The onset of the COVID-19 pandemic in the spring of 2020 caused severe market volatility globally, which complicated the transition of LIBOR to alternative benchmarks, particularly the Secured Overnight Financing Rate (SOFR). Parallel to this crisis, the U.S. Federal Reserve slashed interest rates and U.S. credit markets began to show signs of strain. By mid-March, the LIBOR-SOFR spread had dramatically widened. Yet through all of this, the Fed, the Bank of England, and the Financial Stability Board (FSB) have reiterated their stance on staying firm to the LIBOR decommission deadline of December 31, 2021.

In April 2020, Numerix’s Dr. Ping Sun presented a webinar titled, The LIBOR Transition: Impact of SOFR Switch on Swaptions, which discussed LIBOR transition headwinds linked to COVID-19. During his presentation Dr. Sun also analyzed historical data for SOFR and LIBOR fixings and volatility, and examined the impact of the Fed Funds/SOFR switch on value transfers for swaptions, as well as the impact on swaptions of LIBOR fallback.

This ebook, A Visual Analysis of the LIBOR Transition, was created to provide an illustrative exploration of Dr. Sun’s findings leading up to the March/April 2020 time period, consisting of three chapters.

Chapter 1: Provides an analysis of the impact of COVID-19 on the financial markets and, consequently, on LIBOR and SOFR rates leading up to March/April 2020. This chapter also explores how transition milestones continued despite the pandemic and does so by highlighting SOFR derivatives trade volume.

Chapter 2: Discusses the LIBOR fallback and how market participants can understand the historical data from the fallback definition. Chapter 2 also reviews SOFR compounding and analyzes historical fixings and historical volatility for SOFR versus LIBOR, as well as SOFR-LIBOR correlation.

Chapter 3: Concludes Dr. Sun’s analysis of historical data for SOFR and LIBOR leading up to March/April 2020. This chapter focuses on swaptions and explores two transitions that will take place in the U.S. dollar market: the first is in October 2020, when the discounting curve of cleared, USD denominated products and Price Alignment Interest (PAI) will switch from OIS to SOFR; the second regards the LIBOR fallback, when LIBOR is replaced by SOFR plus a spread.


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