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Interest Rate Modelling in the Multi-curve Framework: Collateral and Regulatory Requirements

London Financial Studies
Course summary
2 days
2,950 GBP excl. VAT
English
Open / Scheduled
Next available date: 20/04/2020 09:00 - Distance
Course Dates
London
20/04/2020 09:00  (English)
2,950 GBP
Distance
20/04/2020 09:00  (English)
2,950 GBP
New York
Contact LFS for details  (English)

Course description

Interest Rate Modelling in the Multi-curve Framework: Collateral and Regulatory Requirements

Interest rate modelling has changed dramatically since the start of the financial crisis in 2007. Most of the derivative models used in academic literature and by practitioners have had to be reviewed in line with new regulatory requirements. One of the main changes is the mandatory variation margin (VM) regime that came into effect on 1st March 2017, which has established the collateralization of derivatives trades as the de facto standard. No reasonable derivative management and modelling can be done without taking the new dynamic and the regulatory aspects into account. Two frameworks have become the standard: the collateral discounting for the VM and the multi-curve framework for interest rate and, in particular, the differentiation between different underlying curves.

The first part of the programme examines in detail the multi-curve and collateral framework foundations and the curve calibrations, including cross-currency aspects. Once the foundations are in place, the interest rate term structure stochastic modelling has also to be re-examined: the existing models have to be adapted and new versions created to take into account the collateral framework, including the stochastic basis between the different curves.

The course will also provide a perspective on the hidden complexity behind the expected changes to the main interest rate benchmarks and the proposal related to LIBOR fall-back.

Participants will review some of the alternative models and the impact of more advanced models on the pricing of vanilla interest rate products (IRS, OIS, FRA, basis swaps, Futures, swaptions, etc.). Practical workshops and examples use production grade open source code (the code is used by banks, CCPs, hedge funds), which participants can take away for immediate application.

All participants will also receive a copy of Dr Marc Henrard’s book “Interest rate modelling in the multi-curve framework: foundations, evolution, and implementation”.

Suitability - Who should attend?

This "Interest Rate Modelling in the Multi-curve Framework: Collateral and Regulatory Requirements" course is designed for:

  • Quants and Financial Engineers
  • Structurers
  • Risk Managers
  • Traders
  • Researchers
  • Model validators
  • Regulators

Outcome / Qualification etc.

This course is eligible for CE/CPD credit hours from CFA and GARP Institutes.

Course leader

Marc Henrard

Dr Marc Henrard is an independent expert specializing in interest rate modelling and risk management, and a visiting professor at University College London.

Over the last 20 years, Marc has worked in various areas of quantitative finance. His experience includes management positions in risk management, trading, software development and quantitative research. He previously worked as Global Head of Interest Rate Modelling for Dexia Group, Deputy Head of Treasury Risk at the Bank for International Settlements (BIS), and Head of Quantitative Research and Deputy Head of Interest Rate Trading also at BIS.

Marc's research focuses on interest rate modelling, risk management and their efficient implementation. More recently, he has focused his attention to market infrastructure (CCP and bilateral margin, exchange traded product design, regulatory costs). He publishes on a regular basis in international finance journals, and is a frequent speaker at academic and professional conferences. Marc is the author of the books "The multi-curve framework: foundation, evolution and implementation" and "Algorithmic Differentiation in Finance Explained".

Marc holds a PhD in Mathematics from the University of Louvain, Belgium. He has been a research scientist and university lecturer in Belgium, Italy, Chile and the United Kingdom.

Training Course Content

Day One


Pricing with collateral – Variation Margin

  • Margin: terminology, fundamentals and market infrastructure
  • Regulatory framework for Variation Margin, CSA, time table
  • Cash collateral and generalization. The cash-collateral discounting. The standard collateral results and their exact application. Extension to generalized definitions of collateral. What is hidden behind OIS discounting (and when it cannot be used)?
  • Assets (bonds) collateral. Not all CSA/collateral agreements are based on cash. Generalization of collateral results for collateral with assets (collateral square)
  • Foreign currency collateral. Impact of foreign currency cash collateral on valuation

Multi-curve framework

  • Definitions and fundamental hypothesis of the framework. The relation to collateral. The basic instruments. The multi-curve framework is based on relatively simple hypothesis, but those hypotheses are far reaching with subtle impacts
  • Curve description: Defining flexible curves. Spread curves. What to interpolate? Impact of interpolation on risk
  • Curve calibration:

        - Standard curves or simultaneous calibration. The multi-curve framework is more            than a juxtaposition of single curves. The curves interact and calibrating them                simultaneously is often required. The basis swaps have also an impact on how              to look at risk. Several markets have idiosyncrasies that need to be taken into                account: two-swaps basis, swaps in EUR, Fed Funds swaps in USD, change of              frequency for AUD IRS

         - Curves are never simple. Incorporating turn-of-year, central bank meeting dates            and dealing with sparse data

        - Risk computation: the growing number of (delta) risk figures. With multiple                      curves, the number of risk factors is also multiplied. How to look at risks for                    (linear) products

        - Jacobian/transition matrices

        - The market quotes are quite heterogeneous in term of instrument used and                     tenors. Standardization of nodes and remapping of risk make it easier to read                 reports. It can also be used to store/use historical data for VaR, scenarios and               statistical analysis

  • Risk management in a multi-curve/multi-currency framework

Benchmarks

  • Changes in benchmarks. Changes are expected for the main benchmarks – like LIBOR – under regulatory pressure, with new overnight benchmarks predicted to replace them

Workshop: Curve calibration

  • Curve calibration
  • Risk management
  • Foreign currency collateral
  • How appearance of risk is changing with the selection of calibration instruments

All curve calibration and collateral examples use production grade open source code (the code is used by banks, CCPs, hedge funds). As the code is open source (Apache 2 license), participants will be able to take away the examples and run them using their own data without limitation.

Day Two

Interest rate modelling

  • Modelling with collateral. Dynamic term structure models have been developed to cover collateral discounting. Even if they are partly similar to the single-curve interest rate models, the collateral adds an extra layer of complexity and an extra layer of spreads to deal with. A large part of the financial mathematics and numerical analysis developed in the single-curve framework can be reused, but some additional issues have to be taken into account
  • Modelling vanilla instruments: IRS, OIS, FRA, basis swaps, STIR futures, swaptions, cap/floor, etc.
  • Review of different multi-curve dynamic models proposed in the literature: deterministic spread, full-term structure models, parsimonious model, rational model, additive and multiplicative spreads, and hybrid models
  • Models for multi-currency collateral
  • Collateral optionality

Benchmarks

  • Fall-back clauses are proposed in case of discontinuation of exiting benchmarks. What are those proposals? What is the impact of the proposals on the valuation of existing portfolios? Analysis of vanilla products applying the models developed in the first part of the programme
  • New products associated to new benchmarks, e.g. futures on overnight benchmarks, deliverable swap futures

Workshop: Multi-curve stochastic models

  • Impact of the choice of stochastic model on the price of vanilla instruments
  • Example of futures and FRA convexity adjustments
  • Impact of fall-back clauses in case of LIBOR discontinuation

All stochastic model examples also use production grade open source code.

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34 Curlew Street
SE1 2ND London

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