Libor’s End Nears 


Banks and money managers will able to take a major step away from Libor in early 2021 in a move that could affect hundreds of trillions of dollars in derivatives contracts.

The International Swaps and Derivatives Association, or ISDA, the global trade group for the industry, said plans to transition from the benchmark are awaiting sign-off from the U.S. Justice Department and global competition authorities, and could become effective in the second half of January.

At issue is a hotly anticipated protocol enabling firms to incorporate fallback language into contracts so they can transition smoothly into replacement benchmarks, even if they haven’t made detailed plans.

Some lawyers predict the protocol will trigger a big shift away from the London Interbank Offered Rate, which will expire at the end of 2021.

An estimated $200 trillion of financial contracts reference dollar Libor alone, with 95% of this exposure in derivatives, according to the Federal Reserve Bank of New York.

Libor’s End Nears 

The protocol will help remove uncertainty if Libor is no longer published or deemed to be representative, according to Priya Misra. She’s head of global rates strategy at TD Securities in New York and a member of the Alternative Reference Rates Committee, convened by the Federal Reserve to guide the transition.

“This is critical as we head into a potential Financial Conduct Authority announcement later this year” about Libor’s fate, she said. “Market participants need to adhere. It has taken years of discussions and consultations and there is broad support and consensus.”

The protocol will help firms avoid complicated renegotiations and a cliff-edge Libor scenario -- yet there are concerns about whether boilerplate language will serve companies’ individual best interests.

The process is completely voluntary and businesses will need to check how fallback rates are determined to assess any economic impact, said Deepak Sitlani, partner at law firm Linklaters LLP in London.

“A constant theme is for market participants to voluntarily transition to the risk-free rate rather than rely on the fallbacks,” he said.

In a Sept. 21 letter to Bank of England Governor Andrew Bailey and New York Federal Reserve President John Williams, ISDA said the protocol could take effect in mid- or late- January, and would be launched three months earlier.

The group, whose members include the biggest dealers and traders in the derivatives market, said it will allow firms to adopt the protocol after authorities approve its use.

Regulators began phasing out the Libor benchmark after European and U.S. banks were found to have manipulated rates to benefit their own portfolios. Regulators including the U.K.’s FCA have said the derivatives protocol will play a key role in retiring Libor by the end of next year.

©2020 Bloomberg L.P.

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