in the current ISDA definitions is not robust. Something need to be done about it, preferably before January 2022. Where I disagree with the marketing barrage in favor of the ISDA protocol that we have seen recently is that the ISDA proposed fallback is the only one that is possible. I even disagree ...

Presenting courses and speaking at conferences is work and also fun for me. I enjoy it and I'm happy to be invited to practitioner and academic events, being public or private (in-house trainings). My careers includes experiences at senior level as quantitative analyst, trader, risk manager, and academic lecturer, but does not include sandwich man or marketing board. When presenting courses or seminars, I provide a service to the audience, sharing (part of) my knowledge and personal in depth research. For a one hour seminar, the preparation time is one day, for a one day course, the preparation time is one week. As a (fiercely) independent advisor, that time is not sponsored by any state or outside company. I speak only at events where a high quality service is provided and the audience is the client (not: the speakers are the clients and the audience is the product); consequently the speakers are selected for their in-depth content, not for their marketing budget. If you conta...

CCPs have announced their plans regarding ESTR swap clearing. Some plans are described in a Risk.Net article titled " LCH sets €STR swap clearing launch date " (subscription required). Some of the claims there exhort me to react: 1. On the valuation and margining side, the fixed 8.5 basis point spread between Eonia and €STR means that we think it’s possible to use Eonia as a proxy for €STR as a risk factor. Whitehurst says. For the valuation, I agree: in October, EONIA will be equal to ESTR+8.5bps, so you can convert from one to the other. For the margin side (initial margin), it seems that they use logic in the wrong direction. You can use ESTR history (that does not exists yet) to predict the future of EONIA (that will soon stop to exists but in the mean time is related to ESTR). You cannot use the EONIA history (that was not linked to ESTR) to predict the future of ESTR (that will start to exists in October). I don't say that it is ...

Mandatory arbitrage Belgium is now imposing mandatory arbitrage in retail. I concede that this is a 2 cents (0.02 EUR) maximum arbitrage by transaction, but an arbitrage nevertheless. The arbitrage is imposed on retailer by forcing them to issue free option with each retail transaction. There is no limit to the number of transactions by customer and retailers cannot refuse the transaction (and the arbitrage). The mandatory free option was proposed by a Belgium vice-premier and minister of Economy ( Kris Peeters ; one of the top 5 minister in Belgium) and approved by the Council of Ministers. Obviously the minister press release does not describe his decision like I did. It is presented as a simplification measure without impact. The press release even indicate that "on average the consumer will pay the same amount". According to the press release, the ECB shares the analysis (I would like to see the analysis). The press release (in French) can be found here: http://ww...

Over the past couple of years, in parallel to my work as Head of Quantitative Research at OpenGamma ,  I have been working as a freelance advisor on a couple of projects. Those projects include designing of a new interest rate futures, presenting multiple executive training, advising hedge funds on the multi-curve and collateral framework, advising on CSA, Variation and Initial Margin frameworks and commenting on regulations. For those projects, I'm working under the structure of an independent advisory firm called mu Ris Q Advisory. Its (concise) website can be found at http://murisq.com/ Don't hesitate to contact me regarding its services or for training, model validation, product design and risk management strategies.