Marc Henrard - Multi-curve framework

The Federal Reserve has manipulated SOFR again. This time not by replacing the actual trade data by a survey of dealers but by directly trading will dealers at off-market prices. The bail-out trades (overnight repo operation) have resulted, as intended, in lower reported SOFR rates. It is true that the rates were originally distorted higher due to government intervention, and the Federal Reserve, an other government body is intervening to distorted the rates lower. The results of all those interventions and distortions is that we don't know where the market really is. And the regulators are pushing for this heavily distorted number to be the base of the interest rate market. What could go wrong with such a system? As I'm at it, the CCPs are pretending that they can summarised all those distorsions into a big bang change from EFFR to SOFR for collateral PAI and discounting using a simplistic valuation mechanism for compensation. And ISDA is asking how to compute the sprea...

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 ...

One of my recent papers related to the LIBOR fallback has been accepted for publication in Wilmott Magazine LIBOR: Don't fallback, step forward The paper will be published in the November 2019 issue. I will present the main results at a CQF Institute seminar on 18 September 2019 . Abstract There is a general consensus that LIBOR's publication will be discontinued in the coming years. The best preparation for the discontinuation is to transition all trades, new and legacy, to different benchmarks. The option of last resort is to rely on the fallback language of existing contracts. The language for derivatives is currently not fit for purpose and is in the process to be reworded. In recent months several fallback-related consultations have taken place. The theme of this article is the fallback proposals. To the author point of view, the proposals are not satisfactory; the main proposal is not achievable in practice and a fundamental revision of the fallback's foundati...

One of my recent paper related to the LIBOR fallback has been published in the risks journal: LIBOR Fallback and Quantitative Finance The full text of the article is available as Open Access article on the journal website.

On 5 June, I published a post titled The Fed Manipulated SOFR . On 6 June, Risk.Net published an article titled A mystery: Why did the NY Fed use a survey to get SOFR? (subscription required). The Fed corporate communications has published a comment in Risk.Net that is supposed to be a rebuttal of those analysis . I was expecting rebuttal to be an argument on the quality of the market infrastructure put in place but I only heard " you cannot sue us for this issue ". It is true that the information on the production of SOFR is available in the Fed Website . But when the Risk.Net article was published, " A spokesperson for the New York Fed declined to comment. ", proof that it was not obvious even for the Fed; the "comment" referred above was published only on 18 July (more than one month and an half after the data); the CRO of a large bank when asked at an industry conferences said that he had no idea what happened. All those small items are evidences ...

One of my original papers on the multi-curve framework has now attracted more than 4,000 downloads on SSRN. The first paper was published in July 2007, before the start of the crisis and was titled The Irony in the Derivatives Discounting . The second one, posted shortly after the crisis, was naturally called The Irony in the Derivatives Discounting Part II: The Crisis . My papers posted on preprint servers (RePEc and SSRN) have now attracted more that 50,000 downloads (and my multi-curve blog that you are reading now, more than 86,000 visits). Thanks for reading my Irony !

My answer to the May 2019 ISDA consultation titled " Supplemental Consultation on Spread and Term Adjustments for Fallbacks in Derivatives Referencing USD LIBOR, CDOR and HIBOR and Certain Aspects of Fallbacks for Derivatives Referencing SOR " is now available. The document has been posted on SSRN with abstract ID 3415930 . It has not been "reviewed" yet but is already available. Comments are welcome! This answer is a follow-up on my answer to the July 2018 consultation on similar subjects .