Abstract:
The IBOR benchmarks have been at the center of interest rate derivatives market for a long time. The decrease of interbank unsecured lending and the increased scrutiny on benchmarks is accelerating the transition from those benchmarks to overnight related benchmarks. One of the step of the transition will be a more robust fallback provision for benchmark-linked derivatives. Several options for such a fallback have been proposed and ISDA held a consultation on some of them. The consultation has selected the “compounding setting in arrears” option. 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. We also explain to which extend the fallback may transform some vanilla instruments into exotics. The presentation focuses on the quantitative finance impacts for derivatives of the different benchmark initiatives.
Short Bio:
Marc Henrard is a Managing Partner at muRisQ Advisory and visiting professor at University College London. Over the last 20 years, Marc has worked in various areas of quantitative finance including risk management, trading, software development, and quantitative research.
Marc’s research focuses on interest rate modeling and risk management. More recently he focused his attention to market infrastructure (initial margin, product design, quantitative impacts of regulation). He authored two books: The multi-curve framework: foundation, evolution, implementation and Algorithmic Differentiation in Finance Explained.