rates

The administrator of the US dollar London interbank offered rate (Libor) will keep the main tenors of the critical interest rate benchmark going until June 30, 2023 to give users more time to move to alternative rates. 

ICE Benchmark Administration (IBA), which administers Libor, said in a statement on November 30 that it will drop the one week and two month US dollar Libor tenors on December 31, 2021.

The other more widely used tenors, such as three month Libor, will be maintained until mid 2023, subject to a consultation due to come out at the end of December that will run until the end of January.

The hope is that the bulk of existing Libor contracts will simply run off by 2023 meaning there will be much less reliance on fallback contracts. These agreements risk becoming a legal quagmire due to potential clashes between counterparties resulting from the move to differently designed benchmarks with distinct market behaviours.

[The] announcements establish a pragmatic, market-oriented path for managing the transition away from Libor

Jay Clayton, SEC

US, UK and other relevant authorities will look at how to limit the use of US dollar Libor by supervised entities in the UK – a major centre for interest rate swaps.

The announcement follows on from the one made by the IBA on November 18, that it would consult on its intention to stop publishing all sterling, euro, Swiss franc and yen Libors by December 31, 2021.

There has been considerable concern among bankers and regulators that parts of the market wouldn’t be ready for the possible cessation of US dollar Libor at the end of 2021 when the UK’s Financial Conduct Authority (FCA) would stop compelling panel banks to contribute to the rate. This could have threatened financial stability given that around $200tn in contracts are priced off US dollar Libor.

SOFR complications

Some users of certain cash products and loans have struggled with moving to the newer US dollar benchmark, the secured overnight financing rate (SOFR), due to differences in design with Libor. It is an overnight rate, does not reflect credit risk and has no well established yield curve.

Banks are being encouraged to stop entering new contracts that reference US dollar Libor as soon as practicable to facilitate an orderly transition away from the benchmark by the Federal Reserve Board, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency.

"Today's plan ensures that the transition away from Libor will be orderly and fair for everyone – market participants, businesses, and consumers," said Fed vice chair for supervision Randal Quarles.

“The decision to extend Libor for legacy contracts until 2023 is a prudent step that will help facilitate an orderly transition away from Libor,” said the advocacy group, Bank Policy Institute.

“Today’s announcements establish a pragmatic, market-oriented path for managing the transition away from Libor. We encourage registrants to proactively transition to market-based reference rates and stand ready to assist market participants,” said Jay Clayton, chair at the US Securities and Exchange Commission.

The FCA said the financial services bill introduced to the UK parliament on October 21, 2020, which amends the Benchmarks Regulation among other EU originated regulatory texts, will give it new powers to prohibit the use by supervised entities of a critical benchmark that is due to cease. The regulator said it will consult on the use of these powers around the second quarter of 2021 and does not envisage using them before the end of 2021.

The European Commission said EU amendments to the Benchmarks Regulation give it the power to designate a replacement benchmark to avoid disruptions to financial markets. As for the other Ibors, the Commission said it is in users' best interests to move to alternative reference rates.

Meanwhile, the European Parliament and Council agreed to postpone rules on third country benchmarks until December 31, 2023, with the possibility of a further extension if the Commission deems it necessary, so EU users can continue using these rates.

This article first appeared in The Banker's sister publication Global Risk Regulator.

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