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RFR Alts vs FIG@RJO – Proposed iVol-based Risk Add-On

Adding Risk to Risk Free Benchmarks

Adding a risk-sensitivity to the new RFRs is absolutely do-able today—quantifiable, executable and hedge-able in virtually any size, today. Part of the confusion is the ‘ask’: “We need credit sensitivity!”. The term ‘credit’ is imprecise and excessively inclusive. ‘Credit’ has become synonymous with ‘sensitivity to liquidity’, ‘sensitivity to all non-interest rate risk’ and/or ‘sensitivity to generic market stress levels’.

So, seeking to alter the new RFRs to reflect stress in the system is not really about ‘credit’ per se. The RFR add-on is really about capturing events that cause bank stress—increases in bank VaR levels, elevated market volatility.

The yield equivalent to implied volatility of options on Treasury Futures fulfills the main objectives to be the ‘risk add-on’ to new RFR benchmarks: near infinite liquidity, no data cost, accessible to virtually all institutions via exchange-traded futures market, can fit into existing LIBOR+x systems, works when bank stress is elevated. Contact The Fixed Income Group at RJO with questions on calculations, or to receive a copy of an Excel spreadsheet to download the data: fig@rjobrien.com 

Dates Yld BPs
7/23/2021 79.3243
7/22/2021 69.9434
7/21/2021 75.8173
7/20/2021 78.4713
7/20/2021 80.2121
7/18/2021 84.3211
7/16/2021 71.9567
7/15/2021 69.5611
7/14/2021 64.5886
7/13/2021 69.4570
7/12/2021 71.6857
7/9/2021 72.1859
7/8/2021 71.3391
7/7/2021 67.6270
7/6/2021 62.3675
7/2/2021 62.5628
7/1/2021 66.0983
6/30/2021 65.4511
6/29/2021 63.0751
6/28/2021 63.4492
6/25/2021 65.4714
6/24/2021 62.5475
6/23/2021 60.9127
6/22/2021 64.9537
6/21/2021 69.6179
6/18/2021 67.9054
6/17/2021 66.1928
6/16/2021 68.7531
6/15/2021 62.0045
6/14/2021 62.9792
6/11/2021 63.7476
6/10/2021 57.0375
6/9/2021 60.9868
6/8/2021 59.7815
6/7/2021 57.5309
6/4/2021 59.2623
6/3/2021 65.2666
6/2/2021 64.7164
6/1/2021 64.2719

CONTACT

222 South Riverside Plaza, Suite 1200
Chicago IL, 60606
P. (800) 367-3349
fig@rjobrien.com

rjo corporate

© 2021 R.J. O'Brien & Associates LLC.
Futures trading involves the substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results.