Treasury Business 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. 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. 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. Choice of RFR Benchmarks

  • The essential need for financial benchmarks
  • Components of LIBOR
  • Risk-free rate alternatives and underlying macroeconomic dynamics
  • Overview of regulatory and industry bodies

3. LIBOR Transition Timelines and Challenges

  • Overview of new RFR benchmarks
  • Chronology of regulatory statements, actions and deadlines
  • Transition timelines
  • Scope and challenges of LIBOR transition

4. 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

5. 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

6. 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

7. 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

8. 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
  • Examples with MM, Swaps, Interest Rate swaps and Non Deliverable Forwards

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. 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

11. 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

12. 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

13. 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)

14. Regulatory and Legislative Initiatives

  • Details of the involvement of specific regulatory bodies
  • List and summaries of proposals in 2020 and upcoming 2021
  • RFR Working Group Touch Legacy Task Force overview
  • OCIE Risk Alert examination on LIBOR transition
  • Impact on consumer finance related legislation and regulation

15. 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

16. 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

17. 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

18. 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

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. 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

21. 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

22. 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

23. LIBOR single period in depth

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

24. LIBOR swap schedule

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

25. 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

26. 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

27. SOFR swap schedule

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

28. Accounting Implications of Transition of Bonds and Swaps

  • Premium/discount amortization due to Fallback
  • Realized P&L on swaps and fixed income before the fallback
  • Changes in Hedge relationships when deals are renegotiated
  • Pitfalls with SOFR being a new benchmark rate for Hedge effectiveness
  • Tax implications due to significant modifications
  • Large MTM loan impact due to LIBOR to SOFR discounting

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…