A patchy end to Libor

Although firms are making progress in their preparations for the Libor transition ahead of the 31 December 2021 deadline, they still face a number of operational, technology and trading hurdles, according to a new report by Bloomberg and Professional Risk Managers’ Association.

 The report, which polled 134 senior executives from financial service firms and corporations across the globe, found that while roughly 80% have a plan in place, 72% will likely still be holding Libor based derivatives after the end of the year.

Moreover, 78% of firms have already taken critical steps including identifying exposures and assessing transition risks, while only 65% have done so to determine the impact of risk-free rates (RFRs) on legacy instruments 

 The report noted regulators have recommended that firms should no longer reference Libor in new contracts and move to risk free rates such as the Secured Overnight Financing Rate (Soft) in the US,  the Euro Short Term Rate (€STR) in the eurozone and the Sterling Overnight Index Average (Sonia) in the UK.

While there has been good traction in the trading of overnight index swaps (OIS) referencing RFRs, activity in the non-linear and cross currency markets has been more gradual

As of mid-October 2021, over 14,600 organisations adhered to the International Swaps and Derivatives Association (ISDA) 2020 IBOR Fallbacks Protocol.

However, the report said that there still remains some uncertainty as to whether to sign the Fallbacks Protocol. Nearly 50% of firms had either already signed or plan to although 23% have no plans to follow suit and a further 28% said they were unsure or didn’t know how too.

ISDA provided a safety net of robust fallbacks via the ISDA IBOR Fallbacks Supplement and associated Protocol. For example, the fallbacks for the Sterling Libor ICE Swap Rate will be based on the ICE Benchmark Administration’s GBP Sonia ICE Swap Rate, plus the applicable ISDA spread adjustment published by Bloomberg.

When asked to identify the major hurdles, 82% pointed to systems and operational readiness while 72% of respondents highlighted choosing and transacting in new alternative rates and conventions. Outreach and negotiation with customers was a big challenge for 70%.

©Markets Media Europe 2021

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