End of Libor Jolts Multitrillion-Dollar Derivative Market Again

(Bloomberg) -- The drip feed of news on the demise of the London interbank offered rate is causing some violent reactions in derivative markets, including another major shake up on Friday.

Activity surrounding June 2023 eurodollar futures -- which are linked to the three-month dollar Libor rate -- spiked over the course of the session amid new details on the so-called spread calculation used to determine fallback rates for contracts tied to the benchmark. The gap between the June 2023 and September 2023 contracts widened 4.5 basis points Friday, bringing the weekly move to 20 basis points -- an unprecedented surge for a three-month spread. Volumes by 3 p.m. New York time were at a record 85,000 contracts.

The surge in activity came after a webinar hosted by the International Swaps and Derivatives Association revealed that an announcement as soon as early next year would trigger a fallback spread calculation for all dollar Libor tenors, including the three-month rate.

“An announcement early next year for all U.S. dollar Libor tenors would fix the spread for all tenors,” Deepak Sitlani, a partner at law firm Linklaters, said during the webinar. “In that instance, the spread would be applied -- that is to say, contracts would fall back to the fallback rate after June 2023.”

Traders were quick to catch on to the detail and adjust positions accordingly. Volumes exceeded 370,000 contracts in the September 2023 future for the first time ever.

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