Financial Firms Are Hoping for Delays in Some Libor Deadlines
(Bloomberg) -- Financial firms both expect and want delays in some Libor transition deadlines, according to a survey conducted over the past few months as the coronavirus pandemic rattled global markets. But most remain on track for the beleaguered benchmark to expire by the end of 2021.
A majority of the more than 70 market participants polled by management consulting firm Sia Partners wanted delays to some individual milestones in the shift away from the troubled set of rates which underpin trillions of dollars in financial products. One area identified for a possible timing pushback was the plan by clearing house LCH to change in October the way it discounts swaps. At the same time, less than a quarter of respondents wanted a delay in the plan to retire Libor altogether at the end of next year.
“This combined feedback reflected a conundrum,” Sia Partners’ operating partner Bradley Ziff and manager Chris Zachodzki wrote. “You were invested to meet the deadlines, you would not mind more time if it was given to you, and constituencies within your institution might have differing views.”
Officials overseeing the shift away from Libor have remained steadfast in their commitment to the deadline at the end of 2021. The Alternative Reference Rates Committee, the Federal Reserve-backed group steering the U.S. transition, has said market participants should assume the benchmark will cease then unless Libor’s regulator, the U.K. Financial Conduct Authority, makes a statement to the contrary before June of next year.
The committee -- which is championing the specially created secured overnight financing rate as a replacement for Libor in dollar markets -- last month issued a series of suggested deadlines for the U.S. transition as part of part of sweeping recommendations provided to market participants.
Despite the challenges, most of the respondents said they were on pace in terms of operational and technological readiness, though a few smaller firms saw the transition timeline as “too aggressive to meet,” according to the survey. About 15% of non-U.S. banks and global systemically important financial institutions wanted some relief on Libor’s end date.
A majority in the survey agreed that if policy makers were to consider developing certain risk-free rate components -- for example, the addition of a credit-sensitive spreads or forward-looking term structures -- than that could assist some firms in the move. A quarter of participants perceived one of these components as a “vital contributor” to their success.
Respondents to the survey ranged from the largest systemically important banks to community institutions, asset managers and insurance companies.
Other highlights from the survey:
- The Covid-19 pandemic didn’t create “meaningful new challenges” for the vast majority of the participants at all levels of size and sophistication. “The challenges of yesterday were, for most, the challenges of today, but now with at least three fewer months to address them,” they wrote.
- Libor budgets stayed the same across all types of participants and attention to governance and oversight also did not change. The one exception was for smaller institutions that identified a “lengthier impact on some of their transition work-streams and a lengthier re-allocation of their resources.”
- Resolution of complex issues surrounding client and counterparty progress is the most “vexing issue” to resolve.
- Respondents said the challenges were numerous, including the requirement to begin the process of review and customization of new products for clients.
- Participants also noted that the “due diligence” issues relating to how much progress clients were making with operational, system and infrastructure initiatives had also not been as aggressive as many would like.
- There has been a lack of either motivation or resource commitment by a myriad of client types to invest in their transition process, and a minority of firms had yet to start the process of linking the risk exposures to their clients, linking them to their documents and considering the overall impact to a firm-wide portfolio of Libor exposures requiring an unwind.
©2020 Bloomberg L.P.