Libor Risk – Quarterly report Q2 2021

The countdown to Libor’s demise is officially under way. At the end of 2021 most settings, including sterling and yen, will cease. At the same time, widely used US dollar settings, which were granted an 18-month reprieve, will no longer be available for new business. If a recent jump in Libor usage is anything to go by, regulators face a Herculean task prising dollar markets off the discredited rate by year-end. The mission is complicated by huge swathes of the US lending market, which are yet to be convinced by overnight SOFR. Many would prefer something altogether more ‘Libor-like’ – and the market seems determined to offer them a growing menu of alternatives to pick from. The new breed of credit-sensitive rates incorporate transaction volume thresholds to ensure they remain representative of the markets they aim to track – a central tenet of benchmark principles devised by Iosco. Understandably, regulators are keen to avoid a repeat of Libor’s past failings, where $200 trillion of risk teetered on $500 million worth of transactions.

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