A Quant Perspective on IBOR Fallback Consultation Results - V2.1

Market Infrastructure Analysis, muRisQ Advisory, January 2019.

46 Pages Posted: 11 Jan 2019 Last revised: 30 Jan 2019

See all articles by Marc P. A. Henrard

Marc P. A. Henrard

muRisQ Advisory; OpenGamma; University College London - Department of Mathematics

Date Written: January 1, 2019

Abstract

With the increased expectation of some IBORs discontinuation and the increasing regulatory requirements related to benchmarks, a more robust fallback provision for benchmark-linked derivatives is becoming paramount for the interest rate market. Several options for such a fallback have been proposed and ISDA held a consultation on some of them. The results of the ISDA consultation has been to privilege the compounding setting in arrears option. This note, which can be viewed as the version 2.0 of a previous note, presents the different options briefly and analyses the privileged option in details. It also presents an alternative option supported by different working groups. The note's focus is on the quantitative finance impacts for derivatives. To our opinion, the option selected by the consultation fails the basic achievability criterion in many cases. Even when achievable, the option can lead to significant value transfer and risk management complexities.

Keywords: LIBOR Fallback, Benchmark, Quantitative Finance, Interest Rate, ISDA consultation

JEL Classification: G13, G15, G18, C51

Suggested Citation

Henrard, Marc P. A., A Quant Perspective on IBOR Fallback Consultation Results - V2.1 (January 1, 2019). Market Infrastructure Analysis, muRisQ Advisory, January 2019.. Available at SSRN: https://ssrn.com/abstract=3308766 or http://dx.doi.org/10.2139/ssrn.3308766

Marc P. A. Henrard (Contact Author)

muRisQ Advisory ( email )

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OpenGamma ( email )

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London, EC1V 9DD
United Kingdom

University College London - Department of Mathematics ( email )

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London, WC1E 6BT
United Kingdom

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