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I was wondering what the impacts of Interest Rates benchmarks (LIBOR/EURIBOR) discontinuation might be on the Quants side ? Do you know if there are articles/discussions providing an analysis grid of potential impacts (discounting, swap/options pricing, VaR time series, ...) Thanks in advance

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Most regulatory/central bank bodies are starting to offer alternatives that the market may or may not adopt.

With the USD we have a new market derived measure called SOFR. For the CHF we now have SARON.

CME group has also launched SOFR futures, albeit low volume.

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There's a paper providing formal arguments why OIS rates should be favored over LIBOR as risk-free benchmarks for derivatives pricing: Hull and White (2013).

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In the US, the clearing houses have announced a new swap contract which is a fixed rate versus SOFR, which is a repo based rate that will be observed and compounded daily, paid probably annually or perhaps quarterly. Thus raises a number of quant type issues: (1) daily projection of SOFR will be required , as opposed to quarterly projection in today's Libor swaps. (2) discounting is yet to be decided, but some contracts will be discounted at FedFunds whilst others could be discounted at SOFR. (3). There's not yet any data series for SOFR based swaps, so there's no historical volatility to help price SOFR swaptions, and no data series to calculate Var. As SOFR swaps gain liquidity, presumably this will gradually be solved.

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  • $\begingroup$ I guess SOFR will be used to discount collaterlized transactions. What about transaction discounted at Libor (as a proxy for bank's own funding cost) ? $\endgroup$ – Aguelmame Jul 24 '18 at 14:15
  • $\begingroup$ SOFR is no longer a proposal $\endgroup$ – pyCthon Jul 24 '18 at 15:27
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    $\begingroup$ Edited to reflect @pyCthon comment $\endgroup$ – dm63 Jul 24 '18 at 22:46
  • $\begingroup$ @aguelmame, clearing houses are making available SOFR swap contracts with both SIFR and Fed Funds as discount rates. I believe CME favors SOFR and LCH favors FedFunds, but this could change over time. There is no cleared contract that will use Libor as a discount rate. $\endgroup$ – dm63 Jul 24 '18 at 22:49
  • $\begingroup$ @dm63 Just updated my answer above as well, CME offers futures and cleared swaps now on SOFR $\endgroup$ – pyCthon Jul 24 '18 at 23:03

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