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Making risk-free rate analytics simple

Samuel Schwalm
Samuel Schwalm
Director, Analytic Platform, Pricing Proposition, Refinitiv

The LIBOR transition is happening now. What analytics challenges are facing firms as they move towards using the new risk-free rate (RFR) benchmarks for financial contracts, whether for repapering or in new RFR instruments, products, and services?

  1. To complete LIBOR transition activities, firms require analytics that can calculate the cash flows on the risk-free rate benchmarks for financial contracts.
  2. Best practice is to employ both data and analytics hosted in the cloud, so that the analytics can be plugged directly into firms’ workflow via an application programming interface (API).
  3. Refinitiv Instrument Pricing Analytics provide cloud-based analytics that are able to support firms during the LIBOR transition and beyond, for calculating RFR-related cash flows.

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Although the transition away from LIBOR has been talked about for years, is it now finally under way.

As a result, financial services firms are looking for practical solutions to a wide range of challenges, including analytics, to calculate cash flows for both financial contracts that need to be repapered, and new risk-free rate (RFR) based products.

Many firms are considering a fresh approach; one where the data and the analytics are a service in the cloud, which can then be plumbed directly into their workflow.

Explore Refinitiv’s LIBOR replacement solutions and services

The LIBOR sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month U.S. dollar settings will cease on the last day of 2021, while other U.S. dollar tenors will probably have until 30 June 2023 to manage the transition.

This means the pressure is on to repaper more than $370 trillion in paper contracts that are tied to LIBOR, change or update technology to work with the RFRs, and put the correct analytics in place to calculate cash flows.

Managing a challenging change

The move away from LIBOR to the RFRs is being driven by a desire for increased transparency, but this has meant that there are structural changes to the way the new RFRs operate.

Firms have long recognised that the changeover from LIBOR to the RFRs will not be a simple process, particularly when it comes to performing the new analytics that will be required. For example, the international LIBOR is being replaced by a number of national RFRs, and while LIBOR was forward-looking, the RFRs are backward looking.

These differences between LIBOR and the new RFRs – as well as others – mean that analytics can be challenging to perform manually, and are perhaps more open to operational risks, including model governance risks.

For firms – which will need to undertake repapering of existing LIBOR-linked financial contracts at scale, and which will also need to engage in new RFR-linked financial contracts – having RFR analytics directly within their workflow is essential.

LIBOR analytics: a fresh approach to RFR calculations. Making risk-free rate analytics simple

Rethinking risk-free rate calculations

Refinitiv Instrument Pricing Analytics have developed best-practice analytics to support each phase of the LIBOR transition for financial services firms:

  • Calculating proceeds: this includes calculating cash flows and the accrual of cash flows. A realised rate calculator and a calculator that integrates the recommended formula in floating rate notes (FRNs) and SWAPs can be useful here.
  • Performing valuation: this involves creating discount curves and forward curves. A tool that calculates new zero curves that can be used to estimate future values of the RFR and determine discount cash flows is what is needed at this stage.
  • Undertaking scenario analysis: combining curves and instruments to analyse trades under different assumptions, such as understanding how an existing LIBOR-based product would perform as an RFR-based product with a fallback rate.

Firms need to consider how they are going to engage with the full range of tools that they will need to undertake the LIBOR transition.

Watch the webinar: Instrument Pricing Analytics for Bond Pricing and LIBOR alternatives

Advancing with RFRs

Refinitiv Instrument Pricing Analytics provide much needed analytics for each stage of the LIBOR transition for firms – from transitioning existing contracts to the new RFRs, to issuing new RFR-linked securities, calculating zero curves, and eventually more sophisticated financial instruments such as interest rate swaps and cross currency swaps.

Below are the Refinitiv Instrument Pricing Analytics for the LIBOR transition that are currently available, including how they are currently accessed:

Realised Rate Calculations – Enables firms to simulate realised rates based on lookback, lockout, and backward shift interest rate calculation methodologies. This will help firms converting existing LIBOR-based contracts to the new RFRs. The analytics are available both as a Codebook example and as an API.

RFR-linked FRNs or swaps – This analytics package provides floating rate note (FRN) proceeds and interest rate swap (IRS) valuations and cash flow – based on and new coupon methodologies, fall-back rates, and curve assigned. This is available as an API. Codebook examples and a Refinitiv Workspace App are available. 

New Zero Curves – Refinitiv calculates pre-defined zero curves for RFRs such as ESTR, SARON, SOFR, SONIA and TONAR, to help firms estimate the forward cash flows for their future payments. This is available as an API, supporting both Refinitiv curves and custom curves. Codebook examples and a Refinitiv Workspace App are available.

Scenario Analysis – Combining instrument pricing and curves, firms can run scenarios to anticipate the impact of the LIBOR transition. Scenarios can be conducted using fallback rates, assigning different zero curves, and valuing instruments like Interest Rate Swaps and Cross Currency Swaps under different assumptions. This analytics tool is available via API.

With Instrument Pricing Analytics to support the LIBOR transition, financial firms do not need to worry about all of the work that normally goes into delivering analytics. Refinitiv sources, cleans and normalises the data, and also provides the pricing models – all in the cloud.

Delivering risk-free rate analytics

Through the APIs, firms are able to plug these analytics directly into their workflow in their technology solutions.

This automation reduces cost and complexity, as well as the potential for the kind of calculation errors that can happen if done manually – decreasing potential levels of operational risk associated with the LIBOR transition programme.

Also, firms can reduce the level of resource devoted to model governance, including reviewing the documentation, and keeping track of specifications, as well as changes to them.

Refinitiv – which has a strong track record of providing benchmarks to the international financial markets – undertakes much of the model governance process. While financial firms cannot outsource responsibility for model governance, they can partner with Refinitiv to deliver model governance.

Reducing operational risk

In summary, although the LIBOR transition may be a challenging process for financial firms, RFR calculations don’t have to be.

By embracing RFR analytics in the cloud, delivered through APIs into day-to-day workflow, firms can empower the front-, middle- and back-office to perform these calculations with confidence.

Refinitiv Instrument Pricing Analytics for the LIBOR transition will help firms reduce operational risk – including model risk governance – and enable them to embrace the new opportunities that RFRs present with efficiency and agility.

Explore Refinitiv’s LIBOR replacement solutions and services