The Bank of England and the US Federal Reserve have confirmed that Covid-19 will not impact the end-2021 deadline set for the Libor transition and that lenders as well as borrowers should have their plans in place now.
Speaking at a webinar – Libor: Entering the Endgame – BoE Governor Andrew Bailey acknowledged there had been calls since the coronavirus pandemic escalated to extend the shirt to the risk-free rate (RFR) from Libor which has around roughly $350 trn of various financial instruments contracts benchmarked against it.
He said, “In my view, what we saw in financial markets in March in response to the shock of Covid only reinforces the importance of removing the financial system’s dependence on Libor in a timely way.”
Bailey was joined by John Williams, the head of the Federal Reserve Bank of New York, who also said the COVID crisis would not lead to an extension of the 2021 deadline.
“It doesn’t matter whether you’re a large global bank or a local company with a handful of employees, you need to be prepared to manage your institution’s transition away from Libor,” Williams said. “As I’ve said before, let’s not make the existing hole we’re trying to climb out of even deeper.”
A warning shot was also fired last week by the Financial Stability Board, a global body for regulators, who cautioned there would be a “significant negative impact” if authorities do not prepare for the end of Libor because many existing contracts are due to mature after 2021.
Bailey said those borrowing past the end of 2021 had to consider the greater certainty offered by alternative benchmarks while those continuing to use Libor had to evaluate how the contract would change before the end of next year.
“We would not expect to see any further sterling Libor linked lending after the end of March 2021,” he said.
According to the International Swaps and Derivatives Association’s (ISDA) first quarter report card, the traded notional of interest rate derivatives (IRD) referencing alternative RFRs was $8.4 trn, comprising 9.6% of total IRD traded notional. This was higher than the $2.7 trn in the fourth quarter of 2019, accounting for 5.4% of total IRD traded notional.
The UK is ahead of the curve with its sterling overnight index average or Sonia linked IRD notional traded surging by 237.4% to $8.0 trn, including $76 bn of basis swap in the first three months. By contrast, Secured Overnight Financing Rate reported a more modest 68.9% hike, totalling $280.4 bn, including $135 bn of basis swaps. One of the main reasons is that Sonia is a far more established and liquid RFR, having been launched in 1986 while SOFR only came onto the scene in 2017.