Complimentary Webinar: Part 1: The LIBOR Discounting Transition
Lessons learned from July’s EONIA to ESTR discounting transition in Europe are applied to the upcoming Fed Funds to SOFR transformation. Key considerations include convexity corrections, optionality, and compensation to remediate P&L and risk.
About this webinar
The next 14 months are a critical time for transforming trillions of dollars of global financial products, ranging from mortgages to loans to swaps and bonds and more, to “risk-free rates” (RFRs). In the wake of the Great Financial Crisis, the legacy London Interbank Offered Rate (LIBOR) is now seen as easy to manipulate, subjective, and not risk free. This can be viewed at LIBOR’s end for the major currencies: USD, EUR, GBP, CHF, and JPY. It was in some sense on life support already, as Credit Support Agreements during the Crisis switched from using LIBOR discounting instead to less risky overnight-index swap rates.
This talk starts with the historical background on LIBOR, which served for many years, and some players are regretfully giving up. The quant framework for the upcoming changes is described, including the development of tenor (1M, 3M, etc.) indexes from native overnight RFRs.
The focus is on modifications to discounting, starting with lessons learned from the EONIA to ESTR transition in July. Seemingly simple to consider, discounting introduces unexpected convexity even in vanilla instruments, and optionality creates additional complications.
The upcoming Fed Funds to SOFR discounting change will have far greater impact. The prospect of re-aligning both the numerator and denominator of cash flows with the same basic stochastic interest-rate process is alluring, and will increase analytical tractability when LIBOR sunsets on 12/31/2021.
If you are interest in attending this webinar, please register here.
Some of the questions that will be answered on October 6, 2020 during Part 1 of the Arrayo-sponsored PRMIA webinar series “The LIBOR Transition – A Deep-Dive Series”
- The ESTR Discounting Transition (late July)
- What deals did it affect?
- Was it successful? Did it affect pricing? Was there risk transfer?
- Did it have different impacts on bilateral deals than those on exchanges (CCPs)?
- What lessons can be learned? How can we use them to prepare for the SOFR discounting transition?
- The SOFR Discounting Transition (late October)
- What deals will it affect?
- Will it affect pricing?
- Will there be there risk transfer? Are there special considerations for optionality?
- Will it affect non-USD deals?
- Will it have different impact on bilateral deals than those on exchanges (CCPs)?
- General questions
- Why is all this happening now, a year before the end of LIBOR?
- What are some of the technical challenges to discounting?
- Why wasn’t the discounting phased in slowly (some call the switch on/switch off a “big bang”)?
- Why aren’t the other LIBOR currencies (GBP, JPY, and CHF) undergoing discounting transitions?
- What about other uses of collateral, like margin in US equity options? Is the rate going to change?
- Are there any plans to discount USD deals in non-SOFR rates, such as Ameribor, the Bank Yield Index, or the Constant Maturity Treasury index?