Posts

Cloudiness in Libor Transition?

03-08-2021 | treasuryXL | Kyriba | Bob Stark

With less than 6 months to go until the transition from Libor to new overnight risk-free rates, uncertainty lingers as to which rate indices are to be adopted in countries such as the United States.

While regulators remain steadfast in their recommendations that risk free rates such as SOFR in the United States and SONIA in the United Kingdom should be the only choice to replace LIBOR, credit-sensitive rates (CSR) including Bloomberg’s proposed BSBY index remain in the conversation for some market participants and influencers. There are several examples of banks offering new contracts based on the BSBY and other CSRs instead of SONIA, in fact.

Arguments for alternative rates

Proponents of credit-sensitive rates such as Bloomberg’s BSBY, AMX’s Ameribor, and HIS Markit’s CRITS suggest that adopting risk free rates such as Sonia does not solve the underlying transparency issues that plagued Libor in the first place. Bloomberg market experts, such as Umesh Gajria, Global Head of Linked Products, have been referenced arguing that robustness of the highly liquid market instruments supporting their calculated index make BSBY, amongst other proposed indices, resilient to manipulation. Regulators in the UK and US do not agree, stating that the market only needs one replacement for Libor and that replacement must be free of risk and market influence.

Time is running out

Whether SOFR prevails or whether a mix of Libor replacement options remain available to corporate CFOs, with less than 6 months remaining until Libor is discontinued, this rate uncertainty is one of the contributing factors explaining why corporates have yet to transition most of their USD contracts away from Libor. While certain Libor USD tenors will continue to be published into 2023, no new contracts in the United States can be based on Libor effective January 1, 2022. Corporate CFOs are running out of time for a solution to move away from Libor.

Treasury systems support all outcomes

Despite the challenges that corporate treasury teams will continue to experience as they sort out which rates should be used in collaboration with their banks and counterparties, FinTech firms including treasury management systems are prepared for any outcome.

Kyriba offers complete Libor transition support within its cloud solution, including backward-looking compounding calculations, amortizations, and online availability for in-advance and in-arrears risk-free and credit-sensitive rates.

If you have questions or concerns, please reach your dedicated Kyriba representative to setup a consultation with our market teams.

Trending treasury topics from the Treasury Barometer 2019

| 29-11-2019 | Enigma Consulting | Bas Kolenburg

While the treasury has always managed changes in both financial markets as in the businesses, the pace at which changes now need to be managed is accelerating. In a time of increased digitalisation, payments acceleration and new business models in the whole value chain of payments processes and bank connectivity, treasurers are becoming increasingly keen to leverage on the opportunities.

Treasury Barometer – the report

In the 6th edition of the Treasury Barometer, developed by Enigma Consulting and Rabobank, the trending topics that are shaping the treasury in 2019 and beyond have been explored drawing on feedback from the survey held in mid-2019. This report presents the latest trends and developments and provides a unique and representative understanding of the Dutch corporate treasury landscape.

The Editor Panel consisting of 6 members of the Dutch treasury community,  set the direction of this year’s Treasury Barometer and to monitor the quality and relevance of the content. The 4 content-interviews were again a great added value to the results of the survey, as they gave more insight into the subjects.

Trending treasury topics

This year’s edition walked readers through many of the hot topics that the treasury face nowadays.

Fraud & Cybercrime

Fraud & Cybercrime are actual trending topics as the treasurers are still trying to find the right responses to the increased cyber and (payment) fraud activity, advanced technology techniques and social engineering that is being used nowadays. Although an astonishing 82% treasury departments have been a victim of attempted or actual payment fraud/cybercrime, only 5% of the fraud (attempts) are being reported to the police. People seem to be afraid to be open about the fact that this happened to them so that it will be difficult for the police to solve fraud cases committed by large scale operating gangs.

KYC requirements

Because of the focus on anti-money laundering (“AML”) and the financing of terrorism (“CFT”), there is a lot of pressure on financial institutions to meet their compliance expectations, being forwarded to their clients in the form of increased KYC requirements and more intensive transactions screening.
From all respondent , 91% see that the increased KYC requirements are hindering operational efficiency, the growth and the management of its business and even 24% of all respondents has considered changing banks due to bank-specific KYC processes.

LIBOR phase out

The LIBOR phase out effect will be temporary but will lead to a total rebuilding of the bank’s infrastructure which will be pushed through to their corporate clients, who are just beginning to become aware what is ahead of them. The Barometer reported that only 42% have performed an impact analysis and even 15% was not aware of the LIBOR phase out at all. Industry experts recommend that corporates perform an impact analysis and become operationally ready for the IBOR phase out as soon as possible.

Technology/Innovation

The instant payments schemes and new technology around the world are transforming treasury departments into a world of real time 24/7 liquidity, based on a shift towards more centralised control with local empowerment. With new business models in the whole value chain of payments processes and bank connectivity, banks are rapidly embracing innovations and developing fintechs. The adoption in treasury departments is a mixed bag with an increasing group of early adopters, but also a large group that has difficulties to steer away from current older technology and interfaces.

Treasury Barometer results

Sustainability seems to be established as a core value and has moved beyond the initial hype, but the results of the Barometer showed no increased activity.

Bas Kolenburg from Enigma Consulting concluded: “From this year’s Treasury Barometer, the Fraud, KYC, LIBOR and Technology/Innovation themes are clearly very much on the radar of Dutch corporate treasurers and we are confident that this year’s report is motivating and inspiring for treasury departments. We aim with the Treasury Barometer not to provide an one-way publication but that this will be part of a multi-stakeholder conversation with the Dutch treasury community. The invitation is therefore open for persons to be engaged in future editions of the Treasury Barometer”

The full report is available for download here.

 

 

Bas Kolenburg

Senior Consultant at Enigma Consulting

 

Bent u voorbereid op de introductie van de BMR?

| 11-3-2019 | ILFA Group | treasuryXL |

Financiële instellingen moeten nú de overgang van de Eonia- en Euribor-tarieven voorbereiden of rekening houden met hogere kosten en risico’s.

De Euro Overnight Index Average (Eonia) en de Euro Interbank Offered Rate (Euribor) zijn kritisch belangrijke rentebenchmarks voor de eurozone. Samen worden ze gebruikt als referentietarief voor meer dan 175 biljoen euro aan financiële producten van corporaties, non-profit organisaties en MKB-bedrijven, inclusief lange termijn-hypotheken in verschillende Europese landen. Toch staan deze benchmarks op het punt vervangen of getransformeerd te worden, omdat geen van beide voldoet aan de onlangs geïntroduceerde EU Benchmark Regulation (BMR).

De LIBOR- en EURIBOR-schandalen brachten aan het licht dat benchmarks vatbaar zijn voor manipulatie. De BMR is ingevoerd om dit risico te bestrijden voor alles wat valt onder de BMR-definitie van ‘benchmark’. Deze definitie is opzettelijk breed gemaakt om een breed scala van financiële producten en bestaande transacties te omvangen. Voor velen, iedereen die bijdraagt aan indices of deze levert of gebruikt, zal de BMR dus belangrijke implicaties meebrengen. De gevolgen van BMR hebben al geresulteerd in een verminderde bijdrage aan benchmarks en hogere nalevingskosten en regelgevingslasten. De verhoogde lasten vormen een reële bedreiging voor de levensvatbaarheid van vele benchmarks en beleggingsstrategieën die hierop zijn gebaseerd.

Er zijn al voorbereidingen getroffen voor een overgang van LIBOR, het equivalent van Euribor, voor Amerikaanse dollars en andere belangrijke valuta. Er is echter veel minder aandacht besteed aan Eonia en Euribor, die een veel kortere overgangstijd zullen hebben. Bedrijven moeten nú handelen om overgangsplannen te ontwikkelen, waarbij de overgang naar schatting voor sommige bedrijven meer dan $ 100 miljoen zal kosten. Uitstel van actie zal de uiteindelijke overgangskosten alleen maar verhogen en zal daarnaast de financiële, operationele en reputatierisico’s vergroten.

Er wordt onderzocht hoe Euribor kan worden hervormd om een (in het beste geval) naadloze overgang mogelijk te maken, maar het blijft onduidelijk of dit scenario haalbaar is tegen de deadline van 1 januari 2020. Gezien de omvang van de betrokken bedrijven zou er een Plan B voor hervorming van de Euribor moeten zijn. Voor Eonia zijn er geen hervormingspogingen en daarom is vóór januari 2020 een overgang naar een alternatief tarief vereist. Een alternatieve referentierentevoet voor het overnight rente tarief is nog niet beschikbaar, hoewel de ECB werkt aan ESTER (Euro Short-Term Rate) en van plan is om lancering vóór 2020 te realiseren.

Terwijl de hervormingsprocessen voor zowel Euribor als Eonia in beweging zijn, moeten marktpartijen niet wachten om te handelen. De ILFA Group identificeert vijf stappen die bedrijven nu kunnen doen om zich voor te bereiden op de transitie:

1. Ondersteuning van sectorbrede initiatieven om Euribor te hervormen en alternatieve referentietarieven te ontwikkelen voor zowel Euribor als Eonia.
2. Zorg ervoor dat er robuuste schriftelijke noodplannen zijn opgesteld voor het geval een benchmark wezenlijk verandert of ophoudt, zoals vereist door BMR.
3. Neem voorzorgsmaatregelen om potentiële toekomstige uitdagingen en risico’s te beperken, zoals veranderingen in fall-back taal in contracten, het evalueren van gedrag en juridische risico’s en het bekendmaken van informatie over nieuwe transacties met betrekking tot Euribor of Eonia.
4. Voer een ‘ondernemingsscan’ uit om een inventarisatie van Euribor- en Eoniagebruik in producten samen te stellen en inventariseer het proces van voor naar achter om de transitie-uitdagingen en -effecten te beoordelen.
5. Ontwikkel een gefaseerd overgangsdraaiboek zodat een programma snel kan worden gestart en uitgevoerd als dat nodig is.

De overgang naar de nieuwe benchmarks zal een uitdaging zijn, vooral omdat marktpartijen al worstelen met de realiteit van een LIBOR-conversie. Aangezien Eonia en Euribor echter niet voldoen aan BMR betekent dit dat ze niet kunnen worden gebruikt voor contracten die na 2020 zijn aangegaan, tenzij er corrigerende maatregelen worden genomen om de benchmarks te hervormen.

 

 

Arnoud Doornbos

Associate partner at ILFA Group

 

Best read articles of all time – FX Swaps vs Libor and EURIBOR: Arbitrage opportunities?

| 10-05-2018 | Rob Söentken |

fxswaps

As we are getting closer to the end of the month, end of Q2 and end of H1 of 2016, it is interesting to see financial markets are maneuvering to get the right liquidity on board for the balance sheet. Or get rid of the unwanted liquidity. For firms with liquidity in various currencies the best means for liquidity management is FX swaps.

What is an FX swap?

In a very simple definition the FX swap is like an exchange of deposits. The big advantage is that the counterparty risk is reduced due to the exchange of notional. Operationally an FX swap is booked as two FX transactions: one to convert and another to revert. The conversion rate is against the prevailing exchange rate. The reversion rate is against the conversion rate plus or minus some ‘swap points’, which reflect the interest rate differential between the respective currencies. During the tenor the exchange rate could change, which creates counterparty risk on the mark-to-market value of the reversion. Mark-to-market risk for tenors up to 1 year is still a small when compared to full notional risk.

How would an FX swap work in theory?

In diagram 1 the Libor and Euribor fixings for USD and EUR are listed for the respective tenors. Now if we would consider exchanging a USD deposit versus a EUR deposit for 1 year the cash flows would be as follows:
For the conversion date we take value spot (ie 2 days, in this case that is per June 30th) and we agree to exchange EUR 1 Mio vs USD 1.1048 Mio (because EUR 1 Mio at current spot of 1.1048 is USD 1.1048 Mio)

For the reversion date we take the value date for 1 year from today’s spot date. We calculate the following amounts including interest:

EUR 1 Mio x (1 + -0.05% x 365 / 360) =                     EUR 999,493.06

USD 1.1048 Mio x (1 + 1.20% x 365 / 360) =         USD 1,118,241.73

Dividing the USD amount by the EUR amount gives the exchange rate for the reversion on the forward date, in this case that is 1.1188089. This is called the ‘forward rate’ The difference to the spot exchange rate is 0.0140089. For simplicity reasons this is multiplied by 10,000 to 140.089. This reflects the interest differential.

When executing an FX swap the EUR amounts are kept constant for both the spot and forward dates. But the USD amounts are calculated using the spot and forward exchange rates as calculated above. Therefor the interest differential is reflected in the USD amount being different between spot and forward date.

How does it work in reality?

As I mentioned at the beginning of this article, the current situation is special because we are getting close to a date special and important for balance sheet reporting. Supply and demand may push the market in a direction.

When looking at the actual FX swap rates and taking the EUR Euribor fixings as given, we can deduce the implied USD funding rates (see diagram 2). First observation is that the FX swaps appear to reflect either a substantial demand for USD from June 30th to July 1st, or a EUR supply. It is interesting to see that the 1 week fixing for EUR was not affected, while the 1 week FX swap was affected maybe 20 bppa. One reason could be the timing of the rates. Euribor is taken at one moment during the day, while FX swaps are affected by events during the day. Because wdiagram2e are looking at a single day FX swap, the annualized rate could swing a lot.

Another observation is that the interest rate differential between EUR and USD is actually bigger than implied by the fixings. For one month tenor the difference is 0.59% p.a.. It would seem possible that supply – demand forces can push FX swaps away from the deposit markets. Likely the counterparty limit constraints on pure deposits keep them from being arbitrages vs FX swaps, like they used to be many years ago.

How can a treasurer benefit from FX swaps?

Each individual and organization should determine for itself what he/she or it needs. And I do not want abstract from discussions around documentation requirements, collateral financing and administration, and the operational extra work. It seems obvious that there are opportunities to investigate.

One key area would be to look at the bid-offer spreads on cash liquidity in various currencies as provided by house-banks and compare those rates with and without using FX swaps. Also I could imagine non-house banks could be more competitive in providing FX swaps, while the counterparty risk is substantially smaller than when pure lending is concerned.

Rob Soentken

Rob Söentken

Ex-derivatives trader

 

How to fix a problem like “IBOR”

| 22-01-2018 | treasuryXL |

In the last year both the ECB in regard of EURIBOR and the FCA in London in regard of LIBOR have come to the same conclusion – the fixing of interest rate indices can not carry on in their present form. The current benchmarks are tainted by allegations of fraud and malpractice. Furthermore, the way that the rates are determined are also criticized – no actual transactions take place at the fixing price when the fix is made daily. But the big problem is that these fixings are intrinsically linked to financial contracts with values measured in 100 of trillions of EUR, USD, GBP etc.

The underlying financial products are not just derivatives – IBOR’s are also used to price floating rate loans, mortgages etc. The major problem beyond the fraud aspect is that the rates are supposed to express the interbank floating rates for various tenors. But with liquidity being very sparse in the interbank market, and the rates only being voluntary expert judgement of actual trading rates, do the rates truly reflect the cost of borrowing? ECB expects to replace EURIBOR by 2020 and the FCA to replace LIBOR by 2021. But what products can be used to replace IBOR?

Initially it appears that secured overnight rates could be the answer. Trades are reported to the relevant authorities and the transactions are based on secured lending. However, the tenor does not complement the existing fixings and financial products. A traditional EUR interest rate swap consists of an annual fixed coupon against floating 6-month coupons. Using an overnight fixing means that you would not know the 6-month floating rate until the end of the 6-month period.

To get around this problem a market could be used for existing basis spread products. As stated an overnight rate relates to secure, risk free transactions whereas IBOR relate to unsecure transactions. This means that with IBOR credit risk is built into the price. Certain additional products could be used to take an overnight rate fix to a 6-month fix – namely basis swaps. But who would supply the prices for basis swaps – the same banks who have been accused of fraud in the current IBOR process.

Another alternative is constructing the fixing from repo transaction with different tenors. But repo’s are sensitive to the credit risk of the collateral issuer. This means trading on the basis of Specials – clearly defined and named collateral issuers. With all the QE that is taking place there is an alarming shortage of high-quality government back paper that is in the free market that the very scarcity would lead to irregular pricing.

So whilst authorities have clearly stated that interest rate fixings can not carry on in their present form, they have yet to offer a valid alternative. In the meantime, contracts measured in 100 of trillions will need to be adjusted for the new method for fixings. The only people who will welcome these changes are the legal profession who get to redesign “all” the existing contracts.

Lionel PaveyLionel Pavey – Cash Management and Treasury Specialist

[button url=”https://www.treasuryxl.com/community/experts/lionel-pavey/” text=”View expert profile” size=”small” type=”primary” icon=”” external=”1″]

[separator type=”” size=”” icon=””]

 

FX Swaps vs Libor and EURIBOR: Arbitrage opportunities?

| 05-07-2016 | Rob Söentken |

fxswaps

 

As we are getting closer to the end of the month, end of Q2 and end of H1 of 2016, it is interesting to see financial markets are maneuvering to get the right liquidity on board for the balance sheet. Or get rid of the unwanted liquidity. For firms with liquidity in various currencies the best means for liquidity management is FX swaps.

 

What is an FX swap?

In a very simple definition the FX swap is like an exchange of deposits. The big advantage is that the counterparty risk is reduced due to the exchange of notional. Operationally an FX swap is booked as two FX transactions: one to convert and another to revert. The conversion rate is against the prevailing exchange rate. The reversion rate is against the conversion rate plus or minus some ‘swap points’, which reflect the interest rate differential between the respective currencies. During the tenor the exchange rate could change, which creates counterparty risk on the mark-to-market value of the reversion. Mark-to-market risk for tenors up to 1 year is still a small when compared to full notional risk.

How would an FX swap work in theory?

In diagram 1 the Libor and Euribor fixings for USD and EUR are listed for the respective tenors. Now if we would consider exchanging a USD deposit versus a EUR deposit for 1 year the cash flows would be as follows:
For the conversion date we take value spot (ie 2 days, in this case that is per June 30th) and we agree to exchange EUR 1 Mio vs USD 1.1048 Mio (because EUR 1 Mio at current spot of 1.1048 is USD 1.1048 Mio)

For the reversion date we take the value date for 1 year from today’s spot date. We calculate the following amounts including interest:

EUR 1 Mio x (1 + -0.05% x 365 / 360) =                     EUR 999,493.06

USD 1.1048 Mio x (1 + 1.20% x 365 / 360) =         USD 1,118,241.73

Dividing the USD amount by the EUR amount gives the exchange rate for the reversion on the forward date, in this case that is 1.1188089. This is called the ‘forward rate’ The difference to the spot exchange rate is 0.0140089. For simplicity reasons this is multiplied by 10,000 to 140.089. This reflects the interest differential.

When executing an FX swap the EUR amounts are kept constant for both the spot and forward dates. But the USD amounts are calculated using the spot and forward exchange rates as calculated above. Therefor the interest differential is reflected in the USD amount being different between spot and forward date.

How does it work in reality?

As I mentioned at the beginning of this article, the current situation is special because we are getting close to a date special and important for balance sheet reporting. Supply and demand may push the market in a direction.

When looking at the actual FX swap rates and taking the EUR Euribor fixings as given, we can deduce the implied USD funding rates (see diagram 2). First observation is that the FX swaps appear to reflect either a substantial demand for USD from June 30th to July 1st, or a EUR supply. It is interesting to see that the 1 week fixing for EUR was not affected, while the 1 week FX swap was affected maybe 20 bppa. One reason could be the timing of the rates. Euribor is taken at one moment during the day, while FX swaps are affected by events during the day. Because wdiagram2e are looking at a single day FX swap, the annualized rate could swing a lot.

Another observation is that the interest rate differential between EUR and USD is actually bigger than implied by the fixings. For one month tenor the difference is 0.59% p.a.. It would seem possible that supply – demand forces can push FX swaps away from the deposit markets. Likely the counterparty limit constraints on pure deposits keep them from being arbitrages vs FX swaps, like they used to be many years ago.

How can a treasurer benefit from FX swaps?

Each individual and organization should determine for itself what he/she or it needs. And I do not want abstract from discussions around documentation requirements, collateral financing and administration, and the operational extra work. It seems obvious that there are opportunities to investigate.

One key area would be to look at the bid-offer spreads on cash liquidity in various currencies as provided by house-banks and compare those rates with and without using FX swaps. Also I could imagine non-house banks could be more competitive in providing FX swaps, while the counterparty risk is substantially smaller than when pure lending is concerned.

Rob Soentken

 

Rob Söentken

Ex-derivatives trader