LIBOR – Back to the future

04 October 2019

Phil LloydHead of Market Structure & Regulatory Customer Engagement

Other insights

View more insights

Does the past impact the future, Doc?

Lots of excitement in GBP Basis of late after the International Swaps and Derivatives Association (ISDA) finally launched the consultation into the fallback parameters – responses due 23 October, so expect results a few weeks later.

From the document the following options are primarily under consideration.  

  1. Median over five year lookback period from date of announcement / publication of information regarding cessation.
  2. Trimmed mean over ten year lookback period from date of announcement / publication of information regarding cessation.

The headline for this is clearly that Floating Rate Agreement (FRA) SONIA basis post cessation should be tighter than it is now, but whilst this provides clarity – there’s also further confusion around how you interpret the text “from date of announcement / publication of information regarding cessation”.

From the argument given by respondents who favoured 5yrs because 10yrs would capture the financial crisis, it seems people are thinking that this spread is going to be calculated in advance of cessation rather than post end of 2021 as one would expect. Surely the point of cessation is after 2021 when Banks are no longer compelled to contribute, cessation is announced, therefore >2021 – 10yrs = >2011.

Were these respondents interpreting this to mean the fallback spread would be calculated in advance of cessation occurring – at the point the fallback language is agreed? The trigger for LIBOR ending is something we've discussed before, and with recent pre-cessation consultation preliminary results not helping, it's a key topic to debate further. 

What if for some (admittedly unlikely) reason cessation didn’t occur for some years after the expected 2022 date – we’d use an average calculated over a period of 5yrs from now – that doesn’t seem like a very robust approach to take for the documentation, and with Bloomberg already announced as the calculation agent, we can be confident that they’ll be publishing an updated calculation of the spread daily using whatever the agreed methodology is as we approach a likely cessation date.

Currently, we still think this means when LIBOR actually ceases – not just when 'information around it ceasing at a future date' is published, ie this fixed basis spread will be calculated when LIBOR production ceases.

As we’d anticipated, we’ve seen FRA SONIA basis moving tighter. 

No doubt there will be a sequel.

Market infrastructure & regulation
LIBOR
Rates
SONIA


Footnote:

*A FRA is a contract for difference against, typically, a LIBOR fixing

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.

NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency.

Copyright © NatWest Markets Plc. All rights reserved.