Thursday, 5 November 2020

Marc's presentation at QuantMinds International

Yesterday's presentation at

QuantMinds International

is now available on demand on the conference website (Wednesday 4th, Stream C). 

The presentation was based on proprietary research that has been published in Risk.Net: CCP discounting big bang: convexity adjustment.

A couple of screen shots:





Tuesday, 20 October 2020

Marc's presentation at QuantMinds International

 Marc Henrard will present a seminar at 

QuantMinds International


which will take place from Monday 2 November to Friday 6 November 2020. The agenda of the conference can be found on the organizer web site:




Marc's talk will take place on Wednesday 4 November at 9h00 am and will be titled CCP Discounting Big-Bang: The irony in the derivatives forwarding.

Agenda:

  • Collateral and discounting big-bang process
  • Valuation impacts: theoretical clean process
  • Valuation impacts: practical dirty process
  • Convexity adjustments: forwarding big bang


The proprietary research underlying the presentation is detailed in a paper that has been published in Risk.Net: CCP discounting big bang: convexity adjustment.

Wednesday, 23 September 2020

Published: CCP discounting big bang: convexity adjustment

 A new timely research paper developed by Marc has been published in Risk.Net. The paper is titled

CCP discounting big bang: convexity adjustment



The CCP discounting big bang in USD is planned to take place in mid-October. The paper has been published on 18 September 2020 and is available at (subscription required): https://www.risk.net/cutting-edge/banking/7682566/ccp-discounting-big-bang-convexity-adjustment

Introduction:

Central counterparties are planning big bang-like collateral transitions. The transitions are done in an illiquid market and some fair market values are unknown. The CCP-selected mechanism to deal with these unknowns gives rise to exotic convexity adjustments. In this paper, Marc Henrard analyses the origin of those adjustments and quantifies the resulting impact based on a model for the dynamics of the relevant discounting and forwarding rates

Wednesday, 26 August 2020

Marc quoted in the press: Practice Insight - IFLR

Marc was quoted in the press in a follow-up article to the "Where is ESTR?" article previously reported. This article, dated 26-Aug-2020, was titled Market still reluctant to adopt €STR (subscription required).

Tuesday, 18 August 2020

New paper: CCP discounting big bang: convexity adjustment

A new timely research paper developed by Marc has been accepted for publication in Risk.Net. The paper is titled

CCP discounting big bang: convexity adjustment


The CCP discounting big bang in USD is planned to take place in mid-october.

Abstract: 

CCPs are planning a big bang-like collateral and discounting transition for USD. This transition is described as providing value and risk exchange compensation at fair market values. Such a transition would conduce to the absence of value and risk impact for market participants if it was done in a pure way. By definition of big bang, the transition is done in an illiquid market for some market segments and some fair market values are unknown. To understand the actual impacts, one has to look at the practical details and how the absence of data for half of the values is overcome in practice. The CCP selected mechanism prompts exotic convexity adjustments for transitioned swaps. In this note we prove that a clean approach would really be clean and analyse the details of the practical approach and its adjustments for vanilla swaps.

Part of the research has been presented at the Online Interest Rate Reform Conference in July 2020 under the title "CCP discounting big bang: The Irony in the derivatives forwarding".


Note added 2020-08-20: The publication is planned for the October paper issue of Risk.Net. It should appear in the online version earlier. A link to the paper will be posted when available online.

Note added 2020-09-23: The link to the online paper is (subscription required):  https://www.risk.net/cutting-edge/banking/7682566/ccp-discounting-big-bang-convexity-adjustment

Tuesday, 28 July 2020

muRisQ in the press: SOFR related data in Risk.Net

The (difficult) transition to SOFR continues. According to the different press reports, the take-over is slower than expected and in some niche market, LIBOR-linked FRNs are growing faster to SOFR-linked ones. Some of those isses are discussed in a recent Risk.Net article: Asia debt market suffers SOFR inertia.

Even if Bloomberg has started to publish SOFR compounded data, the specialized press still relies on data computed and provided by muRisQ Advisory. The preference to muRisQ data is visible in the Figure 4 of the above mentioned article.


All the graphs and figures 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, 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 titled "Euro risk-free rate: where is €STR?". 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 represents transpires to you from the fallback rate adjustment rule book? If not, maybe it would be beneficial for you 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.

Agenda:

  • Collateral and discounting big-bang process
  • Valuation impacts: theoretical clean process
  • Valuation impacts: practical dirty process
  • Transition and convexity adjustments


Note added 2020-08-18: The developments underlying the presentation are detailed in a paper that has been accepted for publication in Risk.Net.

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 Africa, America, Asia, Europe, and Oceania (special discount for any client base in Antarctica!).

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.

Friday, 24 April 2020

Fallback transformers: gaps and overlaps

The proposed IBOR Fallback Rate Adjustments Rule Book has been published by Bloomberg.

The exact details of the fallback from IBOR to compounded setting in arrears seems slightly different from the version in the latest ISDA consultation. In particular the compounding period is back from the "calculation period" to the IBOR tenor period. The period is defined with an "offset by 2 business days".

In this post, we look at the precise description of the "offset by 2 business days" as its implementation may be different from an intuition of such an offset.

The composition period is defined, first by moving froward from the fixing date by two business days to the spot date. The move forward is in the calendar of the replacing overnight index. For USD, this is already a little bit tricky as for LIBOR the fixing is in GBLO calendar, the effective date is in GBLO and USNY calendar but SOFR is fixed in the USGS calendar. We skip this question of calendar here. From the spot date, the start accrual date for the composition is computed by moving backward by 2 business day, this is the "backward offset by 2 business days" from the consultation. The end accrual date for the composition is computed from this start accrual date by adding the tenor of the IBOR index. For tenors in months, the end date is adjusted modified following.

The feature of this approach is that the backward offset is done on the start date and the end date is recomputed from the start date. Due to non-good business days, week-end in particular, there is no guarantee that the end date for the composition will actually be before the end date of the coupon period. In many cases there will be a same day payment. One example is described in the post Fallback and same day payment?.

In this post we want to focus on the impact of the way the offset is computed on the overnight risk. Because each compounded period for consecutive coupon of a swap is computed with its own offset, there is no guarantee that those periods will fit nicely next to each other. In another blog commenting on the fallback rule book, we mention one such example.

Having added the new fallback rule in our Fallback Transformer library, we can now look at the impact that those periods not fitting exactly has on the risk. Here the risk is a lot more complex that for LIBOR as each day counts, and with SOFR showing spikes at month-end, quarter-end or 15th of the month, the exact day is important.

We use the same example as the one described in the above mentioned blog: Example 1M-IBOR swap over 5-month period: 2020-03-26 to 2020-08-26. The standard accrual periods for the coupons payments are on dates 2020-03-26, 2020-04-27, 2020-05-26, 2020-07-26, 2020-07-27, and 2020-08-26. The accrual periods for RFR compositions (with 2 days offset) are [2020-03-24, 2020-04-24], [2020-04-23, 2020-05-25], [2020-05-22, 2020-06-22], [2020-06-24, 2020-07-24], [2020-07-23, 2020-08-24].

We look at the risk of the swap resulting from the fallback and the risk of a standard OIS starting on 2020-03-24 and ending on 2020-08-24. With those dates, the OIS has exactly the same start and end date as the OIS composition resulting from the fallback. This is true at least at the total swap level. What is happening at the coupon level?

The coupon level is described in the next two graphs. The first one is the OIS risk. In the graph, we represent only the risk associated to the forward rates (not the discounting, which is very small). We look at the risk at the (zero-coupon) rate daily sensitivity, not through a standard Bucketed PV01. The daily feature is important to understand the difference between the two instruments. The risk is viewed from 2018-08-30, this date is not important, it turns out this is the date used in previous blogs.

The swap has a notional of 1 million. Its effective date is roughly 19 months after the valuation date and the maturity date roughly 24 months after the valuation date.The risk profile is exactly what you expect. A large risk at the start, with a value of roughly 1,500 USD/bps and a large risk at the end, with a value of roughly 2,000 USD/bps in the opposite direction. Each coupon payment has a very small risk which would be cancelled by discounting risk.


The profile of the swap resulting from the fallback is a lot more interesting. Due to all the adjustments related to week-ends, the end of one coupon compounding period does not match the start of the next coupon compounding period. In this particular case, each coupon creates large positive and negative exposures at slightly different dates. In some case, there are overlaps between the periods and in other cases, there are gaps between them. Counting positive days for overlaps and negative days for gaps, we have at the 4 intermediary dates, 1, 3, -2, and 1.



Market makers will need to adapt their tools to deal with those gaps. Also, those gaps will not be completely random. Some week-ends will be more favorable for gaps and some more favorable for overlap. You cannot expect a large book to smooth those features out, to the opposite, a large book with not perfectly offsetting trades will tend to accentuate those features.


  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.

Sunday, 19 April 2020

Benchmarks in transition videos: Episode 6 - LIBOR fallback: adjusted RFR

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 sixth episode is dedicated to the floating rate 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.

Updates on LIBOR/ON spread

Some updates on the LIBOR/Overnight compounded in arrears spreads. Posted without comments.

We refer to the previous post on Signing the LIBOR fallback protocol: a cautionary tale for the first graph, Forward looking the spread between forward looking and backward looking rates  for the second one and to LIBOR Fallback: a median in a crisis for the third one.





Using the forward ON curves for the next 3 months, the spread is 29.21 bps (computed with the median). The spread if computed with mean would be 35.34 bps, a difference of more than 6 bps.

Wednesday, 15 April 2020

Benchmarks in transition videos: Episode 5 - LIBOR fallback: overview

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 fifth episode is an overview to LIBOR fallback. Three more episodes will be dedicated to 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.

Monday, 13 April 2020

Easter

This year, Easter benefits will be reduced to a small set of strange looking eggs.




When times are better, don't hesitate to contact us if you are interested by one of those golf eggs!

LIBOR discontinuation: 2 years to go and calibration

The most talked about date in the LIBOR world, or disappearance thereof, is January 2022. That is 2 years to go!

You may think that there is a problem with my calendar or that I'm still in the mist of new year celebration and I have missed the fact that there is 3 months less than 2 years to go.

But I maintain it is 2 years to go, actually a couple of weeks less than 2 years. In finance there are many conventions to compute the meaning of a tenor. Why is January 2022 separated by 2 year from April 2020 in the LIBOR world? Take a 2 year swap in the most traded currency (USD) with the most traded LIBOR (USD-LIBOR-3M). If you traded a swap on 2-Apr-2020, the effective date was 6-Apr-2020, the last LIBOR coupon will start on 6-Jan-2022 with fixing 4-Jan-2022. The 2-year swaps traded a couple of days ago, on the 2-Apr-2020 were the first 2-year swaps impacted by the January 2022 discontinuation. This justifies the "2 years to go" part of the title.

What about calibration? In a recent post, we indicated that "LIBOR Fallback is not a curve change, it is a contract change!". Does it means that I have to change the contracts/instruments used in my curve calibration? The short answer is "Yes, you do!" If the contracts are changed, with some payments in the swap changed from a "LIBOR fixed in advance" to a "SOFR compounded in arrears with 2-day shift", those details have to be included in the curve calibration. As mentioned above, we have just past the 2-year (swap) mark for the discontinuation date. This is important as it means that on a 2-year swap, now 1/8 of it embed discontinuation. Moreover, if you use 18-month and 2-year swaps in your curve calibration, 1/2 of the 6-month period between those two nodes is impacted. Is the impact large? The only way to know if is to try with actual market figures.

For this we compare three cases: 1) Ignore the existence of discontinuation 2) Take into account the existence of discontinuation for calibration and pricing 3) Take discontinuation into account for pricing but not for calibration in a hybrid way. This last method is incoherent, but may be a natural first step where the change is introduced were it is the simplest.

First we look at the no-discontinuation/no-fallback case. We just use our standard curve calibration procedure. Here to make the things simple and look at one issue at a time we use curves described by zero-coupon rates with linear interpolation on the rate. Obviously for actual market making, you would be more careful on how you calibrate curve, probably using some piecewise constant forward rate and a coherent LIBOR/OIS spread as described in a previous post on "Curve calibration and LIBOR/OIS spread". Here we want to present the difference between the three methods above and the starting point is not our focus as long as we use the same method for all cases.

How does the curve look? The calibration is done as of Thursday 9-Apr and we display the USD-LIBOR-3M forward rates (not the zero-coupon rates) and the SOFR 3-month period forward rate on the same period as LIBOR. The x-axis is the LIBOR fixing date; there is one rate for each good business day. We observe a standard pattern with kinks. The LIBOR/OIS implied spread is represented with the small dots.



We now move to the discontinuation. For that, we need to introduce a couple of hypothesis: the discontinuation date and the adjustment spread. We have selected 1-Jan-2022 for the discontinuation and 25 bps for the spread. The difference is immediately obvious. First there is a clear jump on the graph, from a market implied spread based on the economical reality of LIBOR to a legal contract implied constant spread. After the discontinuation, the spread is constant. The jump in this calibration is more than 15 basis points. This is called in some places a "cliff-effect", it is a cliff-effect only in the graph, not economically. A given instrument has a given fixing date, e.g. the dreaded 4-Jan-2022 mentioned above, you know already that date, you know that it will be after the discontinuation (under our hypothesis of discontinuation on 1-Jan-2022), so there is no surprise, there is no cliff, this will be a SOFR + spread payment. You would be surprise if, like in the first graph, someone was telling you that the value is depend on the LIOBOR economical reality on that date! The cliff can only come from ignoring reality in your calibration/valuation.



Is there a big difference between the different cases? For that we focus only on the period from 1-Jun-2021 to 1-Jun-2022. The rates are displayed in the figure below.

Before that period, all the methods give the same results. The swaps up to 18-month tenors are not affected by the fallback. If we look at longer term, there will be an impact, but a lesser one. It is really around the discontinuation date that the difference is clear. In the graph we have added also the hybrid result with fallback on the pricing but not on the calibration. We see that around the discontinuation date, before it, the no-discontinuation approach is overestimating the rate and after it, it is underestimating it. The difference between the different cases is up to 10 basis points. The market rates are matched perfectly, so you don't see the difference on standard tenor swaps. But if you have to price a non-standard instrument, e.g. a FRA with a start date just before or just after the expected discontinuation date, you may mis-price it by as much as 10 basis points.

Conclusion: Calibrate wisely and make sure that the instruments you price and those you are calibrating to are taking the LIBOR fallback/discontinuation into account for the contract description.

Saturday, 11 April 2020

Benchmarks in transition videos: Episode 4.b - CCP big bang - USD

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 fourth episode (part b) describes the PAI and discounting big bang at CCPs for USD.




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.

Wednesday, 8 April 2020

Benchmarks in transition videos: Episode 4.a - CCP big bang - EUR

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 fourth episode (part a) describes the PAI and discounting big bang at CCPs for EUR.




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

Monday, 6 April 2020

Benchmarks in transition videos: Episode 3 - New ON benchmarks

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 third episode describes the new overnight benchmarks in USD (SOFR) and EUR (ESTR).




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

Sunday, 5 April 2020

Mandatory IM: Category 5 and 6 delayed by one year

The BCBS has proposed a deferral of final implementation phase of the mandatory IM requirement for non-centrally cleared derivatives. The BCBS press release can be found at: https://www.bis.org/press/p200403a.htm

The BCBS deferral is in line with the proposition that Marc made at the QuantSummit and quoted in the press.

As mentioned previously, we have developed our own code related to a Standard Initial Margin Model (SIMM) used by most of the banks under mandatory IM (currently category 1 to 4). Our implementation is AD compatible and provides the derivatives/sensitivities with respect to all the inputs (all the input amounts).

Note added: By doing some reviews, we have also noticed that some open source code for its computation contains bugs related to the computation of correlations (string comparison bugs).

Benchmarks in transition videos: Episode 2 - Why?

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 second episode is dedicated to the description of why a transition is required.




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

Saturday, 4 April 2020

Benchmarks in transition videos: Episode 1 - Introduction

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 first episode is dedicated to the description of Ibor and Overnight benchmarks.




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

Wednesday, 18 March 2020

LIBOR Fallback is not a curve change, it is a contract change!

In recent consultations, ISDA has proposed a new definitions for the LIBOR fallback. Similar definitions will probably be adopted by CCPs. The exact definitions have still to be clarified (LIBOR tenor or calculation period, calendar for 2 day shift, etc.), but the global idea is to replace a forward looking LIBOR by a backward looking composition on a different period. In previous notes and answers to the consultations, we have explain why the fallback cannot be applied exactly as described in the consultations, some new workaround will be required. Once those clear definitions are available and achievable, how do we include them in our pricing library?

The striking element of that change is not the change from one rate to another but the complete change of the LIBOR-linked derivatives term sheet. The term sheet is changed from a single rate known at the start of the period (or even 2 days before) to a combination of multiple rates known at (or around) the end of the period. This change of term sheet has a direct implication in terms of systems and valuation techniques. It is not possible to look at the fallback from a change of (forwarding) curve perspective. Yes a different curve will be needed, but this is only a very small issue. The main issue is that you have to dynamically change the instrument term sheet. By dynamically, we mean it is not a simple one-off re-booking of the trade in the systems. You may want to do the re-booking once the cessation has taken its full effects, by in the mean time you have to take the trade with its current description and do a what-if type analysis by changing the trade temporarily. The discontinuation date is still uncertain, so you need to do that transformation temporarily (in memory) and have the capacity to do it for several cessation dates, several spreads, several fallback definitions, etc.

This requirements is exactly why we developed the

almost 18 months ago.

We have seen some vendors proposing spread adjustment to RFR curves to price LIBOR swaps in the fallback. This is fine as a toy model to have an overview for vanilla swaps. But if you want a real in depth analysis, how does it work? How do you represent the 2 days shift effect, in particular when the 2 days cover a quarter-end, a year-end or a FOMC meeting? How do you include the difference between LIBOR tenor and calculation period? How do you include the jump on forward rate on the discontinuation date?

The decision to go the "transformer" route was not a random one for us. It was based on several prototypes in a production grade library and running detailed impacts on test portfolios with a market maker requirements in mind. Getting the general level correct by a shift is fine for a first global overview. The next step is to look at the details, at the pricing of short term instruments covering the transition expected date, at the impacts of date shifts, the exact curve shape at each intermediary date, etc. That can be done only by working on the instruments, not on the curves. Each instrument has its own idiosyncrasies that cannot be faked by a curve manipulation.

The inclusion of the jump on forward rate on the discontinuation date is particularly interesting for the moment. The current OIS/LIBOR spreads are very high with respect to the historical median. There is a real impact there. If you have a "fallback curve", how do you represent that? You could say that you would use a technique similar to the one you use for central bank meeting dates jumps. But unfortunately the impact is of a completely different nature. On the day before discontinuation, you have a forward looking LIBOR that covers 3 months. If you use a pseudo-discount factor approach to your LIBOR curve, you have a LIBOR curve for the next 3 months at the LIBOR level. For the 3 months RFR-based forward starting the next day, you need a RFR level (plus a fixed spread). But that RFR rate has an overlap of 3 months minus one day with the LIBOR. On that period, which rate do you use for the pseudo-discount factor curve? The LIBOR level or the RFR (+ spread) level? Today the UD-LIBOR-3M/OIS spread is around 75 bps while the historical median is about 25 bps. There is no way to get away from the contradiction between the levels with a curve approach. There is no reason to expect a convergence of LIBOR to RFR+spread as we appraoch the discontinuation date. And this is only for one single vanilla LIBOR payment, without even looking at the shift, period and composition issues. Even if the LIBOR had a fallback to a clean RFR term rate, this curve approach would not work at the transition.

We advice LIBOR-linked derivative users to implement the "trade transformer" approach in their internal libraries. Using curve based approach is running the risk of a nasty surprise when the actual cessation comes.


Figure 1: Historical time series of realized spread between USD-LIBOR-3M and SOFR compounded. The current crisis does not show yet fully on those figures as the SOFR compounded is backward looking. The full impact will be visible only in 3 months. For a forward looking view of the crisis impact, we refer to the previous post Forward looking the spread between forward looking and backward looking rates.

Figure 2: Distribution of realized spread between USD-LIBOR-3M and SOFR compounded with teh current median. The most recent realizations are in lighter colours. The most recent ones are mainly above the current median and we can expect that the median will increase in the coming months. More details are available in the previous post LIBOR Fallback: a median in a crisis.



We have done many other developments around the analysis of valuation and data in the context of the LIBOR fallback. This includes analysis of value transfer impacts, forward spreads, minimum and maximum spreads, discounting big bang, estimations based on forward curves with calibration using spread control (see Curve calibration and LIBOR-OIS spread).

Don't hesitate to reach out to discuss how those developments could be of interest in the context of the management of your portfolio.

Saturday, 14 March 2020

LIBOR Fallback: a median in a crisis

The ISDA proposed LIBOR fallback mechanism is based on a 5-year historical median estimate. If the LIBOR discontinuation take place as expected in January 2022, we already have a certain portion of the required historical data.

In this analysis, to keep the number of variables low, we look only at USD-LIBOR-3M and suppose that the announcement date is 1 September 2021 (3 month before January 2022). We interpret the "5 year of history" as meaning 5 years of LIBOR fixing for which we have the relevant SOFR fixings. This means we actually use 5 years and 3 months of overnight data (other interpretation of "5 years history" are possible). The LIBOR fixing are from 29 June 2016 to 29 June 2021.

We can plot the historical data from the known period (29 June 2016 to 13 March 2020); the histogram of the data is provided below. The figure also displays the median (as per ISDA proposal) and the median (for comparison). The median is 26.6 bps and the mean 29.2 bps.


There is still the period from 16 March 2020 to 29 June 2021 which is unknown. The proposal is to use the median. We have 876 data points out of the 1260 required. We can already put a hard bound on the lowest and highest possible median spread (conditional to our date hypothesis). The lowest median possible is 20.2 bps and the highest median possible is 36.5 bps. Those figures are represented below.


What about the mean? The mean depends on the exact value of each number, and there is no a priori bound on the individual spreads, so no a priori bound on the mean either. We can nevertheless create some "what-if" analysis. For that we use two extreme scenarios: one with all the remaining spreads at 0 bps and one with all the remaining spread at 100 bps. The graph of those values is proposed below.


The different daily spreads are not independent. There is significant overlap between the overnight rates used in consecutive daily spreads. The spreads tend to cluster, creating a trend in the median evolution. Where are we today (or more exactly were are we in the combination of LIBOR from 3 months ago and overnight up to today)? In the figure below, the have colour-coded the different occurrences. The lighter colours represent the more recent ones, each colour representing one of the 8 groups of 10 prints (a total of 80 recent print are in lighter colours).


The trend in the last months has been to be higher that the median. Note that the above figure do not include the LIBOR rates from the recent turbulent weeks; those will appear in the statistics only in a couple of months. Our best predication of those (see our recent post on Forward looking the spread between forward looking and backward looking rates) is that there will soon be very high spreads (above 100 bps).

This lead us to an embedded option in the fallback proposal. We mention our best estimate of the spreads in the coming months. Suppose that our estimation is perfect, are we sure that those spread will be included in the actual spread computation? The computation of the spread will be done on the announcement date (not on the cessation date). The announcement date will be decided by IBA and the panel banks, the procedure is thus giving a (free) option to the panel banks. Even disregarding the potential material nonpublic information embedded in the decision, there is a real option of non negligible value. Suppose that the option is exercised today and the announcement is made today (for an actual cessation in January 2022), what would be the impact? It is graphically depicted in the figure below. The direct impact would be an estimated margin of 24.5 bps, which is a decrease of 2 bps with respect to the first estimate in this post. Maybe more importantly it also removes the possibility of the spread going up to 36.5 bps which would be the case if all (market) spreads in the next 2 years or so were to be above 36.5 bps. The announcement option has a potential value of as much as 12 bps on all transactions with fixings post January 2022.


What are your options with regards to the fallback and how do you plan to exercise them? Don't hesitate to contact us to estimate them.



We have done many other developments around the analysis of spread data in the context of the LIBOR fallback. This includes analysis of value transfer impacts, forward spreads, minimum and maximum spreads, estimations based on forward curves with calibration using spread control (see Curve calibration and LIBOR-OIS spread).

Don't hesitate to reach out to discuss how those developments could be of interest in the context of the management of your portfolio.

Libor transition plans: Marc quoted in the press

Comments by Marc regarding the impact of the pandemic on some market infrastructure  transformation were reported in the press yesterday: Pandemic threatens Libor transition plans.

The comments were related to LIBOR transition and to uncleared margin rules.

Unfortunately, "A spokesperson for the UK’s Financial Conduct Authority – Libor’s regulator – did not respond to a request for comment."

A spokesperson for the UK’s Financial Conduct Authority – Libor’s regulator – did not respond to a request for comment.
A spokesperson for the UK’s Financial Conduct Authority – Libor’s regulator – did not respond to a request for comment.

Thursday, 12 March 2020

Forward looking the spread between forward looking and backward looking rates

Forward looking the spread between forward looking and backward looking rates or estimating the market misestimation 

The planned approach to adjustment spread in the new derivative LIBOR fallback arrangements are based on historical data. The spread historical data is based on one side the LIBOR forward looking rates and on the other side on the backward looking compounding setting in arrears.

This arrangement creates a spread which is a mixture of credit spread and market misestimation (see A Quant Perspective on IBOR Fallback consultation results, Section 5.2 for previous remarks on this). What is happening to that spread with the current crisis? By definition of the spread itself, we will be able to analyse this only in 3 months time, when all the overnight rates prints are known and we can compare the then backward looking overnight rate to the today forward looking LIBOR rate.

But it is possible to do a little bit better. We know the LIBOR rates over the last 3 months and we can project the overnight rates for the next 3 months. That does not really help us for the spread corresponding to today fixing, but it will help for the LIBOR fixing over the past three months. It is possible to get an estimate of the surprise (surprise cut in this case) that has already been realised.

The following graph is the result of that exercise for USD-LIBOR-3M and USD-SOFR. The LIBOR rates (dark blue line) are know up to today. The SOFR compounding rate in arrears based on the actual fixing (light gray line) are known up to the period corresponding to the fixing from 3 months ago. The projected in arrears for the 3 months up to today (dark grey) are based on known fixing up to today and projected fixing up to the end of the 3-month period. The spreads up to 3 months ago (yellow) are fully known and the spreads up to today are partly known (red) with the LIBOR side fully known and the SOFR side partly known.

We can see that the (projected) data already includes spike in the spread due to the surprise cut. The spike is above 100 bps. On the other side, for the fully forward looking LIBOR versus the fully forward looking SOFR (last red point on the graph), this is a spread without any unexpected element of monetary policy, has a spread larger than the average/median over the last years but is very far away from the spike. It does not mean that the credit crisis is suddenly seen as less severe over the last days, only that the market is not expecting unexpected policy changes.





We have done many other developments around the analysis of spread data in the context of the LIBOR fallback. This includes analysis of minimum and maximum spreads, estimations based on forward curves with calibration using spread control (see Curve calibration and LIBOR-OIS spread).

Don't hesitate to reach out to discuss how those developments could be of interest in the context of your portfolio management.

Sunday, 8 March 2020

Signing the LIBOR fallback protocol: a cautionary tale (2)

Following recent market moves, the graph accompanying the cautionary tale published in Risk.Net has been updated.

The full text is available on Risk.Net website (subscription required):


Updated without comment!

Sunday, 2 February 2020

Discounting transition: big bang impacts

CCPs have announced that they will change the PAI/collateral rate in USD from Effective Fed Fund rate (EFFR) to SOFR. This will be done as a big bang approach, not in line will the planned paced transition set by ARRC in 2017. The planned date for the big bang transition at CME and LCH is Friday 16 October 2020. Some description for CME can be found on their website; we have not found a similar description for LCH, even if it appears that the methodology will be similar.

CCPs are planning a big bang-like collateral and discounting transition for USD. In theory this transition is done with value compensation and risk exchange at fair market value. Such a transition would conduce to the absence of value and risk impact. But by definition of big bang, the transition is done in an illiquid market for which the fair theoretical value is unknown.  To understand the actual impact on valuation and risk, one has to look at the practical details of the transition and how the absence of data for half of the required theoretical quantities is overcome in practice. The resulting situation prompts exotic convexity adjustments for cleared swap and unknown valuation for non-cleared products.

The document, in the muRisQ Advisory Market Infrastructure Analysis series, is titled

Discounting transition: big bang impacts

and is available on SSRN with the reference

Henrard, Marc P. A., Discounting transition: big bang impacts. Market Infrastructure Analysis, muRisQ Advisory, February 2020. Available at SSRN: https://ssrn.com/abstract=3530464.



Other post related to the discounting transition: Change in collateral rate at CCP: quant perspective.

Tuesday, 21 January 2020

Signing the LIBOR fallback protocol: a cautionary tale

As Orwell's Room 101 beckons for LIBOR publication, muRisQ Advisory's Marc Henrard warns of potential pitfall in the fallback protocol.

This is the Risk.Net introduction to Marc's comment about the cleared/uncleared fragmentation of the market due to the design of the IBOR fallback.

The full text is available on Risk.Net website (subscription required):


Figure from the above published comment.



Note that the issue of the market fragmentation will be particularly visible in EUR where it is expected that EUR-LIBOR will be discontinued at the end of 2021 and EUR-EURIBOR will continue to exist probably for a further 5 years. It appears that the EUR-LIBOR fallback will be done directly to ESTR and not to EUR-EURIBOR as suggested in our answer to the ISDA EUR fallback consultation. Any payment originating from LIBOR fallback will be easy to compare to an actual EUR-EURIBOR payment (see also the post about the EUR curve shape not in line with ISDA fallback at all).

The discrepancy between fallback contaminated and clean versions of LIBOR payments should be taken into account in bond reference rate switch from LIBOR to SONIA. A popular method seems to infer the adjustment spread for bonds from the swap market as reported in Nationwide and Lloyds win nod for Sonia bond switch (subscription required). But those spreads are based on the historical past spread, not on the forecast of actual LIBOR-like value. Obviously the switches have been done with the approval of the note-holder, but was that approval based on a clear understanding by the note-holders of what was behind those contaminated cleared swap market figures?