Wednesday 4th March
With the increased expectation of some IBORs discontinuation, the overnight benchmark changes and the increasing regulatory requirements related to benchmarks, a clear quantitative finance perspective on the impacts for derivatives is becoming paramount.
The recent regulations include the mandatory Variation Margin (VM) and the EU Benchmark Regulation (BMR). VM and the related remuneration of collateral means that overnight benchmarks are now ubiquitous. The EU BMR will have severe impacts on derivative market, e.g. on the EUR, GBP, SEK and DKK, from January 2022. For all major currencies, new benchmarks have been proposed and the market are in a transition phase. Each transition has its own idiosyncrasies and a common transition approach cannot be expected. On the EUR side, a recalibration approach with clean discounting has been introduced for EONIA to ESTR transition since 2 October 2019.
On the fallback side, several options have been proposed by ISDA. The results of the consultations has been to select the “compounding setting in arrears with 2 days shift” adjusted rate and the “historical median spread with a 5-year lookback period” approach. We present those options and emphasize their drawbacks. In particular the compounding setting in arrears still lack of details and, in the words of ISDA, is not workable for some products. We also present alternative options supported by different working groups. The historical spread option has led and continue to lead to significant value transfers. We present historical data in several currencies to support the theoretical developments. The presentation focuses is on the quantitative finance impacts for derivatives.
We also describe the new products associated to the new benchmarks and the status in term of liquidity for each market.
- Brief history of LIBOR
- EU Benchmark regulation
- Cash-collateral discounting and overnight benchmarks
- The standard collateral results and their exact application
- What is hidden behind OIS discounting (and when it cannot be used)?
- Impact of new benchmarks on valuation
- The alternative benchmarks:
- Progress in different jurisdictions
- SOFR, reformed SONIA, ESTR, SARON, TONAR.
- Secured v unsecured choice.
- EFFR and SOFR: two overnight rates in one currency! Differences and transition.
- EONIA and ESTR: recalibration and transition
- SOFR intra-month seasonality
- Curve calibration impacts
- Collateral and discounting transition at CCPs
- USD: LCH/CME change from EFFR to SOFR: discounting and cash compensation (October 2020)
- USD: LCH/CME change from EFFR to SOFR: risk compensation
- EUR: LCH/EUREX change from EONIA to ESTR: discounting and cash compensation (June 2020)
- Fallback procedure
- ISDA consultation results
- The adjusted rate: compounding setting in arrears
- Quantitative issues with compounding setting in arrears
- Term rates: a credible alternative?
- The adjustment spread: historical median approach
- Value transfer: transfers already incorporated and transfers to come
- Change of term sheet in existing vanilla instruments
- Presenting the fallback in the language of quantitative finance
- Fallback details still to be clarified
- Fallback for ED futures and options
- Risk management of transition.
- Delta risk through the transition
- Potential impacts on systems
- Multi-curve: double or quit?
- Vanilla becoming exotics: cap/floor and swaptions
- Fallback and UMR rules
- Value transfer and arbitrage opportunities
- Clearing house adoption
- Differences between bilateral and CCP rules
- Fallback new wording adoptions
- Valuation of legacy uncleared swaps, cost of signing the protocol
- CCP divergence from ISDA definitions
- New products associated to new benchmarks
- Volume and liquidity in the new benchmarks
- Futures on overnight benchmarks
- Deliverable swap futures
Managing Partner muRisQ Advisory and Visiting Professor, University College London
Marc Henrard: Managing Partner muRisQ Advisory and Visiting Professor, University College London
Over the last 20 years, Marc has worked in various areas of quantitative finance. Marc’s career includes Head of Quantitative Research at OpenGamma, Global Head of Interest Rate Modeling for Dexia Group, Head of Quantitative Research and Deputy Head of Interest Rate Trading at the Bank for International Settlements (BIS) and Deputy Head of Treasury Risk also at BIS.
Marc’s research focuses on interest rate modeling and risk management. More recently he focused his attention to market infrastructure (CCP and bilateral margin, exchange traded product design, regulatory costs). He publishes on a regular basis in international finance journals, and is a frequent speaker at academic and practitioner conferences. He recently authored two books: The multi-curve framework: foundation, evolution, implementation and Algorithmic Differentiation in Finance Explained.
Marc holds a PhD in Mathematics from the University of Louvain, Belgium. He has been research scientist and university lecturer in Belgium, Italy, Chile and the United Kingdom.
Workshop Schedule 09.00 - 17.30
Break: 10:30 – 11:00
Lunch: 12:30 – 13:30
Break: 15:15 – 15:30