Marc Henrard - Multi-curve framework

A Value-at-Risk (VaR) methodology is a technique to estimate the maximum loss at a given time horizon that is exceeded only at a certain probability level. Several methodologies are used to obtain those estimations and a lot of them are based on “scenarios”. They can be historical data inspired, stress tests or Monte Carlo. Those methodologies are often used to compute Initial Margin (IM) related to exchange traded portfolios. The instruments in exchange trades setup have standardized terms and conditions, including a “tick value” or “minimal increment” which indicates the precision of the price quotation mechanism. This is often one cent on prices and one basis point for interest rates. I have been involved in many VaR and IM methodologies over the past years: development, replication, validation. One question that I have been asked several times with different flavours is: How should the methodology account for tick value in the scenarios? Should the price generated by the scena...

L’actualité a récemment parlé des “fact-checkers” suite à la décision d’un réseau social bien connu d’arrêter leur utilisation. Dans l’absolu, je suis favorable à savoir si ce que je lis est la vérité ou de la fiction. J’ai un a priori théorique favorable à la vérification des informations. Mais la réalité est parfois loin de la théorie. Et pour parodier le titre de ce blog, qui vérifie la véracité des propos des vérificateurs de faits? Qui détient la vérité absolue? Les vérificateurs de faits sont-ils infaillibles et non biaisés? Non Biaisés, non seulement dans leur affirmations mais également dans le choix des affirmations qu’ils tentent de vérifier? Mon expérience personnelle face à ces questions est plutôt négative. Là ou j’ai une compétence supérieure à la moyenne (mathématiques, finance, etc.), je trouve en général les vérificateurs pour le moins “économes avec la vérité”, pour ne pas dire à côté de la plaque, que ce soit par omission ou vraiment en propageant eux-même des ...

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...

 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, ...

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...

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.