Libor Risk – quarterly report Q4 2019

Libor has entered its twilight zone. The benchmark’s life support will be switched off after the end of 2021, leaving it to die.

New markets linked to regulator-preferred risk-free rates are building – albeit at varying rates – but the bigger headache is the fate of $350 trillion in legacy financial instruments.

Swaps, once deemed low-hanging transition fruit with the luxury of a protocol option, are proving trickier than expected; debate rages over when and how fallbacks should kick in, while traders are now busy analysing whether signing up to a protocol could leave them out of pocket. Bonds and loans can’t easily be flipped, yet there’s encouraging activity.

As the clock ticks down, there’s little sign of any global convergence. Regional cracks are turning into crevices – as UK regulators ramp up transition talk, their US counterparts face a backlash over the choice of a volatile repo-based successor rate. In the eurozone, there’s little appetite to sunset Euribor. And while swap and bond markets are warming to backward-looking compounded RFRs, loan markets are heading towards term versions, which may carry Libor’s old trappings.

For banks, investors and corporates alike, 2020 will be a defining year for shaping the new-look rates market.