Fallback, historical spreads, and market convergence

Marc has been active on its personal blog trying to answer the question "Has the value transfer already started in the LIBOR fallback?". From the market data, it seems that the answer is yes. Once there is a value transfer, one can try to take advantage of it. Since November, he has published regular updates on the question, the most recent of them being Making money on LIBOR fallback (5).

We have developed a tool to systematically analyze this idea. In this blog we summarize its results for only one benchmark through a single graph. The benchmark is GBP-LIBOR-3M which could fallback to SONIA compounded setting in arrears. For that benchmark we looked at a total of 48 scenarios. Those scenarios where created using 8 announcement dates, 3 lookback periods (10Y, 7Y, 5Y) and the mean/median options.

The first item represented in the graph is the historical data of the market quoted spread on basis swaps GBP-LIBOR-3M v SONIA for a tenor of 30Y. We also represented the 48 scenarios. For each of them the running measure on each day over the last year has been computed. So each scenario has been run roughly 250 times to generate the curves.

This market has moved by roughly 5 basis points since the July 2018 consultation results announcement on 27 November 2018. The different scenarios still leave a range of 7 basis points for the fallback. The market is now at one of the bounds of the range that we have computed. This range should close when the exact methodology for the spread computation is published by ISDA.

On which side of the value transfer will you be on the next market move?

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Related blogs:

0. Fallback transformers - Introduction
1. Fallback transformers - Present value and delta
2. Fallback transformers - Portfolio valuation
3. Fallback transformers - Forward discontinuation
4. Fallback transformers - Convexity adjustments
5. Fallback transformers - magnified view on risk
6. Fallback transformers - Risk transition
7. Fallback transformers - historical spread impact on value transfer

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Don't fallback, step forward!

Contact us for our LIBOR fallback quant solutions.

Panel expert - Risk Live 2019

Marc Henrard has been invited as an expert panelist at the inaugural

Risk Live

organized by Risk.Net that will take place on June 2019 in London. The agenda of the conference can be found on the organizer web site:

Risk Live 2019 Agenda.

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Marc will contribute to the panel

What could go wrong in Libor reform?

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You can get a discount on the event with the speaker discount code below

Register from the link: https://bit.ly/2vm3lQe

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Don't hesitate to reach out if you want to meet during the event.

Planning for the end of LIBOR - Cass Business School one-day workshop

Marc Henrard will present a seminar at the conference

Planning for the end of LIBOR

organized by Cass Business School in London on Wednesday 19 June 2019. The details of the workshop can be found on the organizer web site:

Cass Business School - Planning the end of LIBOR.

The event is free, but limited number of places are available. You have to register from the organizer's site referenced above. The registration is now open.

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Marc's talk, will be titled LIBOR fallback: a quant perspective. It will be the opening session and will start at 10:00 am.

Abstract

With the increased expectation of some IBORs discontinuation and the increasing regulatory requirements related to benchmarks, a more robust fallback provision for benchmark-linked derivatives is becoming paramount for the interest rate market. Several options for such a fallback have been proposed and ISDA held a consultation on some of them. The results of the consultation has been to privilege the compounding setting in arrears and historical mean/median options. We present those options and emphasize their drawbacks. In particular the compounding setting in arrears lack of details and lack of measurability and they would make it not be achievable in practice. We also present an alternative option supported by different working groups. The historical option can lead to significant value transfer, some of them having already taken place.

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Don't hesitate to reach out if you want to meet during the workshop.

LIBOR fallback: a recognised expertise

Over the coming years, one of the main issues in interest rate trading and risk management will be the emergence of new benchmarks and the potential IBORs fallback.

In the past year, we have looked at those issues from a theoretical and from a practical point of view. Some of the theoretical issues are detailed in a note that Marc published recently called "A Quant Perspective on IBOR Fallback Consultation Results" (https://ssrn.com/abstract=3226183). On the practical side we have implemented different fallback options, curve calibration mechanism and convexity adjustment to analyze the impacts on large portfolios. Some descriptions of the tools are available in a series of previous blogs.

Our expertise has been recognized by the market as documented from the invitations to many practitioner and academic finance conferences and seminars. Marc has been invited as guest speaker or expert panelist at the following events:

• The future of LIBOR (CFA Society Denmark, Copenhagen, Denmark) - 24 January 2019
• CASS Financial Engineering seminar (CASS Business School, London, UK) - 6 February 2019
• Quant Summit (organized by Risk.Net, London, UK) - 6-7 March 2019
• Singapore Management University seminar - 8 April 2019
• QuantMinds International (Vienna, Austria) - 14-16 May 2019
• CASS Business School workshop on LIBOR transition (London, UK) - 19 June 2019
• Risk Live (organized by Risk.Net, London, UK) - 27 June 2019
• The 15th Quantitative Finance Conference (organized by WBS, Italy, Rome) - 16 October 2019.
• The 5th Quant Insights Conference (organized by CQF Institute and Wilmott, London, UK) - 15 November 2019.

We are also presenting in-house workshops on similar subjects (see our training page on LIBOR) at different financial institutions in Europe.

Don't hesitate to contact us if you want to discuss potential in-house training or providing expertise on this subject for your projects.