Libor, IM offset and smart contracts

The week on, June 15–21, 2019

7 days montage 210619

Libor leaders: how seven firms are tackling the transition

BMO, Prudential, Associated British Ports, LCH and others reveal their plans to move off troubled benchmark

Basel closes in on IM offset for leverage ratio

US seen as obstacle to consensus; committee expected to allow netting of margin against PFE only

UBS introduces smart contracts for structured products

Swiss bank aims to tackle shrinking margins by automating workflows and cutting trade processing costs


COMMENTARY: Moving on from Libor

Last week and this, has taken a deep dive into the issue of Libor replacement, focusing on seven case studies of institutions that have made the jump earlier than their peers. The result makes interesting if not entirely cheerful reading. The early adopters – or even early adapters – come from every part of the industry. Asset managers, insurers, banks, dealers and clearing houses have all been among the leaders in advancing into a post-Libor world, and rates traders have been quick to act on each new scrap of information about how the replacement rates will operate.

A model of successful reform? Not entirely. The rest of the industry isn’t nearly as well prepared; two thirds of attendees at a recent seminar on the Libor transition have only just started thinking about what will happen after the end of 2021, the date that will mark the beginning of Libor’s final dive. Three quarters of them expect that, by that date, they’ll still have some – possibly significant – Libor exposure left. In contrast, the reforms of the Euribor benchmark are proceeding a little differently.

Of course, the financial industry is adept at leaving reforms to the last minute, and occasionally even beyond that. And with pathfinder deals already in place in every sector, the way will be clearer and easier for the slower institutions to follow. At least they won’t find, as ABP did, that their suggestions of a shift to Sonia-based products are greeted with laughter.

But the time for them to do so is shrinking. The end of 2021 is just 30 months away, and adapting is a slow process. Prudential started to plan in April 2018 and has not yet moved past the stage of test trades, although Bank of Montreal managed a full transition with just a year of planning and five months of activity. If nothing goes wrong, this sort of timeline implies that late-adopters won’t be Libor-free until late 2020 – still in time for the deadline, but only if they start moving soon.


Citi has given some of the largest electronic market-makers in currencies 90 days to find a new prime broker. The cull is part of a wider effort to reduce risk in the bank’s foreign exchange prime brokerage business, which suffered a reported $180 million loss last year.


“Hedge funds don’t have a crystal ball with respect to how they trade. A lot of things they do don’t work” – Andrew Beer of Dynamic Beta Investments, on evidence that hedge funds struggle to generate alpha on short trades

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