Waterfall methodology
From ACT Wiki
Risk-free rates - valuation.
- Uniform determination methodology
- From mid-2018 a new, uniform determination methodology, the “waterfall methodology”, by which each contributing bank calculates the rates it submits, was progressively introduced. The underlying interest - the market or economic reality that the benchmark seeks to measure - remains the same.
- The “waterfall” methodology refers to the three bases for a bank’s rate submission... the first practical method being used in any case according to the information available...
- The three bases in the LIBOR waterfall are:
- Level 1: Transaction-based
- Level 2: Transaction-derived
- Level 3: Expert judgement
- In summary, the new methodology is more rooted in actual transactions as far as possible. Using less “judgement” that can involve a (possibly unconscious) element of “smoothing”, contributed rates are expected to vary up and down more by small amounts each day. And, recognising the reality that banks short-term-fund in the wider money-markets now, rather just inter-bank, the range of transactions considered is being widened and this can mean small rate differences.
- Following the successful completion of the transition period, LIBOR is now, for each currency/maturity combination, the rate output as the arithmetic mean of the relevant panel banks’ waterfall-methodology based submissions, excluding the highest and lowest quartile of submissions.
- The Treasurer's Wiki - LIBOR.
