LIBOR update - June 2022

Go back 10 June 2022 Sarah Boyce

LIBOR transition – it’s not over…

For many of us, particularly those who transact predominantly in the GBP markets, it may feel as though transition away from IBORs is a done deal – well, it is, and it isn’t…
Given that we are now 6 months post cessation of GBP LIBOR, and the prohibition of ‘no new use of USD LIBOR’, it feels timely to look at where we are – and identify a few areas that are still a work in progress.

GBP markets – the end of synthetic LIBOR…

The UK authorities permitted the publication of 1, 3 and 6-month synthetic LIBOR from 1 January 2022, principally to help those (small) segments of the market that were struggling to transition.
However, this was only ever a temporary solution, and we expect to see a consultation any day from the FCA regarding the cessation of synthetic LIBOR. General consensus seems to be that the 1-month and 6-month settings will disappear at the end of the year and the 3-month will follow shortly thereafter.
To do:

  • if you are using synthetic LIBOR, make every effort to transition. If you can’t, make sure you and your counterparties are aware of what the fallback looks like.
  • respond to the FCA consultation when it’s published if this might impact you (the ACT will flag when it’s published).

USD markets – similar (to the GBP experience) but not the same…

With the prohibition of ‘no new USD LIBOR’ from 1 January, the USD market seems to have moved pretty decisively to SOFR although, as a NatWest article puts it so well ‘there are a few flavours to choose from’. Derivatives and bonds are largely referencing daily SOFR compounded in arrears whilst loans (particularly in the USA) are tending towards term SOFR. 
Progress in US transition is neatly summarized in the ARRC readouts published shortly after their meetings. The latest can be found here: ARRC_Readout_May_2022.pdf 

The ‘issue’ with term SOFR

Term SOFR might seem like a ‘neat and tidy’ replacement for LIBOR, and its initial adoption in the USA has been marked, but there are a couple of things to consider:

  • if the underlying has any sort of derivative referencing it, the derivative will reference daily SOFR (I have two words – ‘hedge effectiveness’…)
  • if the USD tranche is part of a multi-currency facility, the balance of the facility will almost certainly be referencing some sort of daily RFR, referencing a term rate in USD may throw up administration and systems challenges 

What about EURIBOR?

Good question – the EU has not yet started to consult on EURIBOR’s cessation, but from June 2023, it’ll pretty much be the last IBOR standing.
In practical terms, the EUR funding and swaps market currently remains on EURIBOR whilst the cross-currency swap market has switched to ESTR – making risk management a challenge for many. 

Next steps 

There are a few things to consider:

  • Much as we saw in the GBP markets, active transition in the USD markets will be the preferable path so start soon as there will be ‘congestion’ in H1 2023.
  • As with GBP, make sure you understand what your fallbacks look like – they may not be the same as GBP.
  • Check the Governing Law of your contracts – for example fallbacks may differ depending on the governing law of your contract (e.g. English or New York) as legislative solutions differ by jurisdiction.
    • Do not assume that all USD contracts work in the same way.
  • IBORs are slowly disappearing in all currencies (e.g. CARR welcomes RBSL’s decision to cease the publication of CDOR after June 28, 2024 - Bank of Canada) so don’t assume any existing benchmark will exist in a few years – be prepared. 

We would be keen to hear of any issues you encounter (in any currency). Please drop a note to technical@treasurers.org  or directly to me (sboyce@treasurers.org) with queries or observations. 
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Appendix
We include this appendix as a quick reference for useful sources:
For the latest markets data, we’d recommend ‘going to the source’, so the RFR WG in the UK; the ARRC in the USA etc.
By currency, the ‘source’ information comes from:

GBP: Risk Free Rate Working Group (RFR WG)
USD: Alternate Reference Rates Committee (ARRC)
JPY: The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks
CHF: The National Working Group on Swiss Franc Reference Rates 
EUR: Working group on EURO risk free rates 
SGD: Steering Committee for SOR & SIBOR Transition to SORA (SC-STS)
CAD: Canadian Alternative Reference Rate Working Group - Bank of Canada
AUD: Market Operations Resources – Interest Rate Benchmark Reform in Australia | RBA

If you are looking for suggested ways of approaching the transition project, the ACT website has resources. 

Other useful resources include relationship banks, advisers, trade associations such as UK Finance and the FICC Markets Standards Board (FMSB).

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