Sunday, 19 May 2019

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?

Related blogs:
  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

Don't fallback, step forward!

Contact us for our LIBOR fallback quant solutions.