# Tag Info

7

OIS Discounting: First note that we already discount using USD OIS rates, but these would be OIS rates constructed from USD OIS Swaps linked to the Effective Federal Funds Rate (EFFR). In other words, the floating rate of the OIS swap would be based on the EFFR rate, whilst the fixed leg would be the normal fixed leg we are used to seeing in swaps. So the ...

5

Two replacements for the 3M Libor curve are possible: Construct a new 3M Swap discounting curve by adding spreads on top of the SOFR curve. These spreads can be calibrated on uncollateralized 3M SOFR swaps. Discount all derivatives, regardless if collateralized or not, with the SOFR curve, which is the true risk free curve. The credit risk arising from not ...

4

To add to above answer, this GARP article is summarizing recent work on new benchmark indices that attempt to address what Libor was meant to ('fairly') cover, but RFR’s don't, namely (term, unsecured) funding and some credit sensitivity: Ameribor, AXI, US Dollar ICE Bank Yield Index etc.. One banker points out there that an index like SOFR “would plummet ...

3

I believe that this recent paper by Andrei Lyashenko and Fabio Mercurio is going to help you! For me it was completely amazing. It seems that we can just extend the Libor Market Model in a "simple" manner to cope with the new RFR because we can define an extended numeraire $P(t, T)$ for $t > T$ that recovers Ibor-like properties, such as the ...

3

Unfortunately, I cannot provide a definite answer. In the major currencies, the risk free rate working groups (US:ARRC, UK:RFRWG and the EU:RFRWG) try to promote new standards for the cash and derivatives markets. Further, there exist recommendations from various industry bodies how to incorporate (lagged) SONIA/SOFR(/ESTR) in new contracts. As an example, ...

3

I try to keep your enumerated structure yet address the points you edited into the question: (i) I only know of USD OIS referencing the EFFR and the SOFR (ii) My perception is that EFFR als float leg reference is far more liquid at the moment (compare the traded volumes, e.g. https://apps.newyorkfed.org/markets/autorates/fed%20funds vs. https://www.cmegroup....

2

"US banks fund themselves via EFFR (Effective Federal Funds Rate), as well as the Secured Overnight Financing Rate (SOFR)" Bank funding is only partly via Fed Funds - there were many important structural changes to that market post-GFC which I believe reduced bank participation in the market. See, for example, this paper: https://www.clevelandfed....

2

I think a little clarity is needed here. A swap means exchanging A for B. Swaps trade on anything and everything. You can trade IOS/BBA Muni swaps, you can trade a swap linked to the gold forward levels versus Euribor 9 month fixings. Whatever you want. You have a mistake above. OIS swaps are not OIS vs Libor. Generally, when someone trades an ...

2

By definition, the overnight rate is the rate at which banks lend to each other overnight. Overnight index swaps (OIS) allow banks to 'lock in' the cost of funding overnight for a specific term. They exchange a predetermined OIS rate for a payoff equal to the growth of the notional amount of money lent at the overnight rate for a specific term. The overnight ...

2

This has been asked before. I do not think there is any implication from a negative spread (certainly not from the perspective of it being an indicator of perceived credit risk or not). Edit: There is a number of companies who seek to develop and offer a credit sensitive benchmark. ICE's Bank Yield Index Bloomberg's BSBY Index So if you desire an indicator ...

2

Firstly, note that this is a detail which changed in 2018. The BenchMark Regulations (applied from the EU reg) require that benchmarks are based on actual transactions, so Sonia changed from being a term rate for overnight published today for tonight, to being an in-arrears rate published tomorrow for tonight. The rate for some date (the index for that day) ...

2

Another apology, I won't be able to give a definite answer either but in case of IR swaps I believe the following applies: legacy (i.e. IBOR linked) contracts: the fallback protocol has been launched by ISDA last month and Bloomberg had been selected as fallback spread vendor a while back. In case LIBOR ceases to exist, the fallback rate is the compounded ...

2

I like this particular blog on rates: https://www.clarusft.com/blog/ Specifically, here is post with some info on SOFR swaps liquidity. There is a section in this post on SOFR volumes by tenor: https://www.clarusft.com/sofr-futures-and-swaps-feb-2021/ useful details on sofr swaps, from the same blog: https://www.clarusft.com/sofr-swap-nuances/ Specifically: ...

1

I do not think there is any problem. Firstly, you also did not use OIS but LIBOR now, although the "appropriate" risk free rate would be OIS. You also did not compare the two. To address the risk that one or more IBORs are discontinued while market participants continue to have exposure to that rate, counterparties are encouraged to agree to ...

1

This is my most up-to-date understanding of the matter: (i) OIS Swaps are here to stay. Already today, in the US, there two types of OIS Swaps, ones indexed to the Effective Federal Funds Rate (EFFR) and ones indexed to the Secured Overnight Financing Rate (SOFR). Both these swaps work the way you have described (floating based on Geometric Average of daily ...

1

The Fed convened the ARRC (Alternative Reference Rate Committee) in I think 2015 to begin the process of transitioning the financial markets away from Libor. Why? Because Libor had been manipulated , on account of the fact it was based on a poll rather than being sampled from a large , liquid market. The Committee, whose minutes are public, selected SOFR ...

1

iii) The OpenGamma piece on IRS market conventions might help. https://quant.opengamma.io/Interest-Rate-Instruments-and-Market-Conventions.pdf [EDIT or USSO2 BGN Curncy DES, for e.g., which provides details on the conventions for each leg] iv) Yes, SOFR/FF basis swaps trade OTC. Or you can trade SOFR futures vs. Fed Funds futures.

Only top voted, non community-wiki answers of a minimum length are eligible