Answer to the ISDA consultation on Final Parameters for the Spread and Term Adjustments

ISDA third consultation regarding IBOR fallback closed last week. As for the previous consultation, we have provided a detailed answer. The text of our answer can be found on SSRN:

Answer to ``Consultation on Final Parameters for the Spread and Term Adjustments in Derivatives Fallbacks for Key IBORs'' issued by ISDA.

Conclusion:

The consultation asks many questions related to technical details for the IBOR fallback term. Unfortunately it does not consider the main issue, which is that the proposed base solution of compounded setting in arrears is ill-conceived. It fundamentally changes the meaning of IBOR fixing and the question and workaround related to the term are the consequence this ill-conception. Most of the questions consists of workaround for issues that have been described in detail over the last 18 months.

The spread part also focuses on narrow technical questions on how to compute it. It does not answer the question on how to prevent this computation to harm end users through the implied massive value transfer.

We suggest once more to ISDA to review the decision to base the fallback on the compounding setting in arrears and historical mean approaches.

Associated documents:

The answer should be read in conjunction with our previous answer and publication, including a couple of paper in peer reviewed journals.

1. Answer to``Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW'' issued by ISDA. October 2018. Available at http://multi-curve-framework.blogspot.com/2018/10/isda-consultation-on-libor-fallback-my.html.
2. LIBOR Fallback transformers! Market Infrastructure blog, muRisQ Advisory, October 2018. Available at https://murisq.blogspot.com/2018/10/libor-fallback-transformers.html.
3. A Quant Perspective on IBOR Fallback consultation results. Market infrastructure analysis, muRisQ Advisory, January 2019. Available at http://ssrn.com/abstract=3308766.
4. Answer to ``Supplemental Consultation on Spread and Term Adjustments for Fallbacks in Derivatives Referencing USD LIBOR, CDOR and HIBOR and Certain Aspects of Fallbacks for Derivatives Referencing SOR'' issued by ISDA. July 2019. Available at https://ssrn.com/abstract=3415930.
5. Answer to ``Consultation on Final Parameters for the Spread and Term Adjustments in Derivatives Fallbacks for Key IBORs'' issued by ISDA. October 2019. Available at https://ssrn.com/abstract=3476530.
6. LIBOR fallback and quantitative finance. Risks, 7(88), August 2019.
7. LIBOR: Don't fallback, step forward. Wilmott Magazine, November 2019, to appear.

Rate reform: 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" (https://ssrn.com/abstract=3226183). Our answers to the different ISDA consultations are also available on SSRN. 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 documented from the invitations to many practitioner and academic finance conferences and seminars. 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
• CASS Business School workshop on LIBOR transition (London, UK) - 19 June 2019
• Risk Live (organized by Risk.Net, London, UK) - 27 June 2019
• LIBOR: Don't fallback, step forward (CQF Institute talk, London, UK) - 23 September 2019
• CCP round-table (organized by Risk Dynamics, Brussels, Belgium) - 10 October 2019
• The 15th Quantitative Finance Conference (organized by WBS, Rome, Italy) - 16 October 2019.
• The 5th Quant Insights Conference (organized by CQF Institute and Wilmott, London, UK) - 15 November 2019.
• The future of LIBOR (workshop at RiskMinds International, Amsterdam, Netherlands) - 6 December 2019
• Interest rate reform conference (organized by WBS, London, UK) - 4-6 March 2020
• QuantSummit Europe (organized by Risk.Net, London, UK) - 11-12 March 2020
• Interest rate reform conference (organized by WBS, Frankfurt, Germany) - 26-27 March 2020
• QuantMinds International (Hamburg, Germany) - 11-15 May 2020

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.