IBOR TRANSITION

WORKSHOP

20th May 2020

Programme

Session1 - From LIBOR Scandal to RFRs

 

Introduction:

  • LIBOR, where it all began and the BBA first official fix

  • GFC and Switch to OIS discounting and multi-curve pricing

  • LIBOR rigging scandal

  • The lack of liquidity in LIBOR transactions

  • Regulatory responses: IOSCO principles, FCA “Dear CEO” letter,  LIBOR reform and EU Benchmark Regulation

Regulatory Backdrop:

  • Formation of benchmark committees e.g ARRC

  • The new replacement RFRs/ARRs and adoption in major currencies (SOFR, SONIA, ESTR, SARON, TONAR)

  • Regulatory response to “Dear CEO” letter

  • Exposure analysis requests from FCA/PRA

  • Managing dependencies from parallel regulations: Basel IV, FRTB, CRD5, IRRRBB.

CASE STUDY – Review of 2 Issuances in SOFR and Sonia

  

Session 2: Operational Readiness

 

Deeper Dive into Alternative Reference Rates:

  • Backward-looking overnight rates, and T+1 fixings

  • Coupon calculations – Compounding vs Averaging

  • Challenge of backward-looking overnight indices vs forward-looking LIBOR

  • Observation methodologies

  • Coupon Flooring

  • Term structure and how to build a curve

Client communication:

  • Conduct Risk

  • Challenge of clients acceptance of updated fallbacks

  • Compensation procedure (margin changes, non-acceptance of fallbacks)

CASE STUDY – Analysis of Programme structure adopted in Tier 1 Sell-side firm

Session 3: Product Developments and Pricing

 

CCP Discounting Change:

  • Proposed ESTR and SOFR discounting changes

  • Net exposure amendments –margin / PAI changes

  • Compensatory swaps (basis swaps or cash equivalent)

  • Valve Adjustment

 

Documentation: Fallbacks:

  • Limitations of current ISDA 2006 fallback language

  • Proposed fallback changes and ARRC recommendations

  • Estimating the spread adjustment

  • Trading the fallback SOFR-LIBOR basis vs spread assumption

CASE STUDY – Review of Fallback language in recent issuances and securitizations

Session 4: Key challenges and next steps

 

Transitioning the Legacy book:

  • Valuation Adjustments, XVA and the PnL impact

  • Effect of Fallback changes

  • Discounting, Valuation, and OCA curves

  • Transition Strategy and dealing with Tough Legacy

Programme Structure:

  • The buy-side, sell-side and corporate treasury challenge

  • Assessing the pace of adoption via MI

  • Impending milestones and expected impact

CASE STUDY – Practical demonstration of SOFR swap migration covering curve mechanics and comparison by CRZ Pricing

  

Closing comments:

  • Recap of key points and milestones

  • Feedback forms

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