LIBOR Transition Learning Goals – Topics in Focus
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Treasury Business Analyst
Learning Objectives
- Understand new market conventions for SOFR, SONIA, ESTR, HONIA and SARON – Compounding/Averaging, Lookbacks, Lockouts, Observation Period Shift, Payment Gaps.
- Review of Collateralized Pricing Assumptions and Multi-Curve building with OIS.
- Lack of floating rate leg fixings on trade date and resulting reconciliation issues.
- Difference in new conventions for Derivatives, RMBS/CMBS, Fixed Income and Loans.
- Define detailed curve configurations and instrument recommendations – Flat forwards between FOMC meetings, Hermite interpolation, Overlapping 1M and 3M futures.
- Market liquidity and trading volumes of Derivatives and Fixed Income.
- Impact on Derivatives processing for rate resets, accruals, actual and expected Flows.
- Quantifying economics and structural differences between LIBOR term rates and RFRs.
- Quantifying P&L Impact on Fallback Date and Its Implications for Derivatives and Fixed Income.
- 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
- Overview SOFR, SONIA, ESTR, TONAR and SARON
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
- Overview SOFR, SONIA, ESTR, TONAR and SARON
17. SOFR swap schedule
- SOFR swap example
- SONIA swap example
- ESTR swap example
- TONAR swap example
- SARON swap example
