Quantitative Analyst

LIBOR Transition Learning Goals – Topics in Focus

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. Define detailed curve configurations and instrument recommendations – Flat forwards between FOMC meetings, Hermite interpolation, Overlapping 1M and 3M futures.
  4. Incorporating most recent developments – CMS fallback definitions, cap/floor with SOFR term rates and reset in advance.
  5. Market liquidity and volumes of derivatives and cash instruments.
  6. Deriving volatilities for SOFR options based on implied LIBOR volatilities and skew for normal, shifted lognormal and SABR model.
  7. Quantifying economics and structural differences between LIBOR term rates and RFRs.
  8. Define and use algorithms to compute adjustment spreads for ISDA fallbacks and Cash Instrument fallback waterfalls.
  9. Adjustments to existing models including futures convexity adjustments, average swaps, shifted log-normal and Libor Market Model.
  10. Quantifying P&L Impact on Fallback Date and Its Implications for Derivatives, Fixed Income, Loans and Structured trades such as CLOs.

Course Framework

1. Overview of LIBOR and How We Got Here

  • 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. Interest Rate Fundamentals

  • Why are RFRs critical for capital markets
  • Time value of money and compounding methodologies
  • Introduction to bootstrapping and curve construction
  • Relationship between spot rates, forward rates and discount factors
  • Widely used RFRs around the world

3. Dynamics of Interest Rate Swaps

  • Mechanics of interest rate swap
  • Analysis of typical term sheets
  • Swaps and derivatives markets governance – ISDA’s guideline framework

4. Market calendars and business day conventions

  • Business and Calendar Days
  • Holiday Calendar and Combinations
  • Roll Conventions such as Modified Following or Preceding
  • Resets, Interest Rate Periods and Payments

5. End-to-end Valuation Workflow for Interest Rate Swaps

  • Collateral and Credit Support Annex
  • How to discount taking collateral into account
  • End-to-end valuation workflow for interest rate swaps

6. RFR Indices Across All Currencies Worldwide and Its Conventions

  • Mapping from original LIBOR indices to the new RFR indices and how accrual and cashflow calculations are defined for RFR indices
  • Conversions for USD, EUR and GBP and what we can expect from the current OIS rates
  • Detailed description of new vanilla trade conventions for all currencies and indices
  • Detailed description of fallback trade conventions for all currencies and indices

7. Mechanisms of the Transition Fallback and its ISDA Adjustment

  • Relationship among pre-cessation, announcement, and trigger dates
  • Detailed fallback calculation algorithm
  • Routes for banks to transform current LIBOR portfolios

8. Cash Instruments

  • Scope and size of cash instruments and markets
  • Challenges specific to cash markets
  • Definitional Overview
  • Consent Solicitation
  • ARRC Recommended Fallback Language for all types of instruments
    • Floating Rate Notes
    • Bilateral Business Loans
    • Syndicated Loans
    • Securitization
    • Adjustable-rate Mortgages (ARMs)

9. Derivatives - New Payment and Accrual Conventions

  • 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
  • Disappearance of the ability to reconcile first floating leg cash flow at trade inception
  • Lack of floating rate leg fixings on trade date and resulting reconciliation issues
  • Detailed examples of payment gap, lockout, observation shift and observation period shift
  • Reset in Advance SOFR option products

10. 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

11. Quantitiative and Modeling Topics

  • Futures Conventions and Convexity Adjustments
  • Average vs Compounding Swaps
  • Introduction to FMM as an extension of LMM
  • New cap/floor conventions to hedge student loans
  • Volatility decay during RFR term rate period
  • Approximate volatilities using a proxy

12. Model Validation Overview

  • Managing Model Risk for LIBOR Transition
  • Impact of Incorporating LIBOR Fallback on Models
  • Understand the Impact of Discounting Switch
  • Incorporating SOFR and other Overnight Rate Characteristics and Behavior
  • RFR Curve Construction Blind Spots and Challenges

13. 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

14. LIBOR Market Model Introduction and FMM

  • Difference of Transition Impact on Hull&White and LMM
  • Review of LMM and it’s Underlying Behavior
  • Issues with LMM and Reset in Arrears Backward Looking Rates
  • Model Changes based on Lyashenko and Mercurio
  • Deterministic Volatility Decay Function and Ease of Implementation

15. Impact on Existing Model Libraries

  • Fixed Income models and methodologies
  • Derivatives models and methodologies
  • Modifying and adjusting for RFR replacement differences
  • Managing model risk management workflow

16. Risk management workflow and impact of LIBOR replacement

  • Identification of incremental risks
  • Model bencharking
  • Case Study of RFR impacts
  • Allignment and explanation of MTM differences

17. Regulatory Reporting and Guidance on Model Risk Management

  • Risk policies and governance
  • Analysis and internal reporting
  • Impact on model risk management framework
  • Allignment of internal and regulatory reporting

18. Principles of Quantitative Model Validation and Model Risk Management

  • Definitions of Model, Model Risk and Input/Output/Engine components
  • Model Uses across the Enterprise using Practical and Closed Form Calculations
  • Required Processes for Model Validation for Fundamental Changes or Rates
  • Apply Quant Culture with IT Discipline to Manage Transition

19. 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

20. Model Users and their Expectations

  • Behavior and Expectations of Traders and Business Decision Makers
  • Risk Management across Enterprise and Desk level
  • Financial Controls and Accounting
  • Regulators and Policymakers and Expectations on Transition

21. 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

22. 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

23. 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

24. 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

25. 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

26. Deriving Volatilities for A Proxy Index

  • Generalized dynamic model of Mercurio
  • Deriving SOFR volatilities from LIBOR volatilities
  • Numerical examples of shifted lognormal
  • Numerical examples of SABR replication

27. 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

28. Smooth Interpolation with Various Interpolation Techniques

  • Desirable features of any interpolation techniques
  • Quite comprehensive view of interpolation techniques
  • Different interpolation methodologies on zero, forward rates and discounting factors
  • Can linear methods have continuity in forward rates?
  • Spline methods and mentioning of Hermite interpolation as well as Hagan’s monotone convex method

29. Pitfalls of Flat Daily One Day Forward Rates and FOMC Meeting Dates

  • Implied jumps in forwards due to FOMC meeting and future expiration dates
  • Curve generation algorithm in detail combining overlapping futures
  • Can you build a good forward rate curve with bootstrapping or do you need an optimization across instruments
  • Large spikes in forwards close to FOMC meeting dates
  • 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
  • Why are RFRs critical for capital markets
  • Time value of money and compounding methodologies
  • Introduction to bootstrapping and curve construction
  • Relationship between spot rates, forward rates and discount factors
  • Widely used RFRs around the world
  • Mechanics of interest rate swap
  • Analysis of typical term sheets
  • Swaps and derivatives markets governance – ISDA’s guideline framework
  • Business and Calendar Days
  • Holiday Calendar and Combinations
  • Roll Conventions such as Modified Following or Preceding
  • Resets, Interest Rate Periods and Payments
  • Collateral and Credit Support Annex
  • How to discount taking collateral into account
  • End-to-end valuation workflow for interest rate swaps
  • Mapping from original LIBOR indices to the new RFR indices and how accrual and cashflow calculations are defined for RFR indices
  • Conversions for USD, EUR and GBP and what we can expect from the current OIS rates
  • Detailed description of new vanilla trade conventions for all currencies and indices
  • Detailed description of fallback trade conventions for all currencies and indices
  • Relationship among pre-cessation, announcement, and trigger dates
  • Detailed fallback calculation algorithm
  • Routes for banks to transform current LIBOR portfolios
  • Scope and size of cash instruments and markets
  • Challenges specific to cash markets
  • Definitional Overview
  • Consent Solicitation
  • ARRC Recommended Fallback Language for all types of instruments
    • Floating Rate Notes
    • Bilateral Business Loans
    • Syndicated Loans
    • Securitization
    • Adjustable-rate Mortgages (ARMs)
  • 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
  • Futures Conventions and Convexity Adjustments
  • Average vs Compounding Swaps
  • Introduction to FMM as an extension of LMM
  • New cap/floor conventions to hedge student loans
  • Volatility decay during RFR term rate period
  • Approximate volatilities using a proxy
  • Managing Model Risk for LIBOR Transition
  • Impact of Incorporating LIBOR Fallback on Models
  • Understand the Impact of Discounting Switch
  • Incorporating SOFR and other Overnight Rate Characteristics and Behavior
  • RFR Curve Construction Blind Spots and Challenges
  • 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
  • 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
  • Generalized dynamic model of Mercurio
  • Deriving SOFR volatilities from LIBOR volatilities
  • Numerical examples of shifted lognormal
  • Numerical examples of SABR replication
  • 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
  • Desirable features of any interpolation techniques
  • Quite comprehensive view of interpolation techniques
  • Different interpolation methodologies on zero, forward rates and discounting factors
  • Can linear methods have continuity in forward rates?
  • Spline methods and mentioning of Hermite interpolation as well as Hagan’s monotone convex method
  • Implied jumps in forwards due to FOMC meeting and future expiration dates
  • Curve generation algorithm in detail combining overlapping futures
  • Can you build a good forward rate curve with bootstrapping or do you need an optimization across instruments
  • Large spikes in forwards close to FOMC meeting dates

Program Expert Faculty

Sanjay Sharma - LIBOR Bootcamp

Sanjay Sharma, PhD

Chairman GreenPoint Financial
Former CRO, RBC Global Arbitrage and Trading and Natixis, North America

During 2007-16 Sanjay was the Chief Risk Officer of Global Arbitrage and Trading Group and Managing Director in Fixed Income and Currencies Risk Management at RBC Capital Markets in New York. His career in the financial services industry spans over two decades during which he has held investment banking and risk management positions at Goldman Sachs, Merrill Lynch, Citigroup, Moody’s and Natixis. more…
Tim Glauner - LIBOR Bootcamp

Tim Glauner

Head of Capital Markets Global Solution Consulting for Americas, Finastra

Tim leads the Americas’ Capital Markets practice, Global Solution Consulting at Finastra, specializing in front-office, risk and quantitative areas in capital markets for broad asset class coverage including interest rate/inflation/FX/hybrid derivatives, fixed income including corporate and ABS/MBS securities. more…