Waterfall methodology

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Revision as of 09:08, 27 May 2021 by imported>Doug Williamson (Add other link.)
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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.


See also

Other links

LIBOR transition: EURIBOR fallbacks - ECB publishes recommendations, ACT Blog 18 May 2021