Risk.net
Risk Awards 2021: valiant effort to solve swaptions discounting problem wins praise from clients
David Bachelier, Capitalab co-founder
As the world grappled with the Covid-19 pandemic, Capitalab staffers were trying to solve a knotty problem afflicting the swaptions market from their kitchen tables.
Central counterparties (CCPs) would soon begin using new risk-free rates to value more than $200 trillion-equivalent of cleared interest rate swaps, a key milestone in the roadmap for phasing out Ibor benchmarks. The first of these ‘big bang’ switches occurred on July 27, when CME, Eurex and LCH began using the euro short-term rate (€STR) rather than outgoing Eonia to discount future cashflows and calculate interest paid on cash collateral – known as price alignment interest (PAI) – for cleared euro swaps.