The derivatives market’s preference for a backward-looking term version of RFRs as a fallback for contracts referencing LIBOR will create problems for some contracts, according to Marc Henrard, managing partner at msRisQ Advisory. Backward-looking rates, calculated by compounding multiple daily rates, introduce complexity, Henrard said. Products like FRAs won’t work without a forward-rate and their nature will need to change. “Derivatives are not going away,” he said, adding that the market is likely to continue to be dominated by forward rates.
The derivatives market’s preference for a backward-looking term version of RFRs as a fallback for contracts referencing LIBOR will create problems for some contracts, according to Marc Henrard, managing partner at msRisQ Advisory. Backward-looking rates, calculated by compounding multiple daily rates, introduce complexity, Henrard said. Products like FRAs won’t work without a forward-rate and their nature will need to change. Henard called for quants to be involved in the decision making process sooner allowing them to solve for the problems that will arise before fallbacks are set and it is too late to change the definition.