Libor Risk – Quarterly report Q3 2020

The transition away from Libor is littered with ‘chicken and egg’ conundrums. Deep cash markets linked to new risk-free rates (RFRs) require a liquid derivatives market for issuers to hedge exposures, yet RFR derivatives liquidity can only blossom where ample cash activity sparks a real hedging need. Similarly, the development of term RFRs relies on plentiful swaps trading, but there’s a reluctance to adopt the new rates while they lack forward visibility. 

The latest causality dilemma relates to the timing of Libor’s death notice and an industry-wide protocol aimed at inserting standard fallback language in legacy swaps. Regulators suggest widespread uptake of swaps fallbacks would be a trigger for slapping an end date on withering benchmarks. Yet Libor users view the regulator’s cessation notice as the trigger for signing up to the fallback protocol.

Anyone waiting for a 2020 announcement should not hold their breath.

Download the full special report in PDF format

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