LIBOR Transition Learning Goals – Topics in Focus
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Loans and Cash Instruments
Learning Objectives
- Overview of LIBOR and How We Got Here.
- RFR Indices Across All Currencies Worldwide and Its Conventions.
- LIBOR Transition Impact on Financial and Non-Financial Risk Management.
- LIBOR Usage and Major Components of Required Model Changes.
- Building the Short and Long Ends of RFR Curves and Indices.
- Incorporating Replacement RFRs/Fallback Characteristics and Behavior.
- Specific Impacts on Cash Instruments and Lingering Questions Across Jurisdictions.
- Impact of small SOFR convention discrepancies to discount factors.
- P&L Impact on Fallback Date and Its Implications.
- Syndicated, Bi-lateral Loans and Hedged Loan Approach.
- Dynamic Mortgage Models with Current Coupon, Prepayment and Credit.
- Regulatory and Legislative Initiatives.
- ARRC Practical Implementation Checklist for SOFR Adoption.
- Consent Solicitation, Fallback Language and Waterfall Across Jurisdictions.
- Fannie Mae and Freddie Mac LIBOR Transition Playbook for US Residential Mortgages and Structured Securities.
Course Framework
1. Overview of Cash Instruments and LIBOR transition
- Genesis of LIBOR, its composition and mechanics
- IBOR as a global benchmark and foundational challenges
- 2008 Global Financial Crisis and necessity of LIBOR replacement
- Overview of the LIBOR BOOTCAMP program
2. New RFR Benchmarks for Loans
3. Choosing the right Benchmark
4. Fallback Language and Waterfall
- ARRC Recommended Fallback Language for Securitization
- ARRC Recommendations on Fallbacks for Adjustable-rate Mortgages (ARMs)
- ARRC Recommended Fallback Trigger Language for new issue FRNs
- European Central Bank (ECB) Guidance on Fallbacks for Euro Rates
5. ARRC Practical Implementation Checklist for SOFR Adoption - I
- Transition program mobilization and management
- Operational and Technology Readiness
- Communication Strategy
- Exposure management and valuation
6. ARRC Practical Implementation Checklist for SOFR Adoption - II
- Portfolio and Product Strategy
- Contractual Remediation
- Risk Management
- Accounting and reporting
- Taxation and regulation
7. Syndicated, Bi-lateral Loans and Hedged Loan Approach
- RFR market conventions for cash instruments – advance vs. arrear conventions
- Global alternatives for cash instruments
- ARRC waterfall recommendations for cash instruments
- Alternative US RFRs for loans
8. P&L Impact on Fallback Date and Its Implications
- Significance of value transfer for existing Libor contracts
- Impact on counterparty exposure, collateral and xVA measures
- Impact of tax treatment on the decision- making process for transition timing
- Limits and risk mitigation on potential fallback P&L impact
- Exposure measures and hedging of LIBOR SOFR basis spread
9. Fannie Mae and Freddie Mac LIBOR Transition Playbook
- Single family ARMS and securities
- Single family credit risk transfer
- Collateralized mortgage obligations
- Multifamily ARMS.MBS, FRNs and credit risk transfer
10. Consent Solicitation
- Diversity of Consent Solicitation based on Asset Class
- Consent Solicitation for English Law Legacy Bond Contracts
- Operationalizing consent solicitation
- New York State legislative measures
11. LIBOR Transition Impact on Financial and Non-Financial Risk Management
12. Incorporating Replacement RFRs/Fallback Characteristics and Behavior
13. 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
14. Impact of small SOFR convention discrepancies to discount factors
- Curve dependency examples and how it affects errors in zero rates
- Pricing examples for swaps and it’s curves and reconciliation impact
- Payment and accrual convention impact on zero rates
- Pricing examples for swaps and it’s curves and reconciliation impact
15. Dynamic Mortgage Models with Current Coupon, Prepayment and Credit
- Stochastic Interest Rate Models and CMS Rates as Inputs
- Current Coupon Model and lack of SOFR History
- Prepayment, Default, Loss Severity Models
- Structured Securities and Collateral LIBOR assumptions
16. Build the Short End of the RFR Curve and Cross-Currency Basis
- Instruments to define LIBOR, RFR, OIS curves and their relationships
- Interest rate parity for FX forwards and if RFR will have an impact on FX projections
- Impact of RFR on the cross-currency basis in the short end of the curve
- Implementation of the short end of the curve and implied likelihood of Fed Fund rate changes
- Multiple different overlapping futures contracts in a single curve
- SOFR term rate and futures
17. Build the Long End of the RFR Curve and Cross-Currency Basis
- Recommended Curve Instruments across USD, GBP and EUR for RFR
- Comprehensive List of New RFR Instruments for Curves
- Which Rates to use for FX Forward Interest Rate Parity
- Cross Currency Basis and timing in US and other Jurisdictions
- New Mechanisms in Curve Construction for SOFR
- How to reconcile to CME and LCH curves after PAI change