Libor Risk – Quarterly report Q2 2020

Detaching an estimated $350 trillion of financial contracts from Libor was always going to be an uphill struggle. For a rump of so-called “tough legacy” contracts it’s a near impossible task. Now their future lies in the hands of legislators. 

In a recent benchmark transition survey, six jurisdictions told the Financial Stability Board that legislation will be needed to shunt Libor’s most stubbornly welded contracts over to risk-free rates (RFRs). At least two – the US and, more recently, the UK – have already started work drafting suitable language. Another two warn the necessary fixes cannot be guaranteed. 

UK legislators face a balancing act in crafting a lifeline for tough legacy contracts without encouraging widespread complacency. And there’s little time to do it in. While Libor is not set to cease until after the end of 2021 at the earliest, the FCA is eyeing the end of 2020 for possible confirmation of the benchmark’s demise. It’s at this point the credit spread would be fixed for derivatives fallbacks. 

Remember when participants were calling for transition delays in response to Covid-19 lockdowns? That all seems like a very long time ago. 

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