The cessation of the publication of synthetic GBP LIBOR at the end of March marked the end of an era, and it pretty much passed everyone by – just as it was meant to.
Although there are other LIBORs yet to end, it seems appropriate to mark the passing of sterling LIBOR and thank all of you who rolled up sleeves and made this happen.
It’s easy to be negative about such a significant change in how the markets operated; arguably from a corporate perspective, there wasn’t really a problem with LIBOR, but the decision was made.
The ACT was invited to the table late 2017, one could argue far too late as the decision had already been made to replace LIBOR (a ‘simple’ forward looking term rate that originated in the loan market and which corporates had used since the 1970’s) with a backward looking ‘virtually’ risk free overnight rate, originating in the derivatives market.
Watching the process from the inside (demonstrating the reach of the organisation, we were the only real economy trade association invited to join the working group tasked with implementing the transition away from LIBOR), we co-opted a number of corporates of varying sizes and complexity to get involved in various working groups. It is hard to overstate just how valuable their role in this process was – not only did they bring the corporate voice but invariably they were, as you’d expect from treasury folk, practical problem solvers.
None of us would have ‘started from here’, or necessarily thought this was a great idea but everyone rolled up their sleeves and problem solved their way to a result that, broadly speaking works for the market (of course it’s not ideal, very little is, but given the constraints placed upon the working groups, it was a great demonstration of the market pulling together to “get LIBOR done” (if I might borrow an analogy I’m now going to back away from!)).
Whilst those of us who operate in sterling are ‘job done’, the rest of the world is at varying stages of transition – although virtually every currency now has a risk-free benchmark that they are using to a greater or lesser extent.
A couple of things worth noting:
USD synthetic LIBOR will cease at the end of September 2024. Generally speaking, and particularly in the US, transition away from USD LIBOR is also complete. HOWEVER, if you have USD borrowings elsewhere in the world, do check that your counterparties are ready for the end of LIBOR – we are still hearing of lack of readiness, particularly amongst developing markets or smaller banks.
The provision of a Term SOFR solution in the US that’s available for business loans arguably makes life more straightforward but the use case is pretty limited, hedging may be difficult and will certainly be costly – and finally if you have some currencies that ‘have’ to reference an overnight rate and have systems set accordingly, have a term rate in the mix may just complicate everything…
We (and the regulators are watching closely to see just how widely Term SOFR gets adopted – it solved a problem in the US markets but regulators do not want to see it used as the thin end of the wedge… something we’ll be watching out for and will keep you posted.
CAD transition to CORRA continues. The Canadian market is rather different to most others (as those of you who operate there will be aware) and the working group in Canada have produced helpful resources that can be found at: Canadian Alternative Reference Rate Working Group - Bank of Canada with a particularly useful series of webinars to watch on demand.
Other jurisdictions, notably South Africa and Australia continue to work through transition but broadly speaking are following the approach established by the sterling market.
Finally, although most of you will have moved on from LIBOR, please do drop a note to technical@treasurers.org or directly to me (sboyce@treasurers.org) with any queries or observations, particularly on the usage of Term SOFR.
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
