Sunday, 11 April 2021

New publication: Derivative pricing with two collateral rates

A new working paper related to convexity adjustment in the overnight ransition has been made available on SSRN. The paper title is

Derivative pricing with two collateral rates.

The paper is available on SSRN at


This note analyses derivative pricing in the context of a collateral rate switch during the life of a financial product or the existence of two overnight rates. In particular we analyse the impact of forward change of collateral, the impact on OISs when the collateral rate is different from the OIS underlying, and the impact of bilateral swaptions collateral rate different from the one implied by the cleared market. In each case, we evidence new convexity adjustment impacts previously not accounted for. The order of magnitude of those impacts is also proposed for realistic values of model parameters; the individual relative impacts are not huge, but when applied on trillions of notional, as it is the case, the monetary impacts can be substantial.

Sunday, 28 February 2021

Marc quoted in the press: Practice Insight - IFLR

Marc was quoted in the press in an article related to the LCH steering away from ISDA fallback: Industry broadly supports LIBOR big bang switch (subscription required).

The quotes are

While the proposal crafted by LCH may look like an ideal solution for many market participants, it could come at a price, which some deem too high. “I encouraged my clients to consider this approach even before it was proposed by LCH, but we should bear in mind that clearinghouses look at what is in their books – not at the market,” said Marc Henrard, managing partner at muRisQ Advisory.. “They want to push the bifurcation problem out to end-users, who in turn will have to deal with the issue on their bilateral trades and manage the bilateral-to-cleared basis risk."

Bringing forward this proposal earlier and presenting a common mechanism that can also apply to bilateral trades would have made for a smoother process, Henrard added.
In addition, there is a risk that LCH's solution could fragment the swaps market, as liquidity will be split between the trades referencing RFRs and those using ISDA’s fallback rates. “Market participants should make sure they have the right tools in place to compute any small residual valuation difference,” said Henrard. “LCH’s proposal may not work out to everyone’s advantage, and some may want to adjust their positions ahead of the big bang.”

Thursday, 25 February 2021

CQF Institute Workshop: Benchmarks in Transition

Marc Henrard will present a two half-day workshop

Benchmarks in Transition (LIBOR and Overnight)

organized by the CQF Institute on 18 May 2021 and 19 May 2021 (on-line 13:00 - 17:00 BST).

The agenda of the workshop can be found on the organizer website:

The agenda of the workshop will be similar to the one proposed on our training page.

The workshop is also availabe as a in-house course for financial institutions. If you want to be ahead in the transition game, contact us for LIBOR fallback and discontinuation: trainings, workshops, advisory, tools, developments, solutions.

Wednesday, 17 February 2021

Presentation at the Interest Rate Reform Conference

Marc Henrard will present a seminar at

The 3rd Interest Rate Reform (Ibor Transition) Conference

which will take place on-line from Monday 22 February to Friday 26 February 2021. The agenda of the conference can be found on the organizer web site:

Marc's talk will take place on Wednesday 24 November at 13:00 GMT and will be titled Benchmarks in transition: Hidden convexities.


  • Overnight transition: why is it important to everybody?
  • Overnight transition: where does it appear?
  • Modelling approach
  • Impact on OIS
  • Impact on Swaptions
  • Impact on LIBOR forwards

The proprietary research underlying the presentation will be detailed in a forthcoming working paper. The link to the paper will be added soon.

Tuesday, 19 January 2021

Inconsistencies in fallback spread for different tenors

With the recent consultations on different dates for USD-LIBOR and other currencies LIBOR cessation, the discrepancy in spread computation mechanism has been discussed.

To our opinion, there will be no date discrepancy as we expect the LIBOR cessation announcement date to be the same for all currencies, even if the cessation date is not the same.

There are other more important inconsistencies. In the cross-currency market, there is the obvious LIBOR v (IBOR but not LIBOR). EUR-EURIBOR will not cease and the major cross, the one between USD and EUR, will be the prime example of this inconsistency.

But the other, less talk about, inconsistency that we want to point out in this post is the tenor inconsistency within a single currency. The spread for all tenors will be computed on the same day using a look-back period of 5 years. The period for all currencies is nominally the same 5 years, but those 5 years represent different economical realities for each tenor. The differences are coming from the fundamental flaw in the fallback spread methodology which is comparing a forward looking rate to a backward looking composition. To compare those two rates, you have by definition to use different dates. For LIBOR there is one fixing date while for the overnight, there is a tenor-full of dates.

Take the example of the USD-LIBOR-12M. Suppose that the announcement date is on 2021-01-05. What is the meaning of 5 years? This is the most recent 5 years of LIBOR fixing for which we have the corresponding 5 year of SOFR composition over the LIBOR tenor. The period starts on 2015-01-05 and finishes on 2020-01-05. The end is in 2020 and not 2021, even if the announcement is in 2021. This is not a typo but the impact of the in-arrears. To compute the spread, we need the in-arrears compounded on a 12 months period, i.e. the period from 2020-01-05 to 2021-01-05. This is a little bit more complex than that, because of the -2 business day shift in the fallback, but for this post we ignore it (all our data analysis and graphs are produced with the exact rules implemented in a production grade library).

But if we look at the same question for USD-LIBOR-1M, the LIBOR period is 2015-12-05 to 2020-12-05, a 11 month difference with USD-LIBOR-12M, i.e. almost 20% of the period is different. This is very significant when the economical situation is not stable. It turns out that the last 12 months have been very unstable from an economical perspective.

Let's look at it through the lens of the spread data. In Figure 1, we have represented the spread computed on a daily basis of the LIBOR/SOFR compounded in-arrears for tenors 1M, 3M, 6M, and 12M using the ISDA methodology.

Figure 1. Historical spread between USD-LIBOR and SOFR-compounded for different tenors.

Contrary to the intuition of the spread as being a credit spread, we see that the curves cross in several places. The 12M spread can be in some periods below the 6M and even the 3M spread. The April credit spread increase is clearly visible in the 1M, 3M and 6M spreads. Is it visible in the 12M curve? The answer is definitively no. The USD-LIBOR-12M data for the March/April period is not used, only the LIBOR data to 2020-01-05 is used. What is the spike seen at the end of the curve? This is the market misestimation of the monetary policy. SOFR, which closely follow monetary policy, over the last year crisis is strongly impacting the spread, but not for credit risk reason. The spread there is the "wrong" one if the goal is to represent the credit spread, it only represents the market inability to predict the future rates. Is what we want to represent in the spread? Usually a floating rate instrument is there to avoid the future's prediction. In this case, the spread represent the opposite of what we would like. A second spike will appear in the next 3 months and represent the credit spread effect.

This discrepancy can also be viewed in Figure 2.

Figure 2. Distribution of spread for USD-LIBOR-12M. 

We have represented the distribution of the spread with the most recent data in a lighter colour. The recent spreads are high while today all the rates are low, the forward spreads are low due to the injection of liquidity by central banks and all short term historical spreads are low. The same economical reality produces completely opposite effects on different figures that are supposed to provide a fallback to the same LIBOR reality.

Recent related post: Historical spread adjustments: GBP figures, Historical spread adjustments: USD figures and CME steers away from ISDA fallback.

Fallback transformer series: LIBOR Fallback transformers!

LIBOR transition page.

Don't fallback, step forward!

If you want to be ahead in the transition game, contact us for LIBOR fallback and discontinuation: trainings, workshops, advisory, tools, developments, solutions.

Sunday, 17 January 2021

Historical spread adjustments: GBP figures

We compute estimates of the historical spread adjustment for GBP-LIBOR on a regular basis. The data below is as of 2021-01-04.

Current Median 3.4773 12.2818 27.8621
Minimum Median 3.4305 11.4454 25.2390
Maximum Median 3.5505 12.4071 28.9121
Mean 3.6657 13.8936 27.095
Mean-Median 0.1884 1.6118 -0.7671

Contact us for more details on the hypothesis and methodology used.

We can provide production grade code that run those estimates on a daily basis.

Figure: Distribution of GBP-LIBOR-1M / GBP-SONIA compounded in arrears over 1M.

Thursday, 14 January 2021

CME steers away from ISDA fallback

Since the discussion related to the fallback have started almost three years ago, our opinion has been that the methodology proposed, in particular by ISDA, based on compounded in arrears are unsatisfactory. The compounded in arrears itself is the correct approach for overnight, but forcing an overnight in-arrears mechanism into instruments designed for term in advance rates can only lead to dangerous situations from a risk management perspective.

Marc has been quite vocal about it in his blogs and technical publications. The earlier warning can be found in his quant perspectives (proposal, July 2018 and results, January 2019) and blogs (e.g Fallback compounding in arrears won't work).

Recent presentation to clients included in particular messages like:

Don't sign the protocol, don't go through the fallback, this is a unmanageable Frankenstein.

Our advise, in the same presentation was

Fallback does not create OIS-like exposures. Better to repaper existing LIBOR swaps to OIS (even if with same spread).
muRisQ Advisory presentation to a client on 17 December 2020.

There was a general believe that CCP would adopt the ISDA protocol. But in the same client discussion we said: "CCPs do whatever is the easiest for them, not what is right for the market. We still have to read the details of the CCP fallback"!

CCPs have full discretion on how to incorporate fallback.
muRisQ Advisory presentation to a client on 17 December 2020.

We invite you to (re)read of previous blog related to the reason why the proposed ISDA fallback is not acceptable in term of risk management: Fallback transformers: gaps and overlaps and its portfolio or Christmas versions.

LCH recently indicated that it does not plan to use the fallback, as described in the press and in the blog: LCH plans Libor swap switch to RFRs

CME appears to also follow our lead and suggest not to use the fallback. Today's announcement "Cleared Swaps Considerations for IBOR Fallbacks and Conversion Proposal" offers a very short overview of the conversion direction.

The discussion document ask about timing, calculation periods, coupon payment dates, and swaption exercise. Those issues have been mainly ignored in previous consultations and in the collateral/discounting big bang.

We have provided in detail analysis of all those issues to several clients, buy side and sell side. The analysis are all based on production grade code implementing all the successive versions of the fallback, including all the timing, dates and spread issues. Hopefully detailed independent analysis of those issues will be performed and made public by the CCPs.

Don't fallback, step forward!

If you want to be ahead of the transition game, contact us for LIBOR fallback and discontinuation: trainings, workshops, advisory, tools, developments, solutions.