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.


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