Just noticed something unexpected in Bloomberg SWPM.A 3mo USD LIBOR flat always values to Par, implying that they are using this as the discount curve (not just for a USD IRS, it's the same if I look at e.g. EUR/USD crx basis swap). So they are not using an overnight-based (i.e. Fed Funds) curve. For all other currencies Bloomberg is explicitly using OIS discount curves and bootstrapped projection curves for the IBOR forwards.I wasn't expecting this, have I missed something regarding current practice?Thanks in advance Richard

SWPM valuation and the associated curve building are highly customizable, so you need to check your settings.

Isn't the reason that LIBOR flat swaps value to par that the LIBOR forwards are "fudged" (that's what I prefer to call the process) such that fixed and floating sides have equal PV's using OIS discounting?

Of course, but the fixed and floating legs will have (equal and opposite) non-zero values if the discount curve is not congruent to the projection curve.Under the default settings in Bberg, it shows the LIBOR leg valuing to par (i.e. the 3mo forward curve is also the discount curve), which was not what I expected to see.Is Bberg wrong? Or is market practice now not to use Fed Funds as the core OIS discount curve for USD swaps?

QuoteOriginally posted by: rfedrickOf course, but the fixed and floating legs will have (equal and opposite) non-zero values if the discount curve is not congruent to the projection curve.Under the default settings in Bberg, it shows the LIBOR leg valuing to par (i.e. the 3mo forward curve is also the discount curve), which was not what I expected to see.Is Bberg wrong? Or is market practice now not to use Fed Funds as the core OIS discount curve for USD swaps?It is conceivable that you have the "default setting" on, but it is certainly not their recommended setting. Right from the main screen in SWPM you can turn OIS based Libor curve stripping on/off, as well as managing which curve you use for discounting (e.g. OIS or Libor in non-CSA based discounting mode) or invoke discounting based on collateral posting in more currencies than you can shake a stick at. You can further customize your curve building using SWDF, last I checked "Source 8" was the recommended setting for S42. Just turning on the terminal and hoping that it gives the right answer does work with some products, but interest rate swaps no longer belong in that category (if it ever did).

Wouldnt par swap price back to par in OIS discounting as well? If your USD curve is built with par swaps even under multi curve generation with FedFunds your par swaps would still price back to par.

It's a problem in which you need to decide what you want to keep fixed and what you keep moving, i.e. are you fixing your par swap rate and the swap PV (to zero) and move the curve, or are you fixing the swap rate and the curve and let the PV move... But anyway, the reason the BBG system does not ship with SWDF recommended settings is because... computational efficiency is favored over market standards, correctness, etc... It's true to the extent of my understanding. I discussed with them many times, breathed down their neck over it. It's not completely absurd if you consider that with the defaults you get OK results at the benefit of reduced strain on the system. The same is true for the curve interpolation methods btw.

QuoteOriginally posted by: calDexterWouldnt par swap price back to par in OIS discounting as well? If your USD curve is built with par swaps even under multi curve generation with FedFunds your par swaps would still price back to par.The par swap rate will give you a swap value of zero, as long as you are doing things consistently, but (as OP attempted to clarify earlier) his concern was that each leg of the swap (with a terminal payment included) valued to par, which will only happen if you discount with the same curve that you generate the forwards from (in this case Libor).

erm, I thought all he mentioned was that flat libor leg was pricing to par, this will be true under OIS discounting and also for xCCy swaps as xCCy swaps are dollar collateralized as well.Feel free to correct me if this isnt correct. I thought we dont get an uncollateralized rate any more, so any leg with flat libor will always be under collateral assumption and as such price back to par.

QuoteOriginally posted by: calDextererm, I thought all he mentioned was that flat libor leg was pricing to par, this will be true under OIS discounting and also for xCCy swaps as xCCy swaps are dollar collateralized as well.Feel free to correct me if this isnt correct. I thought we dont get an uncollateralized rate any more, so any leg with flat libor will always be under collateral assumption and as such price back to par.This must rely on a usage of the word "par" with which I am not familiar. If you have a positive spread between the rate you are being paid (Libor) and the rate at which you are discounting (OIS) the discounted value of your promised cash flows will be greater than the notional amount on which you are basing the payments.

To add context OPs question mentioned that fixed vs 3M libor flat were pricing back to par on BBG. Under Libor discounting, the Libor curve built will still have quotes for Swaps which are collateralized in USD (due to no contributing data for uncollateralized swaps), however under this bootstrap mechanism a par swap will price back to par since it is a curve instrument.Under collateral assumption, the discount curve will be Fed Funds, but the forecast curve will still be Libor (which has quotes are under collateral assumption) . Under this bootstrap mechanism a par swap will still price back to par as it is also a curve instrument.The problem with Libor discounting now is that we dont really have "uncollateralized swaps" to build a curve, if this were the case then we would have seen some difference under Libor and collateral assumption. I am guessing BBG is using the same set of swap rates in both curves (standalone Libor vs OIS discounted Libor) which leads to this some what unexpected result.

As I said before, it is still a problem of what you hold fixed and what not. There is no market for unsecured swaps, but there is a market for collateralized swaps and there is a govt-interbank basis market. At the level at which we are discussing, you fix two and you imply the third. It's a little like in thermodynamics if you studied physics. If you want to you can imply the unsecured swaps market, throw away the basis market and pretend that there are two quoted swaps market, one collateralized and the other unsecured... (Due to non-linearities, interpolation, etc... this is not completely equivalent...)What would be an issue would be if there was a market for all three instrument types and they were out of line, there would then be arbitrage opportunities.