There is no turning back as the UK’s regulator, the UK Financial Conduct Authority, made it clear that there will be no delays in deciding the fate of 35 Libor currency and tenor pairs, following the completion of a consultation by Ice Benchmark Administration (IBA) and the implementation of the International Swaps and Derivatives Association’s Ibor fallbacks.
“We see no case for delaying decisions or announcements beyond the time necessary properly to assess the consultation responses that have now been received,” said Edwin Schooling Latter, director of markets and wholesale policy in a speech at City & Financial’s Managing Libor transition event.
Financial regulators have said that from April there should be no new loans and derivatives contracts based on Libor that mature after the end of December transition period, and that moving existing contracts from Libor should be well underway.
Scooling Latter, however, said the watchdog will consult in the spring on which “hard legacy” contracts could use a “synthetic” Libor for pricing after the deadline and those that could not.
A syntthetic Libor is a change in Libor methodology legislation and based on the term Sterling Overnight Index Average (Sonia) rate plus the credit adjustment spread.
Overall, “we should paint a picture of good news and good progress, the industry has been rising to this challenge,” he added.
The FCA said that 97% of sterling denominated derivative contracts now include “fallback” clauses to switch pricing to Sonia when Libor ends, to avoid legal limbo.
The UK regulator also reported that 85% of uncleared UK derivatives market is ready for the end of Libor as 12,500 banks across the world have signed up to this fallback clause. This translates into $245 trn of the $260 tn in derivatives globally being covered,
ISDA has said that fallbacks are a vital one-size-fits-all safety net to ensure a workable back-up rate based on a clear, consistent and transparent methodology automatically applies at the point an IBOR ceases to exist or for Libor becomes non-representative, avoiding the risk of market disruption.
However, the trade group added that once robust fallbacks are in place, regulators have emphasised that market participants may be able to better tailor the economic terms of their contracts by actively transitioning their portfolios to alternative rates before any cessation event.
Now that the IBA consultation on proposed end-dates for Libor has closed, attention will be focused on the way to determining and announcing the future path for all five Libor currencies simultaneously. These include Swiss franc, euro, pound sterling, Japanese yen and US dollar.
In the meantime, firms are advised to ensure their systems and processes are fit for purpose for the switchover.
“When there is a change to an underlying reference rate, financial institutions expect to see the change reflected on their trading terminal first thing the next morning,” says Ovie Koloko, global head of product development for data and analytics at TP ICAP. “This is why ensuring access to daily OTC market data is an important way to help firms manage their trading positions when transitioning to these new rates.”