Short-Term Interest Rate Futures: A Market in Development

Since the introduction of Libor in May 1970, Libor rates were widely assumed to be "default risk-free". The demise of Lehman Brothers in September 2008 resulted in a material reappraisal of Libor rates by both the market and the regulatory authorities.
This has led to material changes in the OTC market for forward interest rate instruments and interest rate swaps and for exchange traded short-term interest rate (STIR) futures contracts.
The purpose of this course is to explain how market infrastructure has changed, partly from regulatory pressure, partly from changes in market perception, and the implications this has had on both the cash and derivatives markets.

Course Information

Price £1,750 + VAT
Duration 2 days
Location London
Available Dates

Who Should Attend

Although no prior knowledge of interest rate derivatives is assumed, familiarity with the basic types of derivative security (forwards and futures, swaps and options) is recommended. Participants should have a basic understanding of fundamental financial market concepts such as present value, risk and return.

Booking Information

Tel: +44 (0) 20 7065 7706

Course Content


Setting the Scene: Introduction to Interbank Rates

  • Interbank benchmark rates: A short history
  • Libor/Euribor fixing rates explained

- Their role and importance to market infrastructure

- How the rates are determined

  • Shortcomings exposed pre and during the financial crisis and the impetus for change

- What has changed since the crisis: The Wheatley Report

- Term Libor rates as credit sensitive rates

  • The rise of the overnight market and determination of the overnight rate
  • Sonia, Eonia and the Fed Funds rate
  • Understanding the relationship between the overnight interbank rate and term Libor rates
  • Overnight index swaps (OIS) explained
  • The relationship between the OIS and term Libor rates pre and post-crisis
  • Implications for forward rates and interest rate swap instruments

Market Infrastructure Reform

  • The regulatory backdrop: IOSCO Principles for financial benchmarks explained
  • The move from judgement to transaction based approaches to rate determination
  • Determination of risk-free rates (RFRs) in the major currencies: GBP, EUR & USD
  • The UK approach: reformed SONIA and the phasing out of term Libor
  • The US approach: introducing a new RFR - the secured overnight financing rate (SOFR)
  • The EU approach: a new unsecured overnight rate (ESTER)
  • Implications for cash and interest rate derivative instruments, c.f. IRS
  • The search for longer-tenor RFRs

OTC Forward Contracts: FRAs

  • Forward rate agreements (FRAs) terms explained
  • Locking-in a forward rate
  • Changes in market infrastructure post-crisis
  • Changes in trade execution
  • Managing the credit risk

- Regulatory capital implications

- Introduction of multilateral clearing

- The mandate for initial and variation margin for non-centrally cleared FRAs

STIR Futures Contracts & the Next Generation Contract Design

  • Traditional short-term interest (STIR) futures contracts
  • The principal contracts
  • The contract specification explained
  • From futures price to forward rate: Locking-in a forward rate
  • Creating longer term rates with strips, packs and bundles
  • Current trends in trading activity
  • New generation contracts
  • Contracts linked to overnight rates
  • Contract designs


Valuing Forward Interest Rate Instruments

  • Calculating forward forward Libor rates from cash Libor rates
  • The traditional approach to deriving the STIR futures "fairprice and arbitrage channel
  • Pricing since the financial crisis:
  • Empirical results: forward forward rates v market forward rates (FRAs and STIRs)
  • Calculating the futures strip and comparing to the cash string

- What has changed since 2008?

  • Implications of the market changes
  • Relationship between STIR prices and interest rate swap (IRS) rates
  • Daily variation margin and the convexity effect

Managing the Counterparty Risk:

  • Overview of techniques used in the OTC derivative market to manage counterparty risk
  • Legal documentation

- ISDA Master Agreements

- Credit Support Annex (CSA)

  • Netting and close out
  • Initial and variation margin for non-centrally cleared FRAs
  • Multilateral clearing for OTC and exchange traded derivatives
  • Variation margin explained
  • Calculating initial margin

- Explaining the role of inter-month and strategy spread charges and inter-commodity spread credits

Trading & Hedging Applications of STIR Futures

  • Hedging interest rate risk
  • Creating a synthetic interest rate swap
  • Managing swap book exposures
  • Hedging money market options
  • Trading applications
  • Trading changes in monetary policy
  • Spread trading

- Trading the shape of the yield curve

- Inter-yield curve trades

  • Trading strategy

- Calendar spreads and butterfly trades

- Implied in and out pricing

- Margin offsets

  • Concluding remarks