Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

rollingstone.com

Post reply on HN
Print view View original

51–60 of 89 posts

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#51

Post by smallnamespace »

JumpCrisscross wrote: post #46
smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

> they're against OIS instead OIS stands for overnight indexed swap [1]. Like the fed funds rate [2], it's only quoted for one tenor: overnight. In the United States we're somewhat spoiled with having a deep, reliable, market-based yield curve calculated every business day: the Treasury yield curve [3]. But if you want to approximate the cost of a bank borrowing for a given term on the wholesale unsecured market, Lib…

> Like the fed funds rate [2], it's only quoted for one tenor: overnight.

That's not quite true -- for example, 3m OIS swaps have fixings that are essentially the 3m average of FF over the period in question.

In fact, this is mathematically a bit cleaner. If you construct an interest yield curve off of compounded 1m LIBOR vs. 3M LIBOR, you get rather different answers, whereas OIS yield curves constructed from different tenors are much closer.

The argument for using OIS instead of Treasury yields is pretty simple: Treasuries reflect the cost of borrowing for the government and are implicitly affected by the government's creditworthiness (e.g. not raising the debt ceiling), while banks can actually borrow from the Fed at FF. While the US gov't funds at pretty close to 'risk free', in other markets the credit component would be significant.

OIS is generally closer to LIBOR than a Treasury yield curve is.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#52

Post by JumpCrisscross »

smallnamespace wrote: post #51
JumpCrisscross wrote: post #46

Earlier quoted context omitted.

> they're against OIS instead OIS stands for overnight indexed swap [1]. Like the fed funds rate [2], it's only quoted for one tenor: overnight. In the United States we're somewhat spoiled with having a deep, reliable, market-based yield curve calculated every business day: the Treasury yield curve [3]. But if you want to approximate the cost of a bank borrowing for a given term on the wholesale unsecured market, Lib…

> Like the fed funds rate [2], it's only quoted for one tenor: overnight. That's not quite true -- for example, 3m OIS swaps have fixings that are essentially the 3m average of FF over the period in question. In fact, this is mathematically a bit cleaner. If you construct an interest yield curve off of compounded 1m LIBOR vs. 3M LIBOR, you get rather different answers, whereas OIS yield curves constructed from differ…

> this is mathematically a bit cleaner

But also misleading. Bootstrapping requires making assumptions about term structure [1].

> OIS is generally closer to LIBOR than a Treasury yield curve is

After the crisis the Libor-OIS spread was observed as an indicator of bank instability. They're close, but not the same. When they diverge, it's for reasons incredibly important to certain users of Libor. You're correct in the OIS rate being better than the Treasuries for estimating banks' borrowing costs.

[1] http://www.investopedia.com/terms/t/termstructure.asp

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#53

Post by yborg »

throw2016 wrote: post #19
JumpCrisscross wrote: post #10

Earlier quoted context omitted.

> there is no market that LIBOR measures Except that's not true. Interbank lending is still a $70 billion market in the United States alone [1]. Small compared to banks' balance sheets and less than the $500 billion from as recently as February 2008, but material nonetheless. Good rule of thumb in finance is to ignore Matt Taibbi. [1] https://fred.stlouisfed.org/series/IBLACBM027NBOG

On the contrary Matt Taibbi has done some incredible work exposing the out of control culture of fraud and greed in the financial markets and the litany of fixing scandals. Please read his work and make up your own mind. The Libor fixing is real as is the FX rate fixing. Apologists for the banking system and governments often demand the the smoking gun in fraud and conspiracy even when its not always possible, unless…

Yes, especially since the insiders aren't pretending that it's anything but a lever to tip more money into their pockets. It's funny reading comments here with people soberly defending the deep meaning of LIBOR and that civilians like Taibbi just don't get it while traders in the game are saying things like

"It's just amazing how LIBOR fixing can make you that much money!"[1]

[1] http://www.hitc.com/en-gb/2013/11/01/5-firms-21-astonishing-...

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#54

Post by formerjpl »

lordnacho wrote: post #39
ThrustVectoring wrote: post #20

Earlier quoted context omitted.

Doesn't this work as an argument against cash-settling options and futures? Owning a giant pile of call options and driving the price up during the settlement window doesn't help you any if you have to unload a massive quantity of the underlying stock.

Forgot to mention it was mainly indexes I was talking about, and they are cash settled. Single stock options tend to be settled with actual stock, and at least in Europe tend to be a lot less liquid. And there's other problems with trading them, like other people knowing a lot more than the market maker about what's happening. You also have pin risk which seems to be like a magnet.

I'm really not understanding how someone could manipulate index futures (or options on futures, which, in the US, are subject to stock-type settlement). The "Final Settlement" on an index future is determined by the settled value of the underlying index. Any discrepency between the index future and the underlying index near expiration would result in an easy arbitrage opportunity.

Are you implying that, close to expiration, a large player would move the index, in order to move their option position in the money? In the case of ES, that would imply buying an impossibly large of amount of SP500 assets---which they would have to liquidate at some point after the ES settlement or liquidation...

Also not understanding your point on pin risk, pinning is the result of maintaining a delta neutral hedge, which is a well known strategy...

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#56

Post by dogruck »

65827 wrote: post #55
dogruck wrote: post #34

Ah, Rolling Stone -- great source for solid info on LIBOR.

Are you dense? Matt Taibbi is possibly the most informed and important financial journalist of the last several decades.

Thanks for the insult.

Matt Taibbi has an unabashed, heavily liberal bias. He sells by appealing to readers like you.

I would argue that Michael Lewis is a superior popular finance writer.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#57

Post by tanderson92 »

lomnakkus wrote: post #50
smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

Just by your terminology, I trust that you know (at least somewhat) what you're talking about, so... is there an ELI5 for this stuff? I'm completely lost in these types of discussions. They seem absurdly complicated for (good|bad) reasons? Are we looking at another complexity bubble that's going to burst in 5-10 years... to the detriment of everyone but the "top execs" who'll be bailed out? My impression after readin…

Regularly read Matt Levine's Bloomberg column and the articles he links to and you'll pick up more than you ever thought you would know about finance. It is also fun, how he explains things.

Note: not a substitute for formal study of these things.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#58

Post by clappski »

smallnamespace wrote: post #51
JumpCrisscross wrote: post #46

Earlier quoted context omitted.

> they're against OIS instead OIS stands for overnight indexed swap [1]. Like the fed funds rate [2], it's only quoted for one tenor: overnight. In the United States we're somewhat spoiled with having a deep, reliable, market-based yield curve calculated every business day: the Treasury yield curve [3]. But if you want to approximate the cost of a bank borrowing for a given term on the wholesale unsecured market, Lib…

> Like the fed funds rate [2], it's only quoted for one tenor: overnight. That's not quite true -- for example, 3m OIS swaps have fixings that are essentially the 3m average of FF over the period in question. In fact, this is mathematically a bit cleaner. If you construct an interest yield curve off of compounded 1m LIBOR vs. 3M LIBOR, you get rather different answers, whereas OIS yield curves constructed from differ…

As an aside, as someone that works in this space (yield curve construction, pricing, risking etc), does anyone know of a forum where news items have this sort of discussion?

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#59

Post by cm2187 »

JumpCrisscross wrote: post #46
smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

> they're against OIS instead OIS stands for overnight indexed swap [1]. Like the fed funds rate [2], it's only quoted for one tenor: overnight. In the United States we're somewhat spoiled with having a deep, reliable, market-based yield curve calculated every business day: the Treasury yield curve [3]. But if you want to approximate the cost of a bank borrowing for a given term on the wholesale unsecured market, Lib…

I think you are mixing overnight index and overnight index swap. Derivative discounting is based on the index referenced in the CSA, which is typically an overnight index (Fed Fund in USD). To build a forecast curve for this index (and therefore a discount curve) you need to use swaps paying that index, ie OIS, hence the term OIS discounting. You can have any tenor you want for an OIS. When people refer to an OIS and don't specify the tenor, they usually mean a 3m swap, but you can 10y OIS.

You could document a loan paying quarterly with an interest calculated as the average o/n index for these 3 months. In fact that's how weekly CSA work. But that's not very practical for smaller non financial clients. It would be better if there was an index they can observe directly.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#60

Post by pvitz »

JumpCrisscross wrote: post #52
smallnamespace wrote: post #51

Earlier quoted context omitted.

> Like the fed funds rate [2], it's only quoted for one tenor: overnight. That's not quite true -- for example, 3m OIS swaps have fixings that are essentially the 3m average of FF over the period in question. In fact, this is mathematically a bit cleaner. If you construct an interest yield curve off of compounded 1m LIBOR vs. 3M LIBOR, you get rather different answers, whereas OIS yield curves constructed from differ…

> this is mathematically a bit cleaner But also misleading. Bootstrapping requires making assumptions about term structure [1]. > OIS is generally closer to LIBOR than a Treasury yield curve is After the crisis the Libor-OIS spread was observed as an indicator of bank instability. They're close, but not the same. When they diverge, it's for reasons incredibly important to certain users of Libor. You're correct in the…

I would suggest [1] instead of Investopedia for a modern treatment of yield curve bootstrapping. The only difficulty with OIS is in my opinion the low liquidity for higher maturities where basis swaps have to be used to estimate a spread to LIBOR IRS.

[1] https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2219548

Post reply on HN