Libor Transition Seen on Track Even as Virus Adds Complications

Concern appears to be ebbing that the coronavirus pandemic could significantly delay the transition of dollar markets away from the beleaguered Libor benchmark.

The process for moving away from the London interbank offered rate is on track to take place by around the end of 2021, according to a Barclays Plc survey. A previous poll by the bank had indicated concerns that the Covid-19 outbreak might derail the transition.

“Investors still continue to believe, for the most part, that a small delay beyond 2021 may be needed to see the transition through, but nearly 83% of our investors believe that market usage of Libor will stop by end-2021 or a short time thereafter,” Barclays wrote in a report based off a survey of nearly 100 rates, credit and money-market clients.

The move away from Libor -- and toward new alternatives such as the Secured Overnight Financing Rate -- is a response to concerns about the longstanding benchmark, including revelations about manipulation in the wake of the 2008 financial crisis. The challenge has been to maintain Libor’s accessibility and functionality with an alternative that’s more trustworthy.

Other findings from the Barclays survey:

  • Statements by regulators in recent months have made a difference to investor expectations regarding the timing for when an announcement regarding the termination of Libor will be made. Around 78% of investors see a so-called pre-announcement being made before the final quarter of 2021, with a majority expecting it in the first half of the year.
  • Market participants expect the derivatives market for SOFR to become the primary mechanism of interest-rate risk transfer before December 2021.
  • Nearly half expect that the market will be deep and liquid enough to support a term SOFR benchmark by the end of 2021, with another 40% predicting it will be available a year after that. And most of those surveyed see such a benchmark as broadly necessary.
  • The lack of an unsecured credit spread continues to be a key concern about the transition, followed by concerns about value transfer, according to the survey
  • Investors showed support for the Alternative Reference Rates Committee recommended spread adjustment for securities and for efforts at the state and federal levels to find a legislative solution to the Libor transition in the securities market

©2020 Bloomberg L.P.

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