LIBOR Transition Learning Goals – Topics in Focus
LIBOR Software and Tools
- Overview of Systems Challenges.
- What are the latest timelines for SOFR, ESTR, SONIA for different asset classes.
- What areas require the most focus for reconciliation pre-and-post post portfolio transition.
- What are the required static data changes for a multi-currency derivatives and fixed income portfolio.
- ARRC Practical Implementation Checklist for SOFR Adoption.
- LIBOR Transition Impact on Operational Risks.
- How does the move from term rates to overnight compounded rates impact performance.
- Incorporating SOFR and Fallback Characteristics and Behavior.
- Impact on Existing Model Libraries.
- LIBOR Transition Impact on Curves, Option Models, Cashflows and Accruals.
1. Performance Considerations for Term and Overnight Rates
- General consideration and setting the stage
- Every swap will need daily 1D forward rate
- Curve building with daily one-day forward rates and O(𝑛^2) complexity
- Process changes for Daily resets
- ESTR is a spread over daily 1D forward with time consuming date and holiday calculations in curve building
2. New Model Risk Contributing Factors
- Econometric Model Changes for the the new Risk-Free Rates
- Backward and Forward Looking Term Rates and Shift of Effective Dates and Accrual Dates
- FAS133 Hedge Effectiveness Testing Changes for new Benchmarks and Transition
- Statistical Behavior of the new Rates and Credit Components
- Model Risk Contributing Factors and Changes in Market Regime
- New or Untested Model Type or Class
3. LIBOR Usage and Major Components of Required Model Changes
- Compounding, Averaging and Daily Observation Impact
- Curve and Collateral Dependency Revision across all Currencies
- Move from HJM/LMM to FMM Model
- Convex Accrual Function across all Asset Classes
- Funding and Loan Index Recommendations to Account for Credit Component of LIBOR
- Timeseries Considerations and Historical SOFR model to have data back to 1998
4. Hands-on New Payment and Accrual Conventions for FRN and Swaps for Reconciliations
- Differences among 1M SOFR, 3M SOFR, Eurodollar and Fed Fund future
- Reasons for calculation differences
- Differences of payment and accrual conventions among fixed income, lending and derivatives
- Listing of reliable rate calculation engines for reconciliation of payments
- Detailed examples of payment gap, lockout, observation shift and observation period shift
- Reset in Advance SOFR option products
5. LIBOR single period in depth
- Building blocks to define cashflows
- Rolling Conventions
- Basis and Day Counts
6. USD SOFR single period in depth
- Specific examples of SOFR confirmations and it’s parameters
- SOFR cap conventions with reset in arrears
- SOFR cap conventions with reset in advance and FED SOFR average indices
- Overview SOFR, SONIA, ESTR, TONAR and SARON