The Université de Paris Libor transition workshop

Participation at the event is free but registration is compulsory 

(select ” Quantité ‘1 ‘” on the lower right of the form, then  register without fees) 

 

The major concerns of investment banks for the coming year are, in a quickly decreasing order: the Libor transition, Brexit, and the covid crisis. The mathematical finance group at Université de Paris / LPSM has the pleasure to open the year by a special online event, where two world-famous quants, an industry expert and a renowned academic will share their view on the Libor transition. 

 

David Gorans	Claudio Albanese	Marc Henrard	Ernst Eberlein

Local organizer: Stéphane Crépey

 

PROGRAM

The voice of the industry

A 10 minutes Introduction by David Gorans, head of ALM treasury business management at BNP Paribas, Group IBOR transition coordinator within group ALMT at BNP Paribas, 

 

Two twenty minutes talks and their discussion

Risk Managing the LIBOR Transition, by Claudio Albanese

By halting the LIBOR’s publication, large volumes of fixed income securities, from loans to derivatives, will fall back to an alternative fixing reference. The initial proposal of a SOFR fallback eliminated any degree of subjectivity but opened up funding risk. Overlaying a credit spread over SOFR is a remedy that goes in the right direction, but neither guarantees a robust hedge for funding risk nor prevents accidental wealth transfers.

To ensure robust funding risk hedges under all scenarios, we propose to complement the fallback rate by overlaying it with periodic exchanges of Funding Valuation Adjustment (FVA) reset amounts. Our proposal accomplishes the LIBOR indexing’s mandate of transferring banks’ funding risk to counterparties more accurately and robustly than the LIBOR itself while being objective and legally robust.

We conclude that the LIBOR transition is an excellent stimulus and opportunity to improve funding strategies and, if implemented with foresight, can make the financial system more resilient and efficient.

 

On some market risk hidden in the LIBOR fallback, by Marc Henrard

ISDA has proposed a LIBOR fallback methodology based on two items: an overnight compounded in-arrears floating rate and a spread adjustment. The selected spread has a major value transfer impact but here we focus on the compounded rate part and its market risk impact.

LIBOR is forward looking on a given term but the overnight composition is backward looking. To shoehorn the backward-looking fallback into existing term sheets, the methodology relies on multiple workarounds innocuous in appearance but dangerous in practice. Those workarounds can significantly reshape the market risk of existing instruments.

Using simple vanilla LIBOR swaps we show that the result of the fallback is far from producing an OIS-like risk as advertised. A long swap is transformed into a series of short swaps with gaps or overlaps between them. Those gaps and overlaps are produced by non-good business days and months with non-equal numbers of days. Therefore they appear in a systemic but almost unpredictable way, accumulating on specific days. Large daily changes of overnight risk appear in a manner that cannot be anticipated by looking at the original LIBOR swaps.

Related blog post: http://murisq.blogspot.com/2020/04/fallback-gaps-and-overlap.html

 

Discussion by Prof. Ernst Eberlein

 

Speakers

Claudio Albanese holds a Ph.D. in Physics from ETH Zurich. After postdoctoral work at NYU and Princeton, he joined the University of Toronto where he started a program in Mathematical Finance. After a sabbatical year at Morgan Stanley, he joined the faculty at Imperial College London as Chair of Mathematical Finance. In recent years he has developed an innovative framework for risk analytics aimed at simplifying the solvers and scaling out to large entity-level models. His theoretical work is on the topics of cost of funding and cost of capital for banks, model risk, and reverse-stress-testing.

Marc Henrard is a Managing Partner at muRisQ Advisory and visiting professor at University College London. Over the last 20 years, Marc has worked in various areas of quantitative finance including risk management, trading, software development, and quantitative research.

Marc’s research focuses on interest rate modelling and risk management. He authored two books: The multi-curve framework: foundation, evolution, implementation and Algorithmic Differentiation in Finance Explained. Marc holds a PhD in mathematics from the University of Louvain, Belgium.

Ernst Eberlein is professor emeritus at the University of Freiburg. He studied mathematics and physics at the Universities Erlangen-Nürnberg and Paris and holds a Dr. rer. nat. from the University of Erlangen-Nürnberg. As a Postdoc he was at the University of Bonn, IMPA Rio de Janeiro and ETH Zürich where he got his habilitation in mathematics. He held visiting positions at Stanford University, the University of California, San Diego (UCSD), the University of Technology Sydney (UTS) and was John-von-Neumann professor at TU Munich. Ernst Eberlein is one of the founding members of the Freiburg Center for Data Analysis and Modeling (FDM). He is an elected member of the International Statistical Institute and honorary member of the Bachelier Finance Society.  

In the early 90s he stood at the forefront of the application of Lévy processes for more realistic modeling in finance. More than 20 Ph.D. theses were finished under his supervision. His current research interests and consulting activities focus on interest rate modeling, risk management, as well as the valuation of derivative financial products. Together with Jan Kallsen he  is the author of the book ‘Mathematical Finance‘ (2019, Springer Finance Series) which presents financial models from a semimartingale perspective.

 

Questions and exchange with the audience

 

Participation at the event is free but registration is compulsory

(select ” Quantité ‘1 ‘” on the lower right of the form, then  register without fees)