MVA: from derivatives to people

It appears that the US is planning to require some visitors to pay a bond of up to USD 15,000 for a visa.

Many political comments have been made about it; we would like to bring some light quant comments.

The term used for the visa is “bond”, in the market this type of requirement is called “Collateral” or “Initial Margin” (IM). The quantitative and valuation impacts of those IM requirements have been studied extensively in the literature with regard to derivatives and are known under the name MVA.

The mechanisms would be that the person requesting a visa would deposit a certain amount before using the visa and the amount would be returned when the person has departed the US.

Some parts of the mechanism are similar to IM, and thus require some MVA computations, some other parts are different and require further adjustments.

Some visas, including business visas, require a bond. This bond deposited during the length of the visa usage has some cost, for a corporation this is typically a funding cost. That means that any corporation making business with the US which requires visits from oversea staff will need to incorporate that cost to their prices. This is the MVA part.

By opposition to the standard IM practice in the OTC market, here the IM is deposited not with a third party custodian, but directly with the counterparty (the US government). On that amount there is a non-negligible credit and legal risk. What if the US defaults, or more likely refuses to pay the margin back? What for multi-entry visas? Can the US keep the bond up to the end of visa validity? What if the depositor died before claiming the amount back? Here the question moves from a MVA-like question to a CVA-like question. Involving probability of default (PD) and loss given default (LGD). The LGD may even be higher than 100% of the bond amount itself if the legal cost is added.

In all cases, corporations planning to make business with the US should analyse the potential cost of such a framework (this analysis is itself a cost). We are not experts in political risk, but we have helped clients with many Initial Margin methodologies.

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Don't hesitate to contact us regarding the impacts of initial and variation margin on derivative pricing.

Qu'est-ce qu'un Analyste Quantitatif ?

Après un début de carrière dans le monde académique, depuis 25 ans j’exerce comme “analyste quantitatif” – ou simplement “quant” dans le jargon financier. Mais qu’est-ce qu’un quant et que fait-il ? J’ai souvent du mal à l’expliquer à mes connaissances ; je voudrais essayer de le résumer ici. D’abord il existe plusieurs sortes de quants, les quants de valorisation de produits dérivés, les quants de big data, les quants de portefeuille d’investissement, etc. Je ne peux parler que de la première catégorie, celle à laquelle j'appartiens.

Ceci est l'introduction de l'article publié dans l'EcoFin MAG de juin 2025 dont Marc est l'auteur.

Un lien vers une version életronique est disponbile ci-dessous:

Qu'est-ce qu'un Analyste Quantitatif ?

Bonne lecture!

New muRisQ’s corporate swag

You may remember our golf ball collection, starting the one related to the publication of Marc’s book, you may have seen our branded polos and jackets, now we have also nice caps available!

Figure 1: A cap on top of Marc’s books!

Interest Rate Instruments and Market Conventions Guide - Post LIBOR edition

As announced previously, we have been working on the updated Interest Rate Instruments and Market Conventions Guide. We are glad to announced that the new version

Interest Rate Instruments and Market Conventions Guide - Post LIBOR edition

is now available. You can download it from SSRN at https://ssrn.com/abstract=5099269.

Comments on the content - typos, missing indices, new products - are welcomed.

The benchmark page on our web site has a list and short descriptions of (some) overnight and IBOR-like benchmarks available at

https://murisq.blogspot.com/p/conventions.html

We will do our best to maintain it up-to-date.

SOFR is getting more alive!

In a blog post a couple of month ago, we noticed that “SOFR is really alive again!” After several years of manipulation by the Federal reserve, the benchmark was showing signs that it was actually reacting to market developments.

It appears that those life signs are increasing. In Figure 1 we propose the graph of the SOFR and EFFR spread above target rate over a two-year period. The coming alive of SOFR is clearly visible.

Figure 1: Spread over target rate for SOFR and EFFR benchmarks.

If we look at SOFR’s and EFFR’s average spread (in bps) above target we have

Period	SOFR	EFFR	Note
2023	5.95	7.92
2024	8.14	8.00	EFFR=8bps every day
2024-H2	9.61	8.00

What does the market think about the above SOFR features? For that we looked at the forward SOFR-EFFR spread as quoted in the USD OIS market. Figure 2 displays data on the above spread for OISs with tenor 1, 10, and 30 years. The spreads are for SOFR + spread versus EFFR. A negative spread, as most of the time in the last two years, indicates that the market is ready to pay more for SOFR than for EFFR.

Figure 2: Spread for OIS basis swaps: SOFR + spread V EFFR.

SOFR is a secured rate while EFFR is unsecured. The two pieces of information above, the realised rates over the last 6 months and the forward looking market spreads, indicate that a secured rate is higher than an unsecured rate! We are quantitative finance advisors, not economical advisors; but the laymen in us thinks that “something is rotten in the State of Benchmark (Federal Reserve provided)”.

Moreover, at the view of Figure 1, the Fed sanctioned method to interpolate the SOFR curve described in Heitfield and Park (2019) and used in CME futures based SOFR Term rate, is less and less credible. Saying that the Fed has a biased view of the impact of the Fed on the market may not be a surprise.

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Heitfield, Erik, and Park, Yang-Ho (2019). “Inferring Term Rates from SOFR Futures Prices,” Finance and Economics Discussion Series 2019-014. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2019.014.

Cross-currency basis futures

CME is planning to launch a futures contract related to the OTC cross-currency basis between USD-SOFR and EUR-ESTR. The futures is cash settled against a proprietary cross-currency index. muRis_Q is proposing a note proposes describing the index and the associated futures. The links and differences between the index, the futures and the OTC market is analysed.

Marc's Market Infrastructure note is available at:

Cross-currency basis futures: description

The analysis of the fixing basis and the convexity adjustments will be proposed in a forthcoming muRis_Q Model Development instalment.

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Don't hesitate to contact us regarding the pricing or risk management of interest rate and forex products.

Workshop on multi-curve framework - Warsaw - 5/6 December 2024

Marc will present a two-day workshop on multi-curve framework on 5 and 6 December in Warsaw.

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More details can be found on the LinkedIn page related to the workshop. There are still seats available for that workshop organised by CEETA.

Et tu, ESTR!

In previous blogs, we reported the return of the month end SOFR volatility with regular increase of the spread above Fed Fund target. We have updated the graph and the data. As seen in Figure 1, the month-end volatility continues to be visible almost every month with a larger impact at the latest quarter end.

Figure 1: Spread over target rate for overnight benchmarks.

Over the reported period the average spreads of “normal” days are 7.08 bps. We report below the average spread above that average for “special” days:

Day of the month	Spread (bps)
1st	4.20
2nd	2.35
15th	0.30
Last	3.15

Based on our blog and presentations, it is natural to ask if something similar exists in other currencies. We have run an analysis for EUR. There the results are somehow the opposite. The last days of the month usually see a lower rate. This is reported in Figure 2. The numbers reported are the difference between the last business day of the month rate and the average of the two adjacent rates (second last day of the month and first day of the next month). The average decrease of rate is 1.13 bps with all month but one lower.

Figure 2: ESTR decreased rate at month end.

Benchmark page on our site

One very useful document related to interest rate market is Marc’s “Interest Rate Instruments and Market Conventions Guide". Its latest version was published more than 10 years ago as an OpenGamma Quantitative Research document. It can be found on SSRN at https://ssrn.com/abstract=2128257.

Over that time interval the interest rate market conventions have changed, in particular in relation to benchmarks. We are planning to update the guide and we will post here a link to the new version.

In the mean time we have added a benchmark page on our web site with a list and short descriptions of overnight and IBOR-like benchmarks: https://murisq.blogspot.com/p/conventions.html. We will do our best to maintain it up-to-date.

Don't hesitate to contact us if you think there are "glitches" in the list or to propose new information.

AMERIBOR is also alive!

A couple of days ago, we published a blog titled "SOFR is really alive again!" showing the return of (small) volatility of the SOFR spread above the Target rate. This small volatility was opposed to the dead spread of EFFR.

A natural question at the reading of the blog has been "What about AMERIBOR?".  The third overnight benchmark in the USD market is more directly linked to the actual deposit market without manipulation. 

The spread of AMERIBOR above the target rate is reasonably volatile. A graphical representation is proposed below.

Figure 1: Spread over target rate for three USD overnight benchmarks.