Interbank offered rates (IBORs) yield curves transition from SimCorp Dimension point of view

📈 Interbank offered rates (IBORs) yield curves have been the benchmarks for lending rates during decades. However, as you are already aware, IBOR reform is expected to change that. Not only the financial crisis, including news about banks that manipulated their IBOR, but also the trade volume decreases in unsecured debt market made IBOR curves relevance reduced.

💡 The alternative “risk free rate” curves (RFRs) are already available on the market, whereas each market has the expected timeline and conditions for such transitions to be implemented.

🤔 How to implement such IBOR transitions in SimCorp Dimension appropriately?

I’m going to share with you a reliable plan regarding that matter:

1) Timing

For each market the IBOR transition might experience different timeline and conditions. Therefore, pay attention to the expected timeline in advance per market, so that when transition deadline is reached – you get the implementation on time

2) A new contract or the existing one

The IBOR transition influences an instrument’s valuation in SimCorp Dimension (e.g. in case theoretical pricing is used) as well as related analytics (e.g. duration ratios, risk & performance, LDI hedge strategies, cash flow reports, etc.). Therefore, it is more straight forward to setup a new contract (based on new RFR curves) than amend the existing one (where a consistency with historical pricing data should stay)

3) New RFR curves

Such new curves either have to be setup for regular estimation within Dimension, or imported as quoted yield curves from external data vendors

4) Instruments support

Change of IBOR curve for floating interest type instrument (to the new RFR curve) would mean not only a curve replacement, but also activation of daily coupon compounding with the rest of related settings (i.e. business days calendar, time lag, etc.), as new RFR curves are OIS based ones. In other words, you would have to ensure that instrument supports a new RFR curve (for valuation) in Dimension

5) Credit Adjusted Spread (CAS)

If the existing contract experienced IBOR transition within SimCorp Dimension and it has a floating interest type – please, ensure that “a transition compensation” is correctly set for a coupon. In Dimension you might use a variable spread setting for that purpose (as it supports spreads from certain dates) taking into account that system should continue providing a correct analytics for historical dates (i.e. before transition event)

6) Align a change with existing regulations/reports

There are regulations which are based on market curves VS regulators curves comparison. Once you change RFR curve – please, align it with existing regulations/reports

🧊 In case you experience difficulties regarding IBOR transition within SimCorp Dimension – don’t hesitate to contact Unitso team of Dimension specialists. We’ll be glad to advice you an optimal solution for your specific situation.