Wednesday, 13 October 2021

ICE Swap Rate fallback: impact on swaption pricing

Sterling and dollar working groups have proposed fallback for ICE Swap Rates (ISR) based on the mechanism used for LIBOR itself. It is not possible to create a ISR's fallback coherent with the LIBOR's fallback. Or more precisely it is possible (and easy) for a quant to do so, based on the swap market globally, but it is impossible for a lawyer in a definition involving only one number published on a single screen.

The self-imposed restriction on the type of fallback available make the existence of a coherent fallback impossible. In the absence of an exactly coherent fallback, the working groups tried to provide an approximately coherent one.

The impacts of those fallback go beyond simply printing a formula on a piece of paper and have profound impacts on the valuation and risk management of existing instruments like swaptions.

In particular cash settled swaptions with collateral discounting have a triple problem:

  • Incoherent spread (delta hedge with swaps)
  • Non linear pay-off
  • ``Non-natural'' annuity, i.e. convexity adjustment

The incoherent spread was discussed by Marc in a previous blog: LIBOR transition: How to lose money, automatically!

In a forthcoming paper, we will show how those swaptions can be priced.

The one line summary of the pricing method is a change of strike in line with the non-linear rate transformation and a replication similar to the one used in CMS pricing.

Some early results have been presented in LIBOR transition workshops. A more detailed seminar related to the swaption pricing will be presented at The WBS 17th Quantitative Finance Conference.

Below we already proposed a graph that displays the non-linearity impact, the exact meaning of which will be discussed in the seminar. We will post a link to the full paper once published.

Note added 20 October 2021: A preliminary version of the results were presented at The 4th Interest Rate Reform Conference today.

Note added 20 October 2021: I have added the ICE Swap Rate fallback formulas to my open source library muRisQ-ir-models at

SOFR volume to 8 October 2021

Usual review of SOFR volumes. After a small increase a couple of weeks ago that lead us to ask "Is something happening?", we are back to levels below mid-July level at LCH. ISDA figures indicate that SOFR is back to less than 10% of interest rate derivatives volume.

No real progress a little bit more than two months before the expected deadline for "no more LIBOR".

Short term swaps (less than 2Y) volume is not increasing either, which is not a good indication for the development of Term SOFR rates.

Tuesday, 28 September 2021

SOFR: Is something happening?

Weekly volumes of interest rate trades. Is SOFR slowly waking-up? Weekly volume last week are the highest ever, higher than mid-July. ISDA reported figures (US only) have the highest percentage of SOFR outright volume (almost 14%).

The ISDA data (representing data reported to US regulators) is growing faster than the LCH data (international markets). Does it means that international users are slower to move to SOFR and that we could have two markets: a local market (with local regulatory pressure) and an international market (with more market freedom)?

Note that we have change the definition of relative portion in the graph. The outright SOFR is now reported as portion of all trades, not portion of LIBOR trades. This is to avoid "infinite" results when LIBOR will disappear. The portion is now capped at 100%.

Tuesday, 21 September 2021

SOFR first - two months on

Presented without comments this week.

Comments on ESTR, SARON, and SOFR to come later!

Tuesday, 14 September 2021

Decrease in SOFR activity

We are not certain of its origin, but certainly a significant decrease in SOFR activity last week. The lowest in the "SOFR First" era at LCH and lowest in 5 weeks for the ISDA reported figures. But the ISDA reported figures indicated a relative increase with respect to LIBOR.

It is not clear what the origin of this is. One potential explanation is market moving out of LIBOR but not to SOFR.

CME futures on BSBY provide a view of market price discovery of SOFR v credit sensitive rates. For those that have not yet agreed on the fallback for legacy LIBOR trades, that opens a window on valuation impacts.

This makes Marc's cautionary tale published in January 2020 edition of Risk even more tangible. It is now possible, to some extend, to measure the exercise value of the protocol option. Marc mentioned the "Fallback protocol as an option" in the past, in particular in the blog "ISDA Fallback as an option".

For the (low volume for BSBY and SOFR) trades on the September 2023 contract (first after USD-LIBOR cessation), the spread LIBOR-SOFR is 27 bps and the spread BSBY-SOFR is 19 bps. The first one is roughly in line with the CME Eurodollar futures fallback using ISDA/Bloomberg spread (26.161 bps), the second one provides the cost of protocol signature for a September 2023 fixing: losing or making 8 bps. Lets wait for more volume on the longer term part to assess more of the value transfer. We will try to provide more data on BSBY in a forthcoming blog.

Wednesday, 8 September 2021

SOFR first - six weeks on

No big push since "SOFR First" date six weeks ago. Quite flat volume, both on the weekly figures and on the monthly figures. Using ISDA figures, SOFR outright OIS volumes still less than 10% of LIBOR volumes.

Workshops with CQF insitute

Marc Henrard will present two workshop with the CQF insiture.

The first one will take place on Wednesday 6 and Thursday 7 October 2021.

The second one will take place on Tuesday 9 and Wednesday 10 November 2021.

The agendas of the workshops can be found on the webpages references above.

Don't hesitate to contact us if you want to organise similar workshops in-house.

Tuesday, 31 August 2021

SOFR first - five weeks on

No big push since "SOFR First" date five weeks ago. Using ISDA figures, SOFR outright OIS volumes still less than 10% of LIBOR volumes.

Wednesday, 25 August 2021

SGD SORA figures

On popular demand, we also publish some SGD SORA figures. 

Figure 1. Monthly figures (to July 2021) for SORA clearing at LCH.

Figure 2. Weekly figures (to 20 August 2021) for SORA clearing at LCH.

Tuesday, 24 August 2021

Workshop at the 4th Interest Rate Reform Conference - 19 October 2021


Marc Henrard will present a workshop at

The 4th Interest Rate Reform (Ibor Transition) Conference

which will take place on-line from Tuesday 19 to Thursday 21 October 2021. The agenda of the conference can be found on the organizer web site:

Marc's workshop will take place on Tuesday 19 October from 13:00 to 17:00 and will be titled  

LIBOR transition: almost there and so much to do for quants.


  • Liquidity in ESTR, SONIA and SOFR
  • Multiple fallbacks, multiple market risks, one spread to rule them all!
  • ISDA fallback spreads v recent LIBOR/SOFR data
  • USD: alternatives to SOFR - AMERIBOR, BSBY, ICE BYI, AXI, CMT
  • Hidden issues

ESTR and SARON: weekly figures

Weekly figures for ESTR and SARON at LCH.

In both cases, no real progress over the summer.

Monday, 23 August 2021

SOFR first - four weeks on

Looking at last week SOFR numbers, the only description that comes to mind is "unchanged to slightly lower". No big push since "SOFR First" date four weeks ago.

LCH figures slightly lower, ISDA figures slightly lower, ISDA outright SOFR as portion of LIBOR slightly lower.

Sunday, 22 August 2021

USD transition - quick spreads review

We still have roughly four months to go to the LIBOR transition. USD-LIBOR rates will still be published for 18 months after that, but the goal is to stop adding more LIBOR exposure from the beginning of 2022 onward.

A fallback mechanism for legacy LIBOR has been proposed by ISDA, based on a historical spread approach between the in-advance credit risky LIBOR and the in-arrears secured SOFR. The results of that historical spread computation has been announced on 5 March 2021. FOR USD-LIBOR-3M, the result was a spread of 26.161 basis points.

In USD, other mechanisms to replace LIBOR have been proposed. They include, among others (see this blog for more alternatives) Bloomberg BSBY, CME SOFR Term rates, and AMERIBOR. In this blog we propose recent historical data related to those benchmarks.

The data themselves are IBA USD-LIBOR-3M (2019-01-02 to 2021-08-20), Bloomberg BSBY 3M (2019-01-02 to 2021-08-20), SOFR Term rate 3M (2019-01-03 to 2021-08-19), SOFR compounded using ISDA mechanism (computed from Fed raw data) (2019-01-02 to 2021-05-17), and AMERIBOR 90D (2021-05-17 to 2021-08-20). The SOFR compounded time series are shorter by 3 months due to the in-arrears feature. The AMERIBOR 90D is published only since May this year. The time series are displayed in Figure 1.

Figure 1: Historical rates from beginning of 2019 to today

The drop of rates after COVID-19 pandemic spreads from Wuhan to contaminate the world is clearly visible in the graph at the beginning of 2020. The way the different rates reacted was different.

In Figure 2, we display the spread between LIBOR and the other rates. The BSBY spread has also jumped around that time, but remained contained. The Term SOFR had one big jump that can be interpreted as a market credit concern. At the opposite, the compounded in-arrears ISDA style had two large jumps, probably one due to the delayed nature of in-arrears and one related to credit.

Figure 2: Historical spreads to LIBOR from beginning of 2019 to today.

For the period in the graph, the statistics for the spreads are an average of 5 bps and a standard deviation of 4.6 bps for BSBY. For SOFR Term, the statistics are an average of 23 bps and a standard deviation of 21 bps. For SOFR in-arrears with ISDA methodology, the statistics are an average of 32 bps and a standard deviation of 30 bps. For AMERIBOR 90D, the statistics are an average of -1.7 bps and a standard deviation of 1 bps; the period of reference is very different and those statistics cannot be compared to the previous ones that are reported on a substantially more unstable period.

The fallback method is based on a fixed spread of 26.161 bps (and an implicit standard deviation of 0).

Added 2021-08-28: The spread versus term SOFR is presented in Figure 3. LIBOR, BSBY and Ameribor spreads varied widely but are all positive, except one date for LIBOR (2 March 2020). Over the last year, the spreads have been well below the ISDA spread fixing.

Figure 3: Historical spreads to term SOFR from beginning of 2019 to today.

Wednesday, 18 August 2021

SOFR first - three weeks on

SOFR First started on 26 July. We now have three weeks of data. The results are still somehow mixed.

On the LCH front, the volume is again significantly below the 30 July week level (SOFR First initial week).  The volume is roughly the same as at the end of May.

On the ISDA figures side (from US regulatory figures), the absolute volume is up for the 6th week in a row; the volume has tripled in those weeks. But the figures reported by ISDA (USD 166 bn) are well below the figures reported by LCH (USD 520 bn). 

A temptative interpretation could be that the US local market is moving slowly to SOFR (SOFR volume is now around 11% of LIBOR volume). Even if that move represents a real chance in behavior, it impacts only a small portion of the USD market. The figures published indicate that ISDA actually captures less than a third of the SOFR market in its SwapInfo analysis.

Note: More volume analysis over the last years available on Marc's multi-curve framework blog.

Tuesday, 10 August 2021

SOFR first - two weeks on

SOFR First started on 26 July. We now have two weeks of data. The result is somehow mixed.

On the LCH front, the volume has decrease significantly last week with respect to the previous one (SOFR First initial week).  The volume is roughly the same as in end of May.

On the ISDA figure side (from US regulatory figures), the absolute volume is slightly up but the proportion of SOFR with respect to LIBOR is down; it is below 8%.

Still far away from SOFR First!

Note: Blog initially published at: More volume analysis over the last years available on Marc's multi-curve framework blog.

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.