It's the LIBOR endgame

29 July 2020

Phil LloydHead of Market Structure & Regulatory Customer Engagement

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“I thought by eliminating half of life, the other half would thrive, but you have shown me... that's impossible. As long as there are those that remember what was, there will always be those that are unable to accept what can be. They will resist.”  Thanos, Avengers: Endgame

Andrew Bailey has been channelling his inner Thanos recently, as we move into the 'endgame' for LIBOR1 transition. Then on 28 July we saw the Sterling RFR2 Working Group publish a host of new material covering a range of topics from educational resources to a loans Q&A and a revised timeline. What does it all mean?

Over the last few weeks there has been a flurry of IBOR3 reform headlines. Individually they may not have said that much that is new, but cumulatively they send a message. The announcement on tough legacy, the hints around pre-cessation news this year, Bailey’s “Endgame” speech, the different documents published by the BoE4 on 28 July, the push on loans, the index and conventions landing and the expected pressure on protocol adoption once published, all seem to indicate that the pace is picking up.

So while packing your picnic hamper for a staycation, we thought a quick view from us on what’s cooking would be helpful:

  • Revised road map:hot off the press the revised roadmap from the £RFR WG5. Some of the milestones have been discussed before but what is new is the reference to ceasing trading linear £ LIBOR derivatives from end Q1 2021. How much impact this will have noting the risk management carve-out, we will have to see.
  • Q&A for loan market Q3 deadline:in April the milestones around the cash market were revised. Now the Loan Enablement Task Force has given greater clarity on what that announcement means with a detailed Q&A, with additional detail around contractual arrangements.
  • Official sector rhetoric: BoE Governor Andrew Bailey's Endgame speech did not introduce much new news, but it did underline the official sector commitment to transition, emphasising there are only 18 months to go. The recent comment from Schooling Latter of the FCA that there could be announcements about discontinuation as early as this year did raise some eyebrows in the market. As we wrote in The news of my death has been greatly exaggeratedit’s not clear whether this announcement would be for the less ‘used’ currencies/tenors or the whole kitchen sink. We continue to hear a range of views as to how the end of this year will play out, however what is clear is the importance of the ISDA6 Protocol take up once it is published in September.
  • Tough legacy, or just legacy? As we said in June in With great power comes great responsibility, for legacy contracts that can’t be shifted to RFR rates and those where robust fallbacks can’t be inserted into contracts there is a light at the end of the tunnel. While we await specifics and naturally what happens across the pond, the ‘safety net’ proposed is a big step to accelerating any announcement of the LIBOR ‘end game’.
  • Cash market: still stuck on conventions. As we saw last week, the ARRC7 gave a range of recommendations for syndicated loans, with many crying out for greater clarity to allow the market to move forward. We note that the ARRC has come down in favour of “Business day lookback with no observation shift”. So 'Lag' not 'Shift' in UK terminology. Will be interesting to see where UK loans will land in the coming weeks.
  • Index publication: due in August for SONIA8 and as we wrote about in June in What’s in a numberit’s unclear how much help this index will be (same with the SOFR9 one) if lookback with no observational shift is recommended for loans. The continued discussion around conventions does mean the market is asking for functionality that can cater for Shift, Lag and other variables. The NatWest Markets com is well used and continues to be a tool for the wider market to help transition away from LIBOR to the main backward looking rates.
  • Bloomberg publishing fallback rates: ISDA and Bloomberg recently announced the publication of fallbacks ISDA intends to implement for certain key IBORs. This publication will "significantly reduce the systemic risk posed by a permanent cessation of a key IBOR”, according to Scott O’Malia, CEO of ISDA.
  • Term rate: a few Beta numbers for Term rates have started to be published, and approved production versions are expected early next year – then the focus will shift to the big question of which ‘one’ term rate will be selected when the Bank/Regulator takes over the LIBOR page to drive this synthetic solution that will facilitate the run-off of the toughest legacy contracts.

Outside of the UK developments the market continues to focus relentlessly on managing the bilateral documentation updates for EONIA to €STR with all eyes on whether some industry solution can be achieved for swaptions. Maybe that’s too much for one picnic.

Enjoy the summer, and we look forward to further developments as the Avengers assemble after their holidays.  

1. LIBOR London Inter-Bank Offered Rate
2. RFR Risk Free Rates
3. IBOR Interbank Offered Rates
4. BoE Bank of England
5. £RFR WG Sterling Risk Free Rates Working Group
6. ISDA International Swaps And Derivatives Association
7. ARRC Alternative Reference Rates Committee
8. SONIA Sterling Overnight Index Average
9. SOFR Secured Overnight Financing Rate
10. EONIA Euro Overnight Index Average
11. €STR Euro Short-Term Rate

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