Sunday, 5 July 2020

Marc quoted in the press: Practice Insight - IFLR

LIBOR transition is certainly of great interest to the quant side of the financial industry, as illustrated by numerous seminars over the last years (see here for a list to which we contributed) but also numerous columns, interviews, and quotes from Marc in Risk (eg Signing the LIBOR fallback protocol: a cautionary tale, Pandemic and LIBOR, LIBOR transition mismatch fear, muRisQ quoted in ISDA consultation summary).

The transition has also an impact on the legal side of the financial profession. A recent slightly provocative blog by Marc (Where is ESTR?) has been the starting point of an article in Practice Insight - IFLR. Practice Insight is a "news service for lawyers, tracking how financial institutions are implementing Europe's capital market rules" (subscription required).

Wednesday, 10 June 2020

Benchmarks in transition videos: Season 1: all the episodes


We have created a set of introductory videos related to Benchmarks in transition. There is a total of nine videos which are available on our Youtube channel
  1. Benchmarks: tenor deposit and overnight (11:32)
  2. Why a transition? (15:01)
  3. Overnight transition: EFFR to SOFR and EONIA to ESTR (21:10)
  4. CCP big bang - EUR (6:32)
  5. CCP big bang - USD (21:42)
  6. IBOR fallback - overview (16:40)
  7. IBOR fallback - adjusted RFR (18:06)
  8. IBOR fallback - spread (17:11)
  9. IBOR fallback - value transfer (17:34)
The videos are at the introductory level for each subject. A lot more material is available for workshops and advisory engagements. The slides of the videos are available at: http://ssrn.com/abstract=3568503.



All the graphs in our blogs, seminars and videos are produced by production grade libraries. Our libraries include the Fallback Transformers which allow to apply the exact fallback details to actual trades and portfolios. The transformation details include overnight composition, period offset, spread applicable, and discontinuation date. They are suitable for what-if analysis and risk management.



Don't fallback, step forward!

Contact us for LIBOR fallback and discontinuation: trainings, workshops, advisory, tools, developments, solutions.

Sunday, 31 May 2020

Fallback transformers: gaps and overlaps - portfolio version

In a previous blog, titled Fallback transformers: gaps and overlaps we have described the (unintended?) consequences of the offset mechanism in the IBOR fallback computation period described in the Bloomberg IBOR Fallback Rate Adjustments Rule Book.

From the fallback rule book, does it transpire what the graph below represents? If not, continue reading!


Figure 0. Overnight weights to be explained.

The proposal for the period is to offset the overnight compounding period start with respect to the IBOR period start by two (business) days and to compute the overnight compounding period end as the IBOR tenor after the start (in the modified following convention). As very well known by practitioners, the period additions in finance are neither commutative nor additive — saying that addition is not additive sounds very strange, but period addition is not really an addition. All the back and forth on dates to define the compounding period necessarily lead to "not text book consequences".

One of the consequences, that was demonstrated on an example in the above mentioned blog, is the gaps and overlaps in the overnight coverage generated by the fallback. A natural questions from blog's readers and clients is to know how prevalent this effect is among a 'normal derivative book'. It is difficult to decide what a 'normal derivative book' is but we can generate books covering all dates and see what happens. This blog extends the analysis initiated in the previous blog by looking at the effect on a book consisting of 251 swaps with effective date in each business day of 2020. The swaps are USD fixed (semi-annual bond basis) versus USD-LIBOR-1M with a tenor of 2Y. This means one year in which the book builds up, one year in which it is stable and one year in which swaps come to their maturity.

We have three versions of the book: the original LIBOR book, the book after the fallback (in this case considering that the fallback applies as of start of 2020) and a book of OIS with the same effective dates as the fallback swaps start compounding and using similar conventions (same fixed leg as the fallback leg, SOFR compounding with monthly payments on the floating leg). The valuation date is 2019-10-04. The exact valuation date does not really matter, as long as it is before the start of the first swap. The notional of the swaps are USD 10,000.

Like in the previous case, the first step is to look at the daily PV01 of the floating legs.
We start with the simpler case, the OISs. All the composition periods are perfectly aligned and the risk is what you see in any text book: a risk at the start (in one direction) and a risk in the end (in the other direction). The risk is proportional to the time to cash flow. At maximum in our case, the maturity is a little bit beyond 3 years from valuation, so the PV01 is around USD 3 per swap. Due to non-good business days, in some cases two or three swaps mature on the same date and the PV01 in those dates in around USD 6 or 9. This is represented in Figure 1.



Figure 1. Daily PV01 for the portfolio of OISs.

In Figure 2, we present the same graph but with a scale 10 times smaller. This is not a display error, but this is to be able to compare with the other cases later.


Figure 2. Daily PV01 for the portfolio of OISs. Different scale.

We move to the fallback case. According to some descriptions in text related to the transition, the fallback generate risks similar to OISs and should not create any risk management issues. When we apply or daily PV01 to the generated book, we see the risk displayed in Figure 3. The scale of figure 3 is the same as the one in Figure 2. Very large risk, one of them larger than 100 appear. Note that to obtain such a risk, we would require a 100-year tenor swap, 30 swaps with 3-year tenor or a swap with notional USD 300,000 instead of USD 10,000. This the maximum risk, but there are also many days with risks above 50. The risk profile is clearly distinct from the one of an OIS book.



Figure 3. Daily PV01 for the portfolio of swaps after fallback.

For the third book, the LIBOR book, the daily risk is displayed in Figure 4. There are also spikes of daily risks. Even if LIBOR is the main benchmarks for interest rate derivative, this representation of the risk is probably not familiar and certainly does not appear in most text books. The origin of this risk is again the issue with adjustment for non-good business days. The LIBOR periods do not correspond exactly to the swap accrual periods and payment dates.


Figure 4. Daily PV01 for the portfolio of LIBOR swaps.

This risk has been present for as long as LIBOR swaps have been traded. In term of size, the sum of absolute values of all the risk after fallback is about twice the sum of absolute value in the LIBOR case. But, and maybe more importantly, the LIBOR fixes in advance and those daily sensitivities have an impact only in term of the expected rates over those periods. In the case of SOFR, the composition is in-arrears, so the impact is not on the expected value, but on the realized value which is a lot more volatile. Not only the fallback PV01 are larger but they apply to the more volatile realized rates and not to the smoothed by expectation LIBOR rates. The LIBOR has not only an effect of average by accumulation of days over a tenor but also an average effect of expectation.

The graphs reported up to now do not correspond to the standard representation of risk on a trading desk or in a risk management system. The most used representation is as market quote bucketed PV01. We propose those representation below for the fallback and OIS portfolios where we have changed the notional of each swap to be 1,000,000 USD. As can be seen, the difference is very small. In total, there is around USD 1 difference over an almost USD 50,000 risk; the largest difference on any bucket is USD 42. No market maker would hedge the USD 42 risk, but would a market maker look at a USD 10,000 systemic daily risk - which is the maximum risk reported above for the fallback portfolio?


Figure 5. Bucketed PV01 for Fallback and OIS.

It is also important that those daily risk are not appearing randomly because of large trades in the book, they appear systematically because of the vagaries of the calendar. In a calendar with all months of 30 days and weeks of 10 days, those issues would not appear. Maybe the French Republican Calendar should be reinstated to facilitate the LIBOR fallback!

The risk has been displayed as set of daily PV01. Can we also represent the weight of the different days? If the risk is not uniform, it means that some overnight periods are more important than others. What are those periods and what is the size of those under and over-weights? This is represented in Figure 6. For the fallback and OIS portfolios, we have represented the weigh of each overnight period in the 3-year period. The OIS representation is very clean, days weights increase as we add trades in the book, stay constant at 251 (the number of trades) for a year and decrease smoothly after. The representation for the fallback portfolio (in red) is a lot more chaotic. If we look at the middle year, there are many days with a weight of 251, but there are also many days with weigh well below and well above that level. The maximum weight is 292 on 2020-12-23 — this is 41 more than in the OIS case or 16% more — and the minimum weight is 211 on 2021-03-24. Hopefully nothing bad will happen to SOFR on those dates. You can find other interesting dates:  a weight of 282 on 2020-12-24 — i.e. over a 3 day Christmas week-end — or a weight of 227 on 2020-01-29 — i.e. over a 3 day month end.



Figure 6. Portfolio daily overnight count for Fallback and OIS.

Now that this Christmas tree-like has been interpreted, does what it represent transpires from the fallback rate adjustment rule book? If not, maybe it would be beneficial to discuss all those elements with professionals that have investigated them and many others minutiae for several years.



All the graphs and figures reported in this blog have been obtained using production grade code and market data. The fallback trades are produced using Fallback Transformers tools and libraries developed since 2018. Contact us for more details about those tools.


  1. Fallback transformers - Introduction
  2. Fallback transformers - Present value and delta
  3. Fallback transformers - Portfolio valuation
  4. Fallback transformers - Forward discontinuation
  5. Fallback transformers - Convexity adjustments
  6. Fallback transformers - magnified view on risk
  7. Fallback transformers - Risk transition
  8. Fallback transformers - Historical spread impact on value transfer 
  9. Fallback transformers - A median in a crisis
  10. Fallback transformers - Gaps and overlaps  


Don't fallback, step forward!

Contact us for LIBOR fallback and discontinuation: trainings, workshops, advisory, tools, developments, solutions.

Tuesday, 26 May 2020

Marc's presentation at the Online Interest Rate Reform Conference

Marc Henrard will present a seminar at the

Online Interest Rate Reform Conference


which will take place from Monday 13 July to Friday 17 July 2020. The agenda of the conference can be found on the organizer web site:




Marc's talk, will be titled Discounting Big-Bang: Quant Perspective and Convexity Adjustments.

More details about the presentation will follow soon.

Sunday, 24 May 2020

Benchmarks in transition videos: Episode 8 - LIBOR fallback: value transfer

With the increased expectation of some IBORs discontinuation, the overnight benchmark changes and the increasing regulatory requirements related to benchmarks, a clear quantitative finance perspective on the impacts for derivatives is becoming paramount.

We have created a series of introductory videos on the subject of benchmark transition. The videos are available on our Youtube channel.

The eighth episode is dedicated to the value transfers generated by the new fallback mechanism and the difference between cleared and non-cleared market.




All the videos will be linked in our LIBOR transition page.



In the current situation, we are also happy to offer virtual/on-line courses/workshop. The configuration is even more flexible that in-person courses as participants in different locations can attend simultaneously and courses can be split in half days to avoid participants lassitude.

Friday, 15 May 2020

muRisQ quoted in ISDA consultation summary

The Summary of Responses to the ISDA 2020 Consultation on How to Implement Pre- Cessation Fallbacks in Derivatives has been published yesterday 14 May 2020. There were 142 respondent. muRisQ is among the four Professional Services/Trade Association to have answered and the only respondent from Belgium.

Like in previous consultation summaries of responses, muRisQ responses are largely quoted in the document. A first version of the answer appeared on Marc's blog:  Pre-cessation it will be :(

One of the summary sections provide an highlight of the reason behind our negative answer to the pre-cessation question:
51.In contrast, a European professional services firm emphasized that “[i]n the current master agreements, the only event that leads to a fallback is the non-publication of the rate, there is no notion  of  announcement  date  and  even  less  pre-cessation  trigger.  A  pre-cessation  trigger  forces  extra  complexity  and  increases  the  fragmentation  of  the  market.  Legacy  trades  only  have  non-publication  as  a  trigger,  adding  a  pre-cessation  trigger  create  a  discrepancy  between  the  trades  under the new definitions and the legacy trades. The discrepancy would make it more complex to hedge the legacy book. A new fragmentation of the market will be created.” This entity noted, “To achieve the required exposure on new trades, the fallback has to be trigger as late as possible. Any pre-cessation trigger is a negation of the trade existence itself. The LIBOR fixing, even if not perfect or deemed not representative by a third party – e.g.,  a regulator – is better than a fixing based on a RFR plus a spread which is not credit and liquidity dependent. Fallback should be a last resort mechanism  and  used  only  in  last  resort.  The  pre-cessation  event  is  not  an  event  requiring  last  resort. The estimation by a single entity, even a regulator, without review and recourse mechanism in place, regarding a major interest rate standard that has been working for more than 30 years and is still working, should not be consider as a case of last resort.”



Don't fallback, step forward!

Contact us for LIBOR fallback and discontinuation: trainings, workshops, advisory, tools, developments, solutions.

Thursday, 14 May 2020

muRisQ in the press

An article related to LIBOR/SOFR transition published today in Risk.Net quoted muRisQ. The article is titled "SOFR phase-in for cash products sparks ‘mismatch’ fears". muRisQ provided to the leading magazine on derivatives data related to the transition they could not obtain otherwise. The data is quoted in the text and provided as a graph. We published a similar graph yesterday in Compounding with offset.

Risk.Net turned to us to access data they could not obtain from traditional data provider like Bloomberg. The data has been computed from our production grade libraries. Some examples of the usage of those libraries are provided in the 'analysis' repository provided open source by Marc on Github: https://github.com/marc-henrard/analysis

Wednesday, 13 May 2020

Compounding with offset

The latest proposal related to the IBOR fallback in case of cessation is to include an offset in the overnight composition period. As discussed in previous blogs, this on paper offset may not lead to actual offset on the payment date (see Fallback and same day payment?) and will generate gaps and overlaps between risk periods.

The offset will also be applied to the historical spread used in the fallback. It means that the spread used in the fallback will be impacted by three distinct features: credit/liquidity, market misestimation and offset. The first two have been discussed extensively in different blogs and publication, the third one is new. The interest rates used to measure the spread are related to different periods. Depending if the monetary policy is in a rate increase or a rate decrease cycle over the 5-year lookback period, the intuitive spread will be overestimated or underestimated.

The graph below is the time series of the spreads since SOFR/pre-SOFR has been published (August 2014). As usual in my graphs, the dates reported are the LIBOR fixing dates (not the maturity date) and the SOFR related numbers stop 3 months ago because of the "in-arrears" feature.



The second graph is a focus of the offset impact. Two time series of spreads are computed: one with the two business days offset and one with zero business day offset. The spreads with offsets are a little bit bumpier, potentially due to difference in length in the LIBOR and ON periods.




All the graphs in our blogs are produced by production grade libraries. Our libraries include the Fallback Transformers which allow to apply the exact fallback details to actual trades and portfolios. The transformation details include overnight composition, period offset, spread applicable, and discontinuation date. It is suitable for what-if analysis and risk management.



Don't fallback, step forward!

Contact us for LIBOR fallback and discontinuation: trainings, workshops, advisory, tools, developments, solutions.

Friday, 1 May 2020

Benchmarks in transition videos: Episode 7 - LIBOR fallback: spread

With the increased expectation of some IBORs discontinuation, the overnight benchmark changes and the increasing regulatory requirements related to benchmarks, a clear quantitative finance perspective on the impacts for derivatives is becoming paramount.

We have created a series of introductory videos on the subject of benchmark transition. The videos are available on our Youtube channel.

The seventh episode is dedicated to the spread part of the fallback.




All the videos will be linked in our LIBOR transition page.



In the current situation, we are also happy to offer virtual/on-line courses/workshop. The configuration is even more flexible that in-person courses as participants in different locations can attend simultaneously and courses can be split in half days to avoid participants lassitude.

Tuesday, 28 April 2020

Bespoke course: 3000

We have just received an email from a large training provider. They indicate
Bespoke training for you and your team starting at GBP/USD/EUR 10,000*! *pricing dependent on topic and group size.
On our side, we can say
Bespoke training for you and your team starting at GBP 3,000/day*! *pricing not dependent on topic and group size.

The course are always provided by our in-house experts and, from our training page:

Agenda tailored to your needs. Detailed lecture notes.
Associated to open source code for practical implementation.
Training in English or French

We are an (fiercely) independent management owned advisory firm and the trainings reflect that independence. We don't have hidden agenda and are free of conflict of interest.

In the current situation, we are also happy to offer virtual/on-line courses/workshop. The configuration is even more flexible that in-person courses as participants in different locations can attend simultaneously and courses can be split in half days to avoid participants lassitude.

We have provided public and in-house workshops/courses/seminars in Europe, New York, Singapore and Africa.

Some of our courses are described in our training pages. Over the past year, the most popular ones have been
In all cases, the course are updated with the latest market information and are fully flexible.

You can check some of our introduction videos on our Youtube channel.