Waterfall methodology

1. Project management.

A linear and sequential approach to project management.

Contrasted with agile methodology.

2. Risk-free rates - valuation.

Similarly predetermined steps and prioritisation in determining the basis of contributions to the calculation of risk-free interest rates.

Waterfall methodologies are designed to improve consistency and objectivity.

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.

3. Other contexts.

Similar approaches in other contexts.

See also

• Agile
• Equity
• Fallback
• Funding stack
• Junior debt
• LIBOR
• Liquidation
• Preferential creditor
• Project management
• Risk-free rates
• Senior debt
• Seniority
• Subordinated debt
• Valuation
• Waterfall

Other links

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