Timeline for OIS rate to build Term structure
Current License: CC BY-SA 4.0
11 events
| when toggle format | what | by | license | comment | |
|---|---|---|---|---|---|
| Nov 17, 2020 at 8:00 | comment | added | KevinT | I have opened thread quant.stackexchange.com/questions/59430 for this. | |
| Nov 16, 2020 at 18:01 | comment | added | Jan Stuller | @KevinT: Please do open a new question, I think many would be interested, including myself, and it's a current topic. | |
| Nov 16, 2020 at 16:55 | comment | added | KevinT | I'd be interested to hear other people comment on this (might even open a new question); I think that in most working papers the calculation of the spread was referring to the compounded version of the overnight rate (e.g. isda.org/2020/07/21/…). That being said: Once the spread is fixed, your proposition (using a single but properly term-scaled version of the individual reset) sounds feasible, indeed. | |
| Nov 6, 2020 at 12:27 | comment | added | Jan Stuller | @DimitriVulis, could you please comment on the above? The SOFR used after Libor cessation will be the compounded SOFR over the past 3 or 6 months, or simply the last night's realized SOFR adjusted for annual fraction + spread? | |
| Nov 6, 2020 at 12:26 | comment | added | Jan Stuller | @KevinT: I believe the overnight SOFR rate will be multiplied by the appropriate annual fraction to "stretch it out" to the required tenor, and the fied spread that will be added will compensate for the "credit" risk difference between LIBOR and SOFR. | |
| Nov 6, 2020 at 11:52 | comment | added | KevinT | I see what you mean. However, we then need to clarify that it will be the SOFR term rate that will be used -- this one is the compounded rate over the past 90 or 180d, and not a single overnight reset. In fact, most fallback rates will be defined that way (compound rate + spread, rather than single SOFR fixing + spread). Else you would replace a, say, 6M Libor rate with a single o/n rate, which is missing the term premium. | |
| Nov 6, 2020 at 7:25 | comment | added | Jan Stuller | @KevinT As far as the mechanics of the swaps: that will be identical, in the sense that you just take the published "SOFR" every morning, instead of teh published Libor every morning: and you will use that published SOFR as your swap fixing (just like we do with the published Libor): the only difference is that a constant spread will be added... so I think the mechanics of the Libor swaps, once we switch the SOFR, will be just the same... | |
| Nov 6, 2020 at 7:23 | comment | added | Jan Stuller | @KevinT: I am not sure I agree: SOFR is indeed backward looking in the sense that it is the average Secured Overnight Funding Rate "realized last night". But it is published every morning by the New York Fed. Similarly, the LIBOR is published every morning (based on a survey of banks, who estimate their forward-looking borrowing cost). But that's the entire point: the market wants to move away from forward-looking estimate, they want an undisputable "realized" rate. | |
| Nov 2, 2020 at 12:58 | comment | added | KevinT | NB: This is mainly because there is no "forward looking" SOFR -- but some people are asking for that (mainly derived by expectations priced in by the SOFR futures market). It's not sufficiently liquid yet I believe but I think ARRC plans to start publishing something like this in 2021. Moreover, this is more a consideration for trades conducted in the future. From a practical POV you might be right: the existing, legacy LIBOR trades in the book, might simply be "re-struck" using SOFR+spread instead of LIBOR, ignoring the timing discrepancy. 2021 will bring some more clarity here... [2/2] | |
| Nov 2, 2020 at 12:54 | comment | added | KevinT | Just a brief comment on the very last paragraph of your answer: the "Libor" swaps in the future will not exactly work as the Libor swaps work today. The main reason is that once they start referencing the SOFR, they will become backward looking by defintion (as you describe in (i) above), i.e., exact cashflows will only become known at the END of the accrual period, and not in advance (as is the case today). [1/2] | |
| Oct 31, 2020 at 10:04 | history | answered | Jan Stuller | CC BY-SA 4.0 |