The FCA recently made it clear that Libor will cease to be accepted as a benchmark, but there is now also more certainty about how market participants should proceed, says Florian Nitschke of Duff & Phelps.
On March 5, 2021, the Financial Conduct Authority (FCA) released what was probably its most important Libor statement yet. It finally confirmed what many of us had been expecting: Libor – the London Interbank Offered Rate – will effectively cease to be available as an interest rate benchmark from January 1, 2022. The notable exception is US dollar Libor, where most Libor terms will continue to be published until the end of June 2023.
Nevertheless, for all Libors, including US dollar Libor, the message from the regulators to market participants couldn’t be clearer: stop using it as soon as possible and no later than the end of 2021.
Whilst most US dollar Libors will continue for another 18 months and there may be synthetic rates for sterling and yen for some time, these can only be applied to legacy instruments which cannot be managed through fallback procedures or contract migration.
So, this is it: Libor will disappear in less than ten months. Fortunately, progress has been made and the FCA estimates that 97% of sterling derivatives are now covered by fallback procedures and assumes similar numbers for the other Libor currencies. The FCA’s announcement also triggered a legal mechanism by which the spread adjustment calculated by Bloomberg and applied to existing swap contracts was fixed on that day – providing additional clarity to the industry. Transition solutions have been suggested for loan and bond markets as well.
Further consultations and statements from the regulators are expected over the course of spring and summer on synthetic rates and on how they will police their use. Various transition deadlines loom: By June 30, 2021, US dollar and sterling Libor should cease to be used for nearly all new issuances.
Expect events to move fast and volume in risk free rate-referenced products to increase rapidly. The end of Libor is nigh.
*Florian Nitschke is director, compliance and regulatory consulting, at Duff & Phelps.
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