Libor Enters ‘Final Chapter’ as Global Regulators Set End Dates

Regulators kicked off the final countdown for the London interbank offered rate Friday, ordering banks to be ready for the end of a much maligned benchmark that’s been at the heart of the international financial system for decades.

The U.K. Financial Conduct Authority confirmed that the final fixings for most rates will take place at end of this year, with just a few key dollar tenors set to linger for a further 18 months.

The move comes in the wake of major manipulation scandals and the drying up of trading used to inform the rates, which are linked to everything from credit cards to leveraged loans. Global regulators have made a concerted effort to wind down the benchmark in 2021, with the Federal Reserve and others pushing market participants toward a slew of alternatives.

“Outside the U.S. dollar markets, this marks the end game,” said Claude Brown, a partner at Reed Smith LLP in London. “The rate that linked the world, and then shocked the world, will leave this world in 2021.”

End Dates

Setting

Dec. 31, 2021
  • All sterling, euro, Swiss franc, yen settings
Dec. 31, 2021
  • 1-week, 2-month U.S. dollar settings
June 30, 2023
  • All remaining dollar settings (overnight, 1, 3, 6, 12 months)

Libor is deeply embedded in financial markets. Some $200 trillion of derivatives are tied to the U.S. dollar benchmark alone and most major global banks will spend more than $100 million this year preparing for the switch. Other players -- from corporations to hedge funds -- will also be affected, with many only beginning to shift from legacy contracts.

Bank of England Governor Andrew Bailey said this was now the “final chapter,” and there’s no excuse for delays.

The BOE will hold executives to account for progress in the transition under the U.K.’s regulatory regime for senior managers, according to people familiar with the matter. If firms fail to take appropriate steps, there is the potential for measures such as capital sanctions, though these would come further down the line.

Progress toward replacement benchmarks, such as the Secured Overnight Financing Rate in the U.S. and the Tokyo Overnight Average Rate in Japan, has been sluggish, and there are hopes Friday’s announcement could accelerate the process -- particularly in the vast global derivatives market.

“This was the much anticipated final piece of clarity the market needed to really kick on,” said Kari Hallgrimsson, co-head of EMEA rates at JPMorgan Chase & Co. “We would expect liquidity for trading the new rates to keep increasing from here on out.”

Friday’s decision is a cessation event and locks in the benchmark’s fallback spread calculations, which for dollar Libor will be added to SOFR, the main U.S. replacement. Where firms have adhered to International Swaps and Derivatives Association’s Libor protocol, their contracts will automatically transition to replacement rates the moment Libor ends, avoiding a cliff-edge scenario.

The delay in the most-used dollar Libor tenors -- notably the three-month benchmark -- is a concession to market concerns, but regulators remain adamant that dollar Libor shouldn’t be used for new contracts after 2021. Firms should expect further engagement from their supervisors to ensure timelines are met, the FCA warned.

The Fed, for its part, is intensifying its scrutiny of banks’ efforts to shed their reliance on Libor, and has begun compiling more detailed evidence on their progress.

“In the months ahead, supervisors will focus on ensuring that firms are managing the remaining transition risks,” said Randal Quarles, vice chair for supervision at the Federal Reserve Board and chair of the Financial Stability Board.

While speculation about the announcement’s timing jolted the eurodollar market in December, the market reaction on Friday was subdued. The spread between June 2023 and September 2023 Eurodollars widened one basis point, as did the difference between December 2021 and March 2022 short sterling contracts.

Libor Enters ‘Final Chapter’ as Global Regulators Set End Dates

The FCA also detailed proposals to deal with the most troublesome loans and securitizations that can’t be switched to replacement rates. The regulator will consult on synthetic Libor -- which doesn’t rely on bank panel data -- for the sterling and yen benchmarks, and will continue to consider the case for using these powers for some dollar Libor settings.

Worries are mounting that hundreds of billions of dollars of these legacy contracts will never be able to transition, even with the extension of certain dollar Libor tenors. This will present a key challenge to banks, regulators and lawmakers in the months ahead.

“Some cash products have not embraced Libor and the clock is ticking loudly,” said Priya Misra, global head of interest rate strategy at TD Securities. “A lot of them will mature by June 2023, but there will be a lot left over after that.”

What Analysts Are Saying

Goldman Sachs Group Inc:

  • “Today marks an extremely significant milestone in the multi-year global transition away from Libor,” said Jason Granet, chief Libor transition officer. “With full clarity on Libor’s endgame the market can now move forward towards a smooth and efficient transition.”

Eigen Technologies Ltd:

  • “At this late stage, pure human review and legal advice is going to be too slow and inaccurate, putting the financial firms and their counterparties at economic and conduct risk,” said Chief Executive Officer Lewis Liu. “The only way out of this now is through the rapid deployment of technology.”

Linklaters:

  • This is “expected to be based on a forward-looking term version of the relevant risk-free rate plus a fixed spread calculated over the same period and in the same way as the spread adjustment implemented in ISDA’s Ibor fallbacks,” said Phoebe Coutts, a capital markets lawyer. “It will also be interesting to see which legacy uses of synthetic Libor will be permitted by the FCA, as there has been some uncertainty around which products constitute ‘tough legacy’ products.”

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