Libra Reserve, valuation and volatility


As many of you I am excited by potential new possibilities offered by Libra. If the Association succeeds to limit the volatility of the Libra against main currencies (USD, GBP, EUR, etc.) they really have a chance to be massively used, and some banking activities (e.g. lending) could start using Libra as a real alternative.

So to me one of the key point is the Libra Reserve and after my reading of the available documents I have a couple of questions in case some of you would have more info and/or idea?

  1. Transparency: will the Association be fully transparent about the Libra Reserve balance sheet? Will they publish regular financial statements? Can we have access to the Reserve Management Policy?
  2. In the Libra Association document, section D “executive team”, it is not clear to me who will be responsible for the risk management of the Association/Reserve. Will the risk management (crucial for this kind of activities) fall under the umbrella of the CFO? Risk Department should be fully independent.
  3. The Reserve will be multi currencies but logically it should be consolidated in one currency. Can we expect that they will consolidate in CHF (as a Swiss based entity)?
  4. Does the Association plan to use derivatives to hedge its interest and FX risks?
  5. Will the Association accept multiple currencies from its authorized resellers or only one?
  6. The Reserve has two main objectives: capital preservation and liquidity. Unfortunately, the documentation does not say much more about the investment guidelines, accounting (AFS, HTM, etc.) and risk management. Linked to my first point, will we have access to the Reserve Management Policy?
    o What will be the share of government bonds within the Reserve? What about the duration of the portfolio?
    o I am not sure to agree that the “value of the Libra will come solely as a result of FX markets movements”. The paper states that the Association “plans to rely on short dated securities”. In the euro zone, several countries issue at negative rates (up to 10 years). Same for the cash, holding large amounts of cash in Euro can be a cost. Then, MtM of the bonds should also impact the value of the Reserve and therefore of Libra. Or maybe I missed something?
    o How the split between cash in USD, GBP and EUR (for instance) will be decided? It is an important point. Will the amount of cash hold in USD linked to level/number of USD customers? If yes this means that the authorized resellers will have to exchange information with the Association about its customers? If not, if a USD customer wants to sell its Libra whereas the amount of USD hold by the Association is moderated, how will it work?
  7. Expected volatility: it seems that the Association has already decided how the Reserve will be built. Libra will be available mid 2020, it would be interesting to have access to a virtual Reserve portfolio in order to assess its volatility against main currencies. This would be really interesting for those who want to develop financial applications based on Libra. What are your views about that? Or will the Association provide us some “expected volatility” of Libra against main currencies?


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