LIBOR Software and Tools

Learning Objectives

  1. Overview of Systems Challenges.
  2. What are the latest timelines for SOFR, ESTR, SONIA for different asset classes.
  3. What areas require the most focus for reconciliation pre-and-post post portfolio transition.
  4. What are the required static data changes for a multi-currency derivatives and fixed income portfolio.
  5. ARRC Practical Implementation Checklist for SOFR Adoption.
  6. LIBOR Transition Impact on Operational Risks.
  7. How does the move from term rates to overnight compounded rates impact performance.
  8. Incorporating SOFR and Fallback Characteristics and Behavior.
  9. Impact on Existing Model Libraries.
  10. LIBOR Transition Impact on Curves, Option Models, Cashflows and Accruals.

Course Framework

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
  • Calendars
  • 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