Big bangs, FinCEN leak and prime exodus

The week on, October 10–16, 2020

7 days 161020

CCPs mull ‘big bang’ €STR swap conversion

A co-ordinated transition of Eonia contracts is being discussed with members and end-users

After FinCEN leak, banks want more help from regulators

OpRisk Europe: Suspicious activity reports are going into a “black hole”, banks complain

Prime fund exodus threatens SOFR credit add-on

Falling commercial paper and certificate of deposit issuance could leave new benchmarks with data gaps


This weekend, in a move necessitated by governance failures around Libor, derivatives traders are preparing themselves for what will hopefully be a seamless switch for trillions of outstanding notional in cleared interest rate swaps to a new discounting benchmark.

The exercise will see the UK’s LCH and US’s CME replacing the effective federal funds rate with the secured overnight financing rate (SOFR), which is ultimately intended to replace dollar Libor. The discounting switch follows one on July 27, when the euro overnight index average was replaced by the euro short-term rate (€STR).

The European switch was used by banks as a dry run for this weekend’s more complicated transition. In advance of the July switch, the spread was well known for some time, but moving from fed funds to SOFR is less straightforward because of the unknown spread, and as auction trades in unwanted basis swaps are taking place prior to the transition.

More activity transitioning from fading legacy rates needs to be seen, and reported this week that Eurex and LCH are considering ways to automatically convert outstanding Eonia swaps to €STR ahead of the former’s disappearance in January 2022.

A US issuer, meanwhile, is taking matters into its own hands, future-proofing legacy Libor contracts amid doubts that a legislative fix – without which legacy contracts would convert from floating rate debt to fixed – will emerge before the end of 2021. After that date, the discredited rate is not guaranteed to continue to be available.

Meanwhile, in prime money market funds, also reported this week that fears of an exodus of assets could hinder efforts to build credit-sensitive alternative reference rates in the US dollar market.

Regulators are well aware that time is running out in the face of upcoming deadlines on legacy reference rates. This week, for example, the Financial Stability Board (FSB) published a global transition roadmap for Libor, setting out a timetable of actions for financial and non-financial sector firms to ensure a smooth transition by end-2021.

The FSB urges firms to identify and assess all existing Libor exposures and agree on a project plan to transition in advance of end-2021. By mid-2021, it states, firms should have “established formalised plans to amend legacy contracts where this can be done and have implemented the necessary system and process changes to enable transition to robust alternative rates”.


The systematic active equity team at asset manager BlackRock says that in a normal year, 90% to 95% of its research output would be strategic, meaning signals would be produced that guide the investment process for years to come. But this year, more than 50% of the research output has been tactical and more responsive to conditions. The shift seems to have worked. More than four-fifths of the assets run by the group are beating their benchmark or peer median year-to-date.


“My guess is that in 10 years’ time every investor will be an ESG investor” – Piotr Chmielowski, chief risk officer, Fulcrum Asset Management

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