Libor transition

There has been substantive progress in the global transition away from Libor — but a hefty final push is required to get those efforts over the line.

It is now just over three and half years since Andrew Bailey, then head of the UK Financial Conduct Authority (FCA), effectively set the London interbank offered rate (Libor) on a path of terminal decline.

In the wake of a rigging scandal that irreparably tarnished the benchmark’s reputation — and despite methodology reforms — in July 2017, Mr Bailey announced that he did not believe continuing to use Libor was sustainable or desirable; the underlying markets it was measuring were no longer sufficiently active to calculate a representative rate. As a result, from the end of 2021, the FCA would no longer compel Libor panel banks to submit data, and market participants should use alternative rates.

Libor is the world’s most-referenced benchmark, and has been a standard feature of many financial contracts for decades. Therefore, replacing it is a Herculean task, not only in terms of new issuance but also in dealing with the vast amount of Libor-referencing legacy contracts, worth an estimated $260tn.

Libor is the world’s most-referenced benchmark and has been a standard feature of many financial contracts for decades.... replacing it is a Herculean task

Considerable progress has already been made. For each of the five currencies for which Libor values are published, alternative reference rates have been identified and, to a greater or lesser degree, markets have been developing based on those rates. Work by the International Swaps and Derivatives Association has gone a long way to addressing legacy contract issues: some 90% of outstanding contracts relate to derivatives.

But none of this is to downplay the huge amount of work still to be done. Libor’s administrator is due to publish the response to its consultation on cessation dates imminently. It is expected to confirm most Libor rates will cease at the end of 2021, with an extra 18 months for the most-used US dollar rates, although authorities have been at pains to point out this extension is not for new issuance.

Either way, once those hard deadlines are set, the race to the finish will truly be on. 

Turn to the March issue of The Banker to read all about the Libor transition

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