Thursday, 21 March 2019

QuantCast on Risk.Net

New QuantCast on Risk.Net starring

Mercurio and Henrard on Libor transition and the need to involve quants early in discussions

Some of the elements of the discussion are based on an opinion published on SSRN: A Quant Opinion on LIBOR Fallback.

Marc Henrard in's London studio
Photo: Iain Winfield

Tuesday, 19 March 2019

Risk.Net Podcast: LIBOR transition and fallback

Today Marc Henrard participated to a Risk.Net podcast related to LIBOR transition and fallback. The podcast will be published later this week on the publisher site. We will keep you posted about its publication.

Saturday, 16 March 2019

IBOR transition and fallback trainings and workshops

In-house tailor-made training for all your team and your IBOR transition working group for the price of sending 2 of them to a standard training! The IBOR transition and fallback is a hot topic. Many course provider have jumped on the bandwagon. Those courses are provided at a premium price but with some speakers presenting for marketing purposes.

For the price of sending two staff members to those courses, you can have full in-house training from our experts that have analysed the subject for more than a year, participated to its consultations and done production-grade implementations. It is not a free lunch but certainly a relative value arbitrage opportunity! You invest less and you get more.

A typical agenda for such a course can be found on our training page. And as always, the course will be tailor-made to your specific requirements.

We are an (fiercely) independent management-owned advisory firm and our trainings reflect that independence. We don't have hidden agenda and are free of conflict of interest. All courses are backed by research and detailed in lecture notes provided to the participants. Part of the material of those trainings is used for a course in a master program in financial mathematics (Marc teaches a course on Interest rate modelling in the multi-curve and collateral framework at UCL).

Below is a graph representing the analysis of the USD-LIBOR-3M, SOFR and EFFR compounded. This is the type of analysis which forecast the almost 10 basis points in spread since 27 November 2018 (announcement date of the fallback methodology).

Don't fallback, step forward!

Contact us for our LIBOR fallback quant solutions.

Saturday, 9 March 2019

Fallback compounding in arrears won't work

Our research on the LIBOR fallback, presented by Marc Henrard at the Quant Summit this Wednesday, has been noticed by the magazine Other experts now acknowledge that the option selected by ISDA through its consultation in November won't work in practice for some instruments. The details of our research can be found in one of our previous blogs on A quant perspective on IBOR fallback consultation results.

The magazine article can be found on (subscription required) under the title

FRAs won’t work with standard Libor fallback, experts say

Don't fallback, step forward!

Contact us for our LIBOR fallback quant solutions.

Wednesday, 13 February 2019

KNOWLEDGE CAFÉ at the Quant Summit Europe

Marc Henrard will lead a Knowledge Café at the Quant Summit Europe on Thursday 7 March 2019 at 11:00 am.

The Summit will take place on Wednesday 6 and Thursday 7 March 2019 in London. The agenda of the conference can be found on the organizer web site:

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

Tuesday, 12 February 2019

Course: Interest Rate Modelling in the Multi-curve Framework: Collateral and Regulatory Requirements - Singapore

Marc Henrard will present the course

Interest Rate Modelling in the Multi-curve Framework: Collateral and Regulatory Requirements

in Singapore on 4-5 April 2019.

The course details can be seen on the London Financial Studies web site at

Wednesday, 30 January 2019

Marc's presentation at the Quant Summit Europe

Marc Henrard will present a seminar at the conference

Quant Summit Europe

which will take place on Wednesday 6 and Thursday 7 March 2019 in London. The agenda of the conference can be found on the organizer web site:

Marc's talk, will be titled A quant perspective on LIBOR fallback.

Talk's agenda:
  • The current status of the fallback improvements 
  • Potential difficulties with the proposed compounding in arrears option 
  • Value transfer in the fallback 
  • The RFR term rates

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

Sunday, 27 January 2019

LIBOR Fallback Transformers - historical spread impact on value transfer

On November 27, ISDA has published the preliminary results of its consultation on IBOR fallback (see Marc's comments on his personal blog).The options selected for the adjustment spread was, tothe surprise of many, the "historical mean/median approach". This was surprising as this approach has an embedded value transfer implication that was explicitly mentioned in the consultation and agreed with by most participants.

What was not clear is when this value transfer would take place. From a "rational expectation" arguments and confirmed by market data, our expectation was that a good part of the value transfer has happened just after the fallback methodology was announced last November. Some figures have been detailed in the blog "Has value transfer in LIBOR fallback started?"

The value transfer has started but is not finished. It will continue up to the moment when the exact methodology is defined (look-back period, mean/median choice, linear transition period) and the exact discontinuation date is known. This is particularly true for USD and EUR that were officially not part of the consultation and where the target indices are very recent or have not been published yet. It is not clear if a historical approach could be used for those main currencies. Maybe a term fallback rate will be applied depending of the ongoing work of several working groups.

Among the tools useful to be prepared for the fallback, we have described our Fallback Transformers which is part of our (Java) library and which can transform a portfolio of legacy trades into an after fallback portfolio, taking into account the different options and variants, those proposed in the ISDA consultation and some additional ones.

In this new installment of the fallback transformers, I will apply that tool to a USD portfolio using the historical spread approach with transition period. The historical spread being largely unknown (there is very little history for SOFR), this leave a large uncertainty on the range of spreads.

In the historical mean/median with transition period, there are two unknowns in the fallback spread function. The first one is the historical average used over the long term and the second one is the spot spread used to transition from the current level to the historical average level.

The transition period in some sense reintroduce the spot-spread approach that has been rejected, with good reasons, by the vast majority of the respondents to the consultation. That approach is prone to "manipulation, extreme conditions and arbitrage". If the historical approach has created forward long term spreads in line with historical data, as evidenced in the blog referenced above, the introduction of the transition period would actually create a (one year) cliff effect that it is supposed to remove.

While waiting for the details of the exact fallback methodology on the spread, market participants can already analyse the different spread impacts on their portfolios. We have done so with the 1000 swap portfolio we have used in previous installments of the series. This is a portfolio composed of USD OIS and IRS v LIBOR-3M semi-randomly created for demo purposes.

In this case the valuation date is 25 January 2019. For the first scenario analysis, we suppose that the discontinuation date is 1 January 2022. The fallback options are compounding setting in arrears (with small arbitrary adjustment to dates required as the method is currently ill-defined as documented the "quantitative perspective") and historical mean/median with one-year transition period. The scenarios are the sizes of the historical and spot spreads. We looked a quite wide range of spread, from 20 to 40 basis points for the historical spread and 10 to 50 points for the spot spread. The spot spread has a larger range has it can be more volatile. Note that the spot range is not randomly selected but correspond to the range for LIBOR-3M / SOFR-compounded-in-arrears-over-3-month using actual LIBOR and SOFR data. The graph of the historical data is provide below. Note also that the spread is between a forward looking LIBOR and a backward looking SOFR composition. It includes some credit component and some change of market perception component. This last part is clear in the last month where the realised spread is very low (down to 11 bps) when the expectation of rate hikes by the fed have decreased (no December hike?) but at the same time the LIBOR/OIS spreads have been larger (between 20 and 30 in the September/October period).

Figure 1: Historical data for USD-LIBOR-3M and USD-SOFR compounded in arrears over 3 months.

With those ranges in mind, we can run our scenario analysis. We look at a grid of historical and spot spreads in the ranges described above. For each spread pair, we compute the P/L (value transfer) that would be generated if that pair of spread was to be used for a discontinuation on 1 January 2022. The result is presented in the graph below. The underlying portfolio is made of linear instruments, hence the almost linear appearance of the graph. What is of more interest is the vertical axis, with profits ranging from -200 million to +200 million. Also of interest is the fact that the profit is increasing with the spot spread but decreasing with the historical spread. The exposure to the spread impact is not in the same direction in the one year transition period and in the after transition period.

Figure 2: Scenarios for the historical and spot spreads. Discontinuation date 1-Jan-2022.

This lead naturally to the question of the impact of the discontinuation date. The portfolio exposure with respect to LIBOR is not the same for every period. One can look at the exposure on a very detailed basis, like describe at the end of the "LIBOR Fallback transformers - magnified view on risk" installment or we can also apply some scenario analysis to this issue. In the following graph, we have looked at possible discontinuation date from 1 January 2020 to 1 January 2060. For each possible date (with a 2-month step), we computed the impact of the fallback using three spread scenarios (27.5, 30 and 32.5 bps). The date of the impact can have an important effect on the value transfer. In our example, for the middle scenario (30 bps spread), the value transfer is between -25 and +33 million, depending of the discontinuation date. Obviously the impact is getting small for discontinuation very far in the future.

Figure 3: Scenarios for the discontinuation date between 1-Jan-2020 and 1-Jan-2060. Three spread scenarios.

In all cases the computation time is relatively small. Even for the full time profile (241 dates) and the portfolio of 1000 swaps, the computation time was around ten seconds on a laptop. A couple of ten seconds of computation times is a very small price to pay to have a multi-scenario analysis of the fallback that can cost you hundred of millions!

  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.

Thursday, 17 January 2019

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" ( 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 indicated from the invitations to most of the quantitative finance conferences in Europe over the next months. 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
  • Risk Live (organized by Risk.Net, London, UK) - 27 June 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.