OIS Rates, Reference Indices, and Credit Risk
Summary
An overnight index swap (OIS) exchanges a fixed rate for a floating overnight rate, and its quoted fixed rate is the level that makes the swap fair. There is no single universal OIS rate: the index depends on the currency and market, with examples including federal funds and SOFR in the United States and euro overnight benchmarks in Europe. The response distinguishes secured from unsecured overnight rates and says counterparty credit ratings do not determine the benchmark rate.
The discussion describes how reference-rate adoption changed discounting practice: clearing houses moved to SOFR or other relevant risk-free rates, while some over-the-counter collateral agreements continued to reference older benchmarks. It also notes that credit-sensitive benchmarks and basis swaps have been developed. These are market-practice observations rather than a full pricing derivation, and benchmark usage varies by contract, currency, and date.
Key ideas
- An OIS fixed quote is the rate that balances a fixed leg against compounded or accumulated overnight floating payments.
- OIS references differ by currency and by the overnight index used.
- Counterparty credit ratings do not define the OIS benchmark, though secured and unsecured rates remain distinct.
- Discounting conventions shifted toward relevant overnight reference rates in cleared markets, while some collateral agreements retained older references.
- Credit-sensitive benchmarks can trade against overnight reference rates through basis swaps.
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Full text
# Whos OIS rate? Is there only one? # Whos OIS rate? Is there only one? I have a hard time understanding the OIS rate. My understanding is that this is the rate someone is willing to exchange federal funds rate over say 10 years to someone else. For example, some bank pay the floating rate a company gets in the markets for 10 years and the company pays a fixed rate on the same amount on some period to the bank.(this is just netted in the end) But everyone has a different credit rating. Hence someone should pick a higher rate to swap interest payments with a riskier counterparty. What is this swap rate then or "OIS rate"? ## Answer by AKdemy (score 3) https://quant.stackexchange.com/a/64057 Generally, OIS stands for overnight index swap. RFR (risk free rate) is the current acronym ISDA, central banks and regulators use for the indices in IBOR transition. Therefore, OIS can be Fed Funds (FF) or SOFR for USD, and also can be ESTR or EONIA for EUR. So there is not just one. Credit ratings play "no" role here. BoJ has argued that embedded O/N default risk is negligible. That said, there is still the distinction between secured and unsecured rates. For example a "traditional" FF OIS is a Fixed-Float swap, with the float leg referencing the FED Funds effective rate (EFFR). It resets daily and pays annually. The quote is the fixed leg that makes it a fair swap. You have a liquid market for quotes in these swaps. E.g. if you use Bloomberg, you can find the respective curves on `ICVS` (`ICVS 42` is the "traditional FF OIS, `ICVS 490` the SOFR OIS (RFR), `ICVS 133` EUR OIS and `ICVS 514` is ESTR). In terms of what is used more frequently, the market (USD biased answer) is using SOFR discounting for all sorts of quotations now. For example, swaption vol is quoted with SOFR discounting, CME and LCH moved to SOFR PAI and discounting on Oct. 16 2020 on new AND legacy swaps. For EUR cleared, major CCPs did this since July 27 2020. The market switched to discounting with the relevant RFR rates on the dates above. Hence, if you have a dual stripped curve (e.g. 3m US Libor), you use SOFR and no longer OIS (FF). While CCP's have switched to RFR discounting on SOFR/ESTR, many CSA's in OTC trading still reference FF/EONIA. I suppose both will co-exist for (quite) some time. In terms of credit risk post Libor, there are credit sensitive benchmarks being developed. - ICE's Bank Yield Index - Bloomberg's BSBY Index For example, BSBY-SOFR basis swap already started to trade. Edit BSBY will be discontinued on November 15,2024 after a damning Iosco verdict, see Risk.net.
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