On a somewhat related but slightly different topic, as I think this one is a nothing-burger, there was discussion today (internal) and the person was talking about svb. He said that one issue was HTM - Held to Maturity, where I guess you don't have to value assets that you plan to hold until maturity and that's why things were looking good, until they didn't. I don't know anything about this. Just did a google search and found this:
Hello there fren, its been awhile! Have you been hearing anything else in the financial world?
FASB old accounting rules are definitely notable.
April's numbers for the LIBOR to SOFR transition are about to come out. In March, the derivative volume only increased by 2% from February. So still about 40% of derivatives need to move over from LIBOR to SOFR by June 30, 2023. I expect changing about $80 Trillion of derivative contracts will have ramifications, along with the other trillions in CDOs/CLOs.
No more information. As I mentioned, we were working against a Dec 2021 deadline so I'd be surprised if there's much, if anything, left to transition.
As I said, I think this is a nothing burger. From the little I read on it sounds like LIBOR had some shortcomings which was why they decided to replace it.
It says in the actual reports from the link you gave me that there is still 40% left to go till June 30, 2023. It doesn't seem like a nothing burger to me considering how far they still have to go.
RFR Adoption indicator tracks global trade activity which is measured by DV01 that is conducted in Over-the-Counter (OTC) and exchange-traded Interest Rate Derivatives (IRD) that is trading in Risk-Free-Rates (RFR, in US is called SOFR) compared to total trades that also involve LIBOR.
On page 1 of the February report - 59.1% of USD IRD DV01 was transacted in SOFR.
61.5% of USD IRD DV01 was transacted in SOFR this month.
That is a 2.4% change
There is 3 months from that time to get he other 38.5% to SOFR. They've had years to do it and now they have to sandwich it all at once. That is a lot to still go.
I think we get the April report next week.
Unless you got some extra info I'm not familiar with, they are absolutely not out of the woods on this.
The DV01 of an interest rate derivative is the ‘discounted value of a basis point’. This describes the
valuation change in a derivative contract resulting from a (parallel) 1 basis point (0.01%) shift in the
interest rate swaps that are used to value it.
To calculate the approximate DV01s from notional volume traded, the following process is applied:
Standardized DV01s for par (at-market) swaps are calculated for the standardized tenors, 1Y,
2Y, 5Y, 10Y, 30Y and 50Y.
All DV01s are calculated on the USD curve, irrespective of the underlying currency.
The par swaps are modelled as forward-starting swaps, out of the next quarterly
international monetary market (IMM) date. This is to avoid any complications of
including/excluding the first fixing. The DV01 also fluctuates less month-on-month (for the
same market rates) because the exact number of days in the swap is more consistent.
The DV01 is calculated by valuing the swap at market (net present value (NPV) = zero) and
then applying a parallel shift to the curve of 1 basis point (0.01%) and recalculating the NPV
at the shifted market rates.
Well seems like you're going to be pretty well versed on the sunset of LIBOR. If you're looking for something else, maybe something nefarious, don't think you're going to find it. My guess is that it will be like Y2K for any suggesting this is a big deal which will have huge negative ramifications. Just my guess.
On a somewhat related but slightly different topic, as I think this one is a nothing-burger, there was discussion today (internal) and the person was talking about svb. He said that one issue was HTM - Held to Maturity, where I guess you don't have to value assets that you plan to hold until maturity and that's why things were looking good, until they didn't. I don't know anything about this. Just did a google search and found this:
https://tax.thomsonreuters.com/news/silicon-valley-banks-failure-sparks-speculation-that-fasb-accounting-rules-for-held-to-maturity-debt-securities-should-be-revised/
Seems like if you could find out what other banks/investment firms use this for many of their assets you might know which ones could be in trouble.
Hello there fren, its been awhile! Have you been hearing anything else in the financial world?
FASB old accounting rules are definitely notable.
April's numbers for the LIBOR to SOFR transition are about to come out. In March, the derivative volume only increased by 2% from February. So still about 40% of derivatives need to move over from LIBOR to SOFR by June 30, 2023. I expect changing about $80 Trillion of derivative contracts will have ramifications, along with the other trillions in CDOs/CLOs.
No more information. As I mentioned, we were working against a Dec 2021 deadline so I'd be surprised if there's much, if anything, left to transition.
As I said, I think this is a nothing burger. From the little I read on it sounds like LIBOR had some shortcomings which was why they decided to replace it.
It says in the actual reports from the link you gave me that there is still 40% left to go till June 30, 2023. It doesn't seem like a nothing burger to me considering how far they still have to go.
From the link you gave me
https://www.isda.org/2022/05/16/benchmark-reform-and-transition-from-libor/#clarus
Go to 3. ISDA-Clarus RFR Adoption Indicator
Under Monthly Reports:
For the month of February
https://www.isda.org/a/aaJgE/ISDA-Clarus-RFR-Adoption-Indicator-February-2023.pdf
RFR Adoption indicator tracks global trade activity which is measured by DV01 that is conducted in Over-the-Counter (OTC) and exchange-traded Interest Rate Derivatives (IRD) that is trading in Risk-Free-Rates (RFR, in US is called SOFR) compared to total trades that also involve LIBOR.
On page 1 of the February report - 59.1% of USD IRD DV01 was transacted in SOFR.
For the month of March on page 1
https://www.isda.org/a/aeLgE/ISDA-Clarus-RFR-Adoption-Indicator-March-2023.pdf
61.5% of USD IRD DV01 was transacted in SOFR this month.
That is a 2.4% change
There is 3 months from that time to get he other 38.5% to SOFR. They've had years to do it and now they have to sandwich it all at once. That is a lot to still go.
I think we get the April report next week.
Unless you got some extra info I'm not familiar with, they are absolutely not out of the woods on this.
Extra Info - Defining DV01
On page 10 of the Whitepaper
https://www.isda.org/a/iKNTE/ISDA-Clarus-RFR-Adoption-Indicator-Whitepaper.pdf
Under Calculating DV01
The DV01 of an interest rate derivative is the ‘discounted value of a basis point’. This describes the valuation change in a derivative contract resulting from a (parallel) 1 basis point (0.01%) shift in the interest rate swaps that are used to value it.
To calculate the approximate DV01s from notional volume traded, the following process is applied:
Standardized DV01s for par (at-market) swaps are calculated for the standardized tenors, 1Y, 2Y, 5Y, 10Y, 30Y and 50Y.
All DV01s are calculated on the USD curve, irrespective of the underlying currency.
The par swaps are modelled as forward-starting swaps, out of the next quarterly international monetary market (IMM) date. This is to avoid any complications of including/excluding the first fixing. The DV01 also fluctuates less month-on-month (for the same market rates) because the exact number of days in the swap is more consistent.
The DV01 is calculated by valuing the swap at market (net present value (NPV) = zero) and then applying a parallel shift to the curve of 1 basis point (0.01%) and recalculating the NPV at the shifted market rates.
Well seems like you're going to be pretty well versed on the sunset of LIBOR. If you're looking for something else, maybe something nefarious, don't think you're going to find it. My guess is that it will be like Y2K for any suggesting this is a big deal which will have huge negative ramifications. Just my guess.