Page 1 of 1

SOFR Fallback impact on swaptions

Posted: December 1st, 2019, 10:38 pm
by tglauner
ISDA has some preliminary recommendations on the fallback for Libor swaps when Libor stops being quoted end of 2021. I have been asked to estimate the MTM impact of a portfolio on this fallback. On a high level the fallback states that Libor+Spread becomes SOFR+Spread+Adjustment where the Adjustment attempts to create a small MTM impact on vanilla swaps. The Adjustment is some formula that calculates the mean/medium difference of term Libor vs term SOFR over a historical term (5y/10y). For vanilla swaps we have seen a 2-5 bp impact as the Adjustment is different from the Libor/SOFR basis swap quotes.

My question is if anyone has a suggestion on how to apply such a methodology to European swaptions, Caps/Floors and ultimately to Bermudan swaptions. These option trades are not yet traded on SOFR so would like to try and have some rather straightforward algorithm to do an initial impact analysis on these type of trades.

Thank you,
Tim