20181017-法国巴黎银行-BENCHMARK_REFORM_45页_2mb

BENCHMARK REFORM SUMMARY

1. Risk-Free Reference Rate (RFR)

Core Content

The European Central Bank (ECB) has chosen ESTER (Euro Short-Term Rate) as the new risk-free reference rate for the EUR, replacing EONIA. This reform aligns with the Financial Stability Board's (FSB) recommendations from 2014, aiming to create more robust and transparent benchmarks.

Key Differences Between ESTER and EONIA

Transition to ESTER

• Timeline: ESTER will start official publication by October 2019, with "pre-ESTER" data published in the interim.
• Methodologies: Four methodologies are under consideration for deriving term rates from ESTER:
  1. OIS quotes-based: Uses firm tradeable/committed quotes on regulated electronic trading venues.
  2. Futures-based: Extracts expected levels of ESTER using liquid futures markets.
  3. OIS transactions-based: Based on OIS transactions, though data suggests limited volumes.
  4. Backward-looking: Uses historical rates, either in arrears or in advance.

EUR RFR Working Group

• The Working Group has called for a delay in the transition from EONIA to ESTER, requesting a minimum 2-year extension.
• The European Commission indicated that an extension could only be considered if:
  • The request is clear,
  • There is high stakeholder support,
  • There is evidence that alternative options would not achieve a smooth transition.
• Despite the call for delay, the Working Group aims to complete the transition by 1 January 2020.

2. Strengthening Existing IBORs

EURIBOR Reform

• EURIBOR is being moved to a hybrid methodology, incorporating transaction data and expert judgment where necessary.
• The new definition focuses on wholesale unsecured borrowing in the euro area.
• Eligible Transactions include:
  • Unsecured deposits from deposit-taking corporations, insurance, pension funds, and central banks.
  • Fixed-rate, short-term securities like CPs, CDs, etc.

Waterfall Methodology for LIBOR

• The transition to the waterfall methodology is underway, with 20 LIBOR panel banks required to make parallel submissions.
• The methodology includes:
  • Level 1: Transaction-based, with volume-weighted average.
  • Level 2: Transaction-derived, including interpolation.
  • Level 3: Expert judgment, used when transaction data is insufficient.
• The waterfall methodology ensures that LIBOR can be published even in extreme market conditions.

Credit Spread Adjustments

• Credit spreads are calculated based on the business day before the fallback is triggered.
• Key credit spread methodologies:
  • Forward approach: Reflects market expectations, more realistic, but vulnerable to manipulation.
  • Historical approach: Less vulnerable to manipulation, but may result in flat spreads across the curve.
  • Spot spread approach: Also less vulnerable to manipulation, but may lead to large PV transfers.

3. ISDA Backfalls for Derivatives

Robust Fallbacks

• ISDA has proposed fallback methodologies for derivatives in the event of a permanent discontinuation of an IBOR.
• These fallbacks will be based on the relevant risk-free rate, with term and credit spread adjustments.

Term Adjustment Methodologies

• Four methodologies are proposed for term adjustment:
  1. Spot Overnight Rate (SORf): No adjustment, fallback to the overnight rate.
  2. Convexity-adjusted Overnight Rate (CORf): Daily compounding over the LIBOR term.
  3. Compounded Setting in Arrears Rate (ARRf): Rate known at the end of the period.
  4. Compounded Setting in Advance Rate (ADRf): Rate known at the beginning of the period.

Credit Spread Methodologies

• Three methodologies are under consideration:
  1. Forward-based (most realistic but vulnerable to manipulation)
  2. Historical mean (less vulnerable to manipulation, but may result in flat spreads)
  3. Spot spread (also less vulnerable, but may lead to large PV transfers)

Fallback Rates and Spreads

• Fallback rates for EURIBOR are illustrated as spreads to EONIA OIS, with -9bp adjustment when ESTER is unavailable.
• Fallback rates for GBP LIBOR are shown as spreads to OIS, with varying levels depending on the tenor.

4. Potential Implications of Transition

• A mass transition to RFRs may cause significant changes in pricing and hedging strategies.
• Credit spreads may fluctuate, with shorter tenors tightening and longer tenors widening as the market converges toward the RFR.
• Hedges such as:
  • 6M OIS/BOR flattener: Receive ~4y4y vs pay ~30y10y (around 12bp)
  • 3s6s basis widener: Pay 20y20y forward (around 0.75bp to 9bp)

5. Appendix: Three Pillars of Benchmark Reform

1. RFR: Developing nearly risk-free reference rates (e.g., ESTER).
2. IBOR+: Strengthening existing IBORs by underpinning them with transaction data.
3. Fallbacks: Defining robust fallbacks for derivatives in case of IBOR discontinuation.

Summary of Key Points

• ESTER is the new risk-free rate for EUR, chosen by the ECB in 2018.
• EONIA is no longer BMR-compliant and will be phased out by 2020.
• Waterfall methodology is being used for LIBOR and EURIBOR to ensure continuity.
• ISDA is working on defining fallbacks for derivatives, with term and credit spread adjustments.
• Credit spread methodologies vary in approach, with forward-based being the most realistic but vulnerable to manipulation.
• Hedges are being considered to manage the transition, including flattener and widener trades.
• Timeline for key milestones:
  • 18 October 2018: Scorecard assessment of methodologies.
  • Q4 2019: Implementation of new methodologies.
  • 2019 onwards: Consultation on term and spread adjustments for USD, EUR, and GBP LIBOR.

Conclusion

The transition from IBORs to RFRs is a critical reform in the financial industry, aimed at creating more resilient and transparent benchmarks. The ECB and ISDA are leading efforts to ensure a smooth transition, with ESTER as the primary RFR for EUR. The waterfall methodology and fallbacks are key tools to maintain market functionality during the transition. The credit spread adjustments and hedge strategies are essential to mitigate risks and manage the impact on derivative pricing. The reform is expected to be fully implemented by 2020, with ongoing consultations and adjustments to ensure alignment with market conditions and regulatory requirements.