Loans and Cash Instruments

Learning Objectives

  1. Overview of LIBOR and How We Got Here.
  2. RFR Indices Across All Currencies Worldwide and Its Conventions.
  3. LIBOR Transition Impact on Financial and Non-Financial Risk Management.
  4. LIBOR Usage and Major Components of Required Model Changes.
  5. Building the Short and Long Ends of RFR Curves and Indices.
  6. Incorporating Replacement RFRs/Fallback Characteristics and Behavior.
  7. Specific Impacts on Cash Instruments and Lingering Questions Across Jurisdictions.
  8. Impact of small SOFR convention discrepancies to discount factors.
  9. P&L Impact on Fallback Date and Its Implications.
  10. Syndicated, Bi-lateral Loans and Hedged Loan Approach.
  11. Dynamic Mortgage Models with Current Coupon, Prepayment and Credit.
  12. Regulatory and Legislative Initiatives.
  13. ARRC Practical Implementation Checklist for SOFR Adoption.
  14. Consent Solicitation, Fallback Language and Waterfall Across Jurisdictions.
  15. 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