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Posts: 2
Joined: April 30th, 2019, 12:02 pm

LIBOR Replacement Secured vs Unsecured

September 1st, 2019, 7:02 pm


I have been drawn into lots of LIBOR replacement questions and to myself I started asking few fundamental questions. Let's take an example USD LIBOR is a 3M forward unsecured rate, while SOFR is a secured overnight rate. I don't think one can be interchanged with other in a straight forward manner. 
  • How do you interchange a forward rate with a secured overnight rate?
  • In case of Cross Currency Swaps let' say cable swap. SONIA is unsecured. Now do you modify your pricing with one end being secured overnight rate and other being unsecured overnight rate to replace a forward rate?
  • If you use a spread adjustment, will it be single? dynamic, if dynamic? or term structure? How do you justify this?
  • how do you agree on a spread number with the counterparts?
This is not for any work perspective, these questions are just my own personal curiosity. I thank you for your time to read this question and look forward for your wisdom.

Warm Regards,
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Posts: 236
Joined: July 14th, 2002, 3:00 am

Re: LIBOR Replacement Secured vs Unsecured

September 4th, 2019, 1:46 pm

TBC I am afraid
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Posts: 49
Joined: February 13th, 2018, 5:27 pm

Re: LIBOR Replacement Secured vs Unsecured

September 4th, 2019, 6:15 pm

Yes.  We're a little early to the party.  I've heard a myriad of possible solutions and outcomes. Too much speculation at this point.  
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Joined: July 19th, 2006, 4:30 pm

Re: LIBOR Replacement Secured vs Unsecured

October 7th, 2019, 7:55 am

Focusing solely on derivatives contracts, ISDA have published the outcome of their consultation for 'IBOR fallbacks.

At a highlevel, we are a looking at:

1) Compounded in arrears risk-free rates (e.g. SONIA for GBP and SOFR for USD)
2) Most likely a backward shift in the observation period (I'm guessing 2 business days)
3) A fixed, invariant, non-zero credit spread calibrated off "fixings" (10 year trimmed median / 5 year mean etc)

Key things to note from my perspective, the basis swap market i.e. 'IBOR-OIS is and has been trading flat for a while now in anticipation of the change.

And, for the avoidance of doubt - FRA and 'IBOR in arrears type products will need to be converted into something more OIS friendly.

PW by JB has been "Serving the Quantitative Finance Community" since 2001. Continued...

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