Treasury Business Analyst

Learning Objectives

  1. Understand new market conventions for SOFR, SONIA, ESTR, HONIA and SARON – Compounding/Averaging, Lookbacks, Lockouts, Observation Period Shift, Payment Gaps.
  2. Review of Collateralized Pricing Assumptions and Multi-Curve building with OIS.
  3. Lack of floating rate leg fixings on trade date and resulting reconciliation issues.
  4. Difference in new conventions for Derivatives, RMBS/CMBS, Fixed Income and Loans.
  5. Define detailed curve configurations and instrument recommendations – Flat forwards between FOMC meetings, Hermite interpolation, Overlapping 1M and 3M futures.
  6. Market liquidity and trading volumes of Derivatives and Fixed Income.
  7. Impact on Derivatives processing for rate resets, accruals, actual and expected Flows.
  8. Quantifying economics and structural differences between LIBOR term rates and RFRs.
  9. Quantifying P&L Impact on Fallback Date and Its Implications for Derivatives and Fixed Income.
  10. How does the move from term rates to overnight compounded rates impact performance and back-office processes.

Course Framework

1. ARRC Recommended Fallback Language and Waterfall

2. Diversity of Consent Solicitation based on Asset Class

3. 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

4. Redocumentation Risk, Broken Hedges and Hedge Cashflow Mismatches

  • Management of timing differences when assets, liabilities convert to LIBOR
  • Impact of client vs Street swap payment conventions on hedge slippage
  • Analysis of impact of observation period shifts on projected vs realized cashflows
  • Ability to achieve exact hedge between loans and swaps
  • Basis risk for illiquid callable SOFR swaps
  • Decomposition of a LIBOR swaps into OIS and SOFR swaps

5. Repricing perfectly CME, LCH and Bi-lateral swaps despite basis

  • PAI and Collateral assumptions on exchanges
  • Chicago vs London and its members
  • Quote differences between CME and LCH and the basis
  • Initial Margin for CME, LCH and Bi-lateral swaps
  • IM methodologies and API usage to avoid heavy calculations

6. 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

7. Vanilla/Static, Dynamic and Credit Models

  • Term Structure Models for Interest Rates
  • Market-Implied PD and LGD Models
  • Actuarial-Statistical PD, Risk Migration and Loss Models
  • Stochastic Models for Equity,FX and Commodity

8. 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

9. 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

10. 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 projectionsImpact 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

11. Build the Long End of the RFR Curve and Cross-Currency Basis

  • Many alternatives to build the long end of the curve
  • Removal of LIBOR dependency on the SOFR curve
  • Long end discussion with SOFR outright vs basis to OIS or LIBOR
  • Necessity for multi-curve bootstrapping when SOFR swap discounts on SOFR

12. 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

13. LIBOR single period in depth

  • Building blocks to define cashflows
  • Calendars
  • Rolling Conventions
  • Basis and Day Counts

14. LIBOR swap schedule

  • Payment gaps
  • Calendars
  • Continuity of rate schedules or accrual period gaps
  • Notional Exchanges

15. New accrual, reset, cashflow conventions

  • Average/Compound rates
  • Fed SOFR Averages 30D, 90D, 180D and reset in advance
  • Lockouts, Lookback, Observation Period Shift

16. 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

17. SOFR swap schedule

  • SOFR swap example
  • SONIA swap example
  • ESTR swap example
  • TONAR swap example
  • SARON swap example