Marc Henrard - Multi-curve framework

On Monday and Tuesday I was in Warsaw presenting a workshop related to the content of my soon to be published book " Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, Transition, and Implementation ". In the book's subtitle, there is "Transition". I knew that the Polish market was in a transition phase between WIBOR and POLSTER. Nevertheless, I was surprised that the WIBOR benchmark administrator announced while I was there that WIBOR will cesse to be published on 1 January 2037 (to my knowledge, no casual relation between my presence and the announcement). That is a 10-year period between announcement and actual cessation! That is a world record!!! Congratulation to Poland for that world record. Now you have to live with it! In particular have a look at Section 6.6.4 of my book and my blog posts LIBOR Fallback Transformers - Risk transition , LIBOR fallback transformers - forward discontinuation and LIBOR discontinuation and curve ...

It took me a little bit longer than expected, but the new edition of “ The multi-curve framework ” book is now with the editor. I will provide more details on the advancement of the book's physical production when I receive them.

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...

If you read this, it means that the world has not ended! Good to know the world can exist without LIBOR. Actually some GBP-LIBOR fixing will still be published to the end of March 2024 and some USD-LIBOR will still be published to the end of September 2024 due to FCA use of “Article 23A benchmarks”. Maybe I penciled the wrong “end of the world date” in my calendar! New “real” LIBOR (by opposition to the one invented by FCA) fixings are not published anymore, but old fixings still exists. We can see almost 10 trillions of it in the LCH data of Outstanding IRS. In number for 30 June 2023 on USD 3-month tenor: LIBOR fixing 5.54543 CME SOFR Term Rate: 5.26936 ISDA Spread: 0.26161 “Synthetic” LIBOR: 5.54543 There is a 1.546 bps gap somewhere! Where would that be? According to market rumours, both LIBOR and CME SOFR Term Rate are representative market rate as of 30 June 2023. We can only conclude that ISDA Spread is not a representative market rate. Why it will be used fro...

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...

At the beginning of the week I participated to the "Benchmark Reform Congress" organized by CEETA in Warsaw (Poland). I discovered with interest the current situation in the Polish market with the strong push by the government to reform the interest rate benchmark and discontinue the use of WIBOR as the main benchmark by the beginning of 2023. The transition could be more difficult than in the LIBOR case as 6 months before the potential discontinuation date, the replacement benchmark has not been decided yet. The current overnight rate is POLONIA , published by the central bank; it is used for collateral remuneration but there is almost no OIS transactions. The local CCP KDPW is in theory clearing those instruments but there is currently no outstanding transactions (even if there were some a couple of years ago). The local players are discussing about potential new benchmarks. The current status is discussed in a long consulting paper published by GPW Benchmark: Transact...

Open letter to Ursula VON DER LEYEN in relation to REGULATIONS COMMISSION IMPLEMENTING REGULATION (EU) 2021/1847 of 14 October 2021 on the designation of a statutory replacement for certain settings of CHF LIBOR Dear Ursula, I read with interest your REGULATION (EU) 2021/1847. If you don't mind, I would have a couple of simple questions regarding the text. I'm certain the numerous consultations you indicate you have done have already answered those questions, so it should just take you a couple of minutes to answer them. Ambiguous definitions (rate) The text indicates 1-month CHF LIBOR is replaced by 1-month SARON compound Rate, as observed over the 1 month period preceding the interest period; What is the meaning of " 1 month period preceding ". From my experience, this is not a trivial question in finance. The first ISDA consultation, published in July 2018, had a similar issue. It indicated " observed over the relevant IBOR tenor and compounded daily dur...

LIBOR transition is involving large value transfers between market participants. In the past, I offered to my faithful readers the possibility to make money on LIBOR fallback (see the series starting here ). The money making machine required to take some "spread positions" and trust that the LIBOR cessation process would complete in a time frame of a couple of years. The LIBOR cessation completed on 5 March 2021 with the announcement regarding the forthcoming cessation. The term "position" above is in between inverted commas because the point was that it was not really a spread position from a market risk perspective, only from a name perspective. It turns out that there is a little bit of market position in the trade as described in Fallback transformers: gaps and overlaps and the following muRisQ's blogs. The position I proposed In November 2019 has made more than 10 bps in rates . Now that you have made some money with hard work, I propose a mechanism to lo...

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 ...

SOFR First started on 26 July. We now have two weeks of data. The result is somehow mixed. On the LCH front, the volume has decrease significantly last week with respect to the previous one (SOFR First initial week).  The volume is roughly the same as in end of May. On the ISDA figure side (from US regulatory figures), the absolute volume is slightly up but the proportion of SOFR with respect to LIBOR is down; it is below 8%. Still far away from SOFR First !

No change on the EUR side at LCH. The volumes have not really moved in the last 5 months. I could not find volume figures on EUREX site (let me know if those figures are public somehow), so I don't know if a significant part of the volume is now trading at EUREX rather than at LCH. As mentioned last month, LCH has changed its reporting mechanism and does report only below 2Y numbers and does not split it any more in below 1Y and 1Y to 2Y. This is really unfortunate as the different OIS term rates are in discussion. Those term rates are based on liquid quotes for 1-month, 3-month and 6-month periods. It is of great importance to see the actual liquidity in those buckets. Removing the split is removing a very interesting piece of information in relation to the transition. On the CHF side, there was a significant increase over July. But it is only a small victory in the sense that it is only the first time that the volume is above the February 2020 volume (18 months ago). Good incr...

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...

 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, ...

This time I have also included the CHF figures. I will start there. The year-to-date (YTD) figures at LCH are LIBOR IRS at 1,670 bn and SARON OIS at 505 bn. LIBOR swaps represent still more than 75% of the notional (we have not included the FRA in the LIBOR part). Unfortunately PV01 figures are not available on LCH site, but one can guess that they would be worst for SARON. From the ISDA Clarus RFR adoption indicator (May 2021 as the June one is not available yet), it seems that globally the portion of SARON is below 15%. (*) Note that LCH has changed his volume report, with volume below 2Y as one bucket (instead of 2: <1Y and 1Y-2Y) and volume above 5Y as 3 buckets. In USD, the SOFR usage is increasing steadily but is still at relatively low levels. Over the month of June, 2,179 bn have been cleared at LCH; an increase of 23% form the previous record level in April. But the SOFR figures are still well below the LIBOR or even the Fed Funds levels. YTD, the LIBOR swap level at LCH...

Monthly review of ESTR and SOFR volumes. No progress in SOFR, no progress in ESTR. In May, the LCH SOFR volumes are barely above 70% of the April's ones. In volume, SOFR swaps are still below 3% of LIBOR swaps according to ISDA figures. With the decision by CCPs to steer away from ISDA's fallback and convert LIBOR swaps to OIS with spread, one could argue that LIBOR swaps and SOFR-OIS are the same products. Nevertheless given the uncertainty on the exact conversion mechanism and the non-fungibility due to spreads, I would be very reluctant to trade LIBOR swaps at this stage. Clearly the market majority disagrees with me and thus I'm wrong (but I don't know why)! EONIA is disappearing at the end of the year, in seven months, and the bulk of the OIS is still EONIA-linked.

Monthly review of ESTR and SOFR volumes. Decent progress in SOFR, no progress in ESTR. It seems that we can not get one month with increase in both. ESTR volumes decreasing with respect to March. EONIA is disappearing by 1 January 2022 with an unmanageable fallback process but the bulk of the EUR OIS volume is still in EONIA! The SOFR volume (ISDA figures based on US regulatory reporting) still indicates less than 3% SOFR/LIBOR ratio.

Monthly review of ESTR and SOFR volumes. Decent progress in ESTR, no progress in SOFR (opposite of last month). The ESTR swap volume over the month has jumped from 250 billions to 557 billions (USD equivalent). The SOFR volume is is slight decrease in March with respect to February. The monthly volume has decrease down to 1181 billions from 1310 billions. The ISDA figures (based on US regulatory reporting) are also stable. SOFR volumne is less than 2% of LIBOR volume.

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...

After some financial fictions, here is a food fiction. Following price manipulation and decrease of volume in cookies, the cookie market is going through a reform. There are always tough cookies. To deal with them, the Factory Cookie Authority (FCA) has decided to ask for more power to the parliament. The proposed power would allow the FCA to impose synthetic prices on cookie contracts. The cookie prices will be based on the flour price plus a fixed spread. The spread has been decided by the International Cookie Dealer Association (ICDA) after a public consultation answered by a less than 100 people, mostly ICDA members. The spread is a fixed number for the next 50 years and is not based on cost of other cookie ingredient, like sugar, eggs, salaries, taxes, but is based some on historical figures selected by ICDA mixing (pun intended) flour, sugar and rotten (i.e. in-arrears) eggs over different periods. Should the MPs vote for such a tough cookie power? Wouldn't that be a tough co...

Some random comments about the LIBOR cessation announced on 5 March 2021. The IBA decision (forced by the panel banks) is now public . LIBOR with cease on 31 December 2021: all but USD tenors below 30 June 2023: USD-LIBOR ON, 1, 2, 3, 6, 12 M. All LIBOR are expected to stay representative to the last date. Interesting that FCA can assert that they are confident that USD-LIBOR will stay representative for more than 2 years while a couple of months ago they said that they would provide information about non-representativeness in 2021 by the end of 2020. A potential "synthetic LIBOR" may be decided after those dates (depending on the FCA getting the power from the lawmakers). But this would not be a true LIBOR from an economical or quantitative perspective. The potential synthetic LIBORs by FCA are for GBP, JPY and USD 1, 3 and 6 months. The debate about pre-cessation trigger that was considered as " essential " a year or so ago turn out to be a nothing-burger. The a...