"Post-IBOR float legs": ISDA Fallbacks - Digest of the mechanics - d-fine

„Post-IBOR float legs“:
ISDA Fallbacks
Digest of the mechanics

Frankfurt, 20.09.2020

Agenda

01 ISDA – Fallbacks: Introduction 03

02 ISDA Fallbacks – Digest of the mechanics 05

03 Discussion – Implementing the mechanics 10

04 Appendix: Bloomberg Tickers 12

Note: The mechanics are presented as of 20.09.2020. Methodological changes by ISDA etc. should be followed carefully as the
the final publicaton of the amendments to the ISDA definitions is still outstanding.

Target Post-IBOR float legs and transtion paths
– the two key points for legacy IBOR derivatives

 Target Post-IBOR float leg Transition paths

  How do new standard market  Fallback triggered by (pre-)cessation
 conventions look like? events etc.
 Legacy
  How do the legs resulting from fallbacks vs.
 look like? IBOR derivatives  Active migration of legacy trades into
  How do conventions relate to each other deliberately chosen structures
 (fallback to new products, derivatives to  Strategy to be chosen by institution
 loans to MTNs etc.)?

 This presentation covers the mechanics of the “Post-IBOR float leg” in plain vanilla swaps resulting from ISDA
 Fallback rules, pointing out various subtleties. It does not detail the transition path or other products.
ISDA Fallbacks
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FOOD 4 THOUGHT: ISDA FALLBACKS

01 ISDA – Fallbacks:
 Introduction

Introducing ISDA Benchmark Fallbacks
in four basic points

 What is provided by ISDA? How do Fallback clauses work?

  Cessation of an IBOR corrupts ISDA  Upon cessation of an IBOR, the floating
 master agreement (MA) governed IBOR rate option (FRO) referenced in the trade
 referencing trades. is replaced by a Fallback Rate.
  ISDA will provide Fallback clauses in its  Thereby interest rate periods, payment
 2006 ISDA definitions dates and fixing dates are kept, only the
 mechanics “under the hood” of the FRO
  via a supplement for new trades,
 in the ISDA MA are changed.
  via a protocol for legacy trades.
 ISDA Fallbacks
 What is the Fallback Rate? What is the role of Bloomberg?

  The Fallback Rate is the sum of:  Every day Bloomberg publishes for
 none, one or several IBOR Fixing dates
  Adjusted Reference Rate (ARR): RFR
 and all relevant tenors:
 compounded in-arrears over the
 respective IBOR tenor anchored by the  the Adjusted Reference Rate,
 IBOR Fixing date,  the Fallback Spread,
  Fallback Spread: 5-year median ARR/  the “all-in” Fallback Rate.
 IBOR-basis, fixed prior to cessation.

 The principle of the ISDA Benchmark Fallbacks is straightforward: one LIBOR fixing, one Fallback fixing.
 However, some subtleties of the mechanics need careful consideration.
ISDA Fallbacks 01.00 ISDA – Fallbacks: Introduction
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FOOD 4 THOUGHT: ISDA FALLBACKS

02 ISDA Fallbacks – Digest of the
 mechanics

How to determine the relevant dates of the Fallback rate for a given original
IBOR Rate Record Day01

 Accrual Accrual Accrual End Fallback
 ≙ Publication
 Start Date Spot Date Date Date
 3 1 2 4

 1.
 1 Start with original IBOR Rate Record Day (i.e. the IBOR Fixing Date) spot
 EURIBOR 2
 2.
 2 Add IBOR specific spot (see table) to calculate the Accrual Spot Date USD LIBOR 2
 GBP LIBOR 0
 CHF LIBOR 2
 3.
 3 Subtract two business days from date in 2 to receive interest JPY LIBOR 2
 Accrual Start Date
 4.
 4 Add IBOR tenor to date in 3 using modified following business day
 rule to receive interest Accrual End Date, which is identical to the
 Fallback Publication Date
01 adapted from IBOR Fallback Rate Adjustments Rule Book , April 2020

 The Fallback rate for the IBOR Rate Record Day (i.e. IBOR Fixing Date) is published on the Fallback Publication
 Date (=Accrual End Date). The Accrual Period determines the calculation of this Fallback rate.
ISDA Fallbacks 02.00 ISDA Fallbacks – Digest of the
© 2020 d-fine mechanics 7

How to determine the Fallback rates for existing IBOR Swaps01
 Fallback
 Observation Date

 * usually same as Period End Date or
 following/previous business day

 Float payment in a typical IBOR swap to be replaced by fallback:

 × × , ⇒ × × , ෤

 swap notional of the period
 daycount fraction of the contractually agreed convention between
 and
 , IBOR rate of tenor , fixed at t (the original IBOR Rate Record Day)
 , ෤ Fallback rate for IBOR of tenor for IBOR Rate Record Day ෤
 t The original IBOR Rate Record Day (≙ IBOR Fixing Date) of the contract
  spot days before
 ෤ The original IBOR Rate Record Day if this rate is known at the Fallback Observation Date
 (defined as date two business days prior to the Payment Date), otherwise the most recent
 IBOR Rate Record Day whose fallback rate is known at that observation date.
01 adapted from IBOR Fallbacks Fact Sheet, June 2020

 The Fallback Observation date and the original IBOR Rate Record Day (≙ IBOR Fixing Date) determine the
 Fallback Rate to be used.
ISDA Fallbacks 02.00 ISDA Fallbacks – Digest of the
© 2020 d-fine mechanics 8

How to calculate the Fallback Rate for a given tenor and Accrual period

 Fallback rate for :
 = + 
 Adjusted Reference Rate:
 , + 1 × 
 = × ෑ 1+ −1
 [ , ] 
 ∈ , 

 Reference rate for business day 
 [ , ] number of calendar days between and EURIBOR 360 €STR 360
 Accrual Start Date USD LIBOR 360 SOFR 360
 Accrual End Date GBP LIBOR 365 SONIA 365
 , set of business days between and (excl.) CHF LIBOR 360 SARON 360
 JPY LIBOR 360 TONA 365

 Spread Adjustment:
 = Median5 { − }

 The calculation of the Adjusted Reference Rate is determined by the Accrual Start Date and the Accrual End
 Date.
ISDA Fallbacks 02.00 ISDA Fallbacks – Digest of the
© 2020 d-fine mechanics 9

Fallback publication details – example of what is published on a given
fallback rate publication date
  The fallback rates will have two dates associated with it
  The Rate Record Day (Original IBOR fixing date)
  Fallback rate publication date
  It can happen that on a certain day no, one or several fallback rates (with different IBOR
 publication dates) are published

 Example:
 IBOR rate is GBP LIBOR 1M. Bloomberg will publish:

 No fallback rates on 12.05 since 12.04 is not a business day

 One fallback rate on 13.05 with corresponding GBP LIBOR 1M reset
 date 15.04. (15.04. was the original IBOR Fixing date of the
 contract)

 Two fallback rates on 11.05 with corresponding GBP LIBOR 1M
 reset dates 13.04 and 14.04 (choose the fixing whose associated
 date corresponds to the original IBOR fixing date of the contract)
ISDA Fallbacks 02.00 ISDA Fallbacks – Digest of the
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FOOD 4 THOUGHT: ISDA FALLBACKS

03 Discussion –
 Implementing the mechanics

Food for thought
– points to consider when implementing ISDA Fallbacks front2back

 Market Data supply Trade Life Cycle/ Cashflows

  Ability to feed and distribute several  Fallback Rates as separate Indices?
 Fallback Rates (Rate reference day/  Ability to apply fixings:
 fixing) at a given day
  Identification of corresponding
  Adjusted Reference Rate, Fallback publication dates,
 Spread and all-in to be provided?
  Triggering fixings at publication dates.
  Irregular tenors to be provided centrally?
  Life cycle events (e.g. partial term.)
 ISDA Fallbacks
 front2back
 Valuation/ Curve building Market Risk Measurement

  How to calculate forwards after the  Zero curve or spread curve setup?
 cessation event?  Just OIS as risk factor? Separate
  Integrate dedicated forward curves in “forward” and “discount” risk factors?
 curve universe (all-in?)? Implement  Realized vs. unrealized CFs (P&L)?
 full Fallback algorithm?
  Basis risk to plain OIS leg
  How to calculate accruals?
  Spread in IR risk
  Fallbacks in complex models?

 A thorough discussion along the front2back chain is necessary.
 Note that the points above in no way claim completeness or comprehensiveness.
ISDA Fallbacks 03.00 Discussion – Implementing
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FOOD 4 THOUGHT: ISDA FALLBACKS

04 Appendix

APPENDIX

04.01 Bloomberg Tickers
 for ISDA Fallback Rates

Fallback rate data & tickers

  Bloomberg publishes compounded setting in arrears risk free rate, fallback spread adjustment
 and the all-in fallback rate (sum compounded risk free rate and fallback spread)
  Overview of fallback rates for each index available at in Bloomberg Terminal
  Example Quotes for GBP LIBOR on 08/06/20:

 Logic for GBP fallback tickers:
 Index – BP0003M Index
 Fallback Rate – FBP0003M Index
 Fallback Spread – SBP0003M Index
 Compounded RfR – SONIA3M Index

ISDA Fallbacks 04.00 Appendix 04.01 Bloomberg Tickers for ISDA
© 2020 d-fine Fallback Rates 15

APPENDIX

04.02 Other derivatives
 discussed by ISDA

Derivatives in focus of ISDA aside the plain vanilla swap case

  FRAs

  Swaps with period/tenor mismatch
  Swaps with stubs
 ISDA Fallback of legacy trades
  Swaps with early payment features
  In-arrears swaps
  Range Accruals

  Cross Currency Swaps

 Conventions for new products
  CMS-products (ICE swap rate etc.)

  Caps/Floors
  Swaptions

 The list is not exhaustive, only covering products in focus of ISDA.
 In particular exotic/structured IBOR derivatives need further attention.
ISDA Fallbacks 04.00 Appendix 04.02 Other derivatives discussed by
© 2020 d-fine ISDA 17

APPENDIX

04.03 d-fine and the Benchmark reform
 – selected references

Overview on recent (and running) d-fine projects on the O/N- and IBOR-
transition

 Large German banking
  Implementation of the benchmark reform for interest rate in EUR for market and liquidity risk controlling
 group

German commercial bank  Pre-study on the impact and the need for action from international O/N-and IBOR-transition

 German development  Training of the controlling (risk and finance) department concerning EONIA- and EURIBOR-
 bank transition/reform

Large German commercial  Implementation of SOFR and €STR as indices and curves as well as introduction of a SOFR-linked FRN
 bank as new product

 Solution provider for
  Support and advice in coping with EONIA/EURIBOR, SOFR/LIBOR etc. related need for action
 cooperative banks

Large German commercial
  Implementation of €STR and SOFR along the entire value chain (front2back)
 bank

  Support in the implementation of €STR and SOFR in settlement pricing and risk management and
 Large CCP
 integration of ISDA fallbacks

ISDA Fallbacks 04.00 Appendix 04.03 Selected references
© 2020 d-fine 19

Overview on recent (and running) d-fine projects on the O/N- and IBOR-
transition

 Large German banking  Support in the planning, steering and delivery of the group-wide IBOR reform project, including setup of
 group €STR FRN as new product and introduction of €STR/EURIBOR+ along the entire value chain (front2back)

  Running support in the IBOR reform transformation project, including e.g. ECB “Dear CRO”-Letter and
 German commercial bank
 €STR/SOFR-curve implementation

 Dutch asset manager  Support in the setup of €STR and SOFR curves in Front Arena

 European development  Support in the optimization of the FTP-models / FTP-framework, inter alia preparation of FTP in the post-
 bank IBOR-world

  Support in the bank-wide IBOR program, in particular introduction of €STR, SOFR and SONIA in
 German bank
 treasury and Risk (System Summit)

 German bank  Introduction of €STR curves and €STR products (System Front Arena)

 Solution provider for
  Introduction of RFR curves and RFR products (System SCD)
 savings banks

ISDA Fallbacks 04.00 Appendix 04.03 Selected references
© 2020 d-fine 20

Overview on recent (and running) d-fine projects on the O/N- and IBOR-
transition
  Support of the project owner for the group-wide IBOR reform project
 European development
 bank  Consolidation and regular check/addition of the requirements as well as coordination of the completion
 of the several work streams

  Support in the planning, steering and delivery of the group-wide IBOR reform project, including setup of
 Large Irish Bank RFR curves and products (System Summit and Algo) and establishment of impact analyses for switch
 and cessation events

 Swiss commercial bank  Support of the introduction of mortgages on SARON (daily compounding) in Quant-team

 Deutsche development
  Extension of MoCA: introduction of the ESTR based valuation, scenarios and Value-at-Risk
 bank

  Planning of the introduction of SONIA-linked credit products
 German commercial bank
  Adjustment of the interfaces from the bank‘s systems to Front Arena

  Production of ad-hoc analyses for the EONIA/ESTR transition (in RiskWatch)
 German commercial bank
  Support during the NPP for several RFR related products, especially trials of new coupon structures

 European development
  Support in designing, implementing and testing new RFR curves and interest rate structures in WSS
 bank

ISDA Fallbacks 04.00 Appendix 04.03 Selected references
© 2020 d-fine 21

Interested in further discussion?

Dr Hans Peter Waechter, CFA, FRM
Partner
Tel +49 89 7908617-488
Mobile +49 162 2631356
E-Mail HansPeter.Waechter@d-fine.de

Dr Sebastian Schneider
Manager
Tel +49 89 7908617-1308
Mobile +49 162 2631540
E-Mail Sebastian.Schneider@d-fine.de

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