
Libor leaders: how seven firms are tackling the transition
BMO, Prudential, Associated British Ports, LCH and others reveal their plans to move off troubled benchmark
At the law firm Fieldfisher’s offices near London Bridge last week, around 75 people gathered in a meeting room for a seminar on Libor transition.
During the event, the audience of buy- and sell-side executives answered poll questions on their smartphones. The answers were not encouraging.
Asked: ‘How prepared are you for Libor discontinuance?’, two-thirds said they were just “starting to think about it”. None had begun moving Libor positions to new risk-free rates (RFRs).
Only a quarter expected to transition all of their exposures away from Libor by the end of 2021, and nearly half predicted they would only be able to get 50–80% of the work done in time.
This was a small sample size, and the results should be taken with a pinch of salt. But polls at other industry gatherings also give the impression that despite clear warnings Libor may disappear soon after 2021 – at which point the UK Financial Conduct Authority (FCA) will no longer compel banks to submit quotes to the various benchmark panels – market participants have done little about it, at least so far.
Polls at other industry gatherings also give the impression that despite clear warnings Libor may disappear soon after 2021, market participants have done little about it
There are exceptions. Risk.net spoke with a number of forward-thinking firms in a range of sectors – corporates, asset managers, insurers, regional banks, clearing houses and supranational issuers – about the progress they have made in transitioning away from Libor, and we will be publishing one profile a day over the next seven days.
UK-based firms appear to have made the most headway, and today we start the series off with BMO Global Asset Management – a liability-driven investment manager based in London, which has moved nearly 95% of its £10 billion ($13 billion) sterling Libor swaps portfolio onto Sonia. The firm targets pockets of liquidity from asset swaps and unwinds, and all of its new sterling swap trades are linked to Sonia.
Associated British Ports is proof that corporates don’t need to be laggards in the transition. The company moved more than £500 million of sterling Libor swaps onto Sonia late last year, and on June 11 will be meeting holders of its listed floating rate notes to convince them to switch the benchmark to the sterling overnight rate.
The European Investment Bank issued a Sonia-linked floating rate note last year – an oversubscribed £1 billion bond – and in the process, worked out the kinks of using the compounded-in-arrears methodology to calculate coupon payments. It is now trying to take the formula to the US, and beyond.
Toronto Dominion Securities was bookrunner on the EIB’s first Sonia issue, as well as on some early US secured overnight financing rate (SOFR) deals. It helped create the standard structure in the UK, where coupons are calculated by compounding the overnight rate in arrears, but has found that a lack of consistency in SOFR deals has held back progress in the US.
But for other markets, progress has been a little slower. US insurer Prudential Financial is still testing the pipes with some SOFR swap trades, and getting accustomed to some of the technical differences inherent in the new products.
Hartford, Connecticut-based Webster Bank, meanwhile, is preparing to repaper legacy loan and swap contracts, and implementing the client education process that goes along with that effort.
LCH has a key role, especially with SOFR swaps. The clearing house found a way to safely accept the contracts for clearing without waiting for bilateral liquidity to build, as it does with most products. Next year will see the discounting rate for US dollar Libor swaps changed to SOFR, a move that is expected to boost demand for SOFR swaps.
Over the next seven business days, Risk.net will publish in-depth interviews with each of these firms, starting today with BMO.
The final article in the series is an interview with Cornelia Holthausen, deputy director-general in the directorate general market operations division of the European Central Bank, who will speak to Risk.net about transitioning from Eonia to the euro short-term rate, and how long Euribor can really hang around.
The interviews
BMO Global Asset Management sets the pace for Libor transition
Prudential takes SOFR for a test drive
EIB sees prizes and pitfalls in Libor reform
Associated British Ports crafts blueprint for corporate Libor switch
Webster Bank aims to clear big SOFR hurdles
TD Securities takes Sonia FRN standards to US
LCH brings SOFR swaps into the fold
ECB’s Holthausen on Euribor, fallbacks and Eonia’s end
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Our take
Korea’s ‘worst-of’ times are here to stay
Chinese houses’ success in Korean autocalls could stymie hopes of diversifying the product mix
Could intraday FX swaps help reduce settlement risk?
New swap platform hopes to ease funding pains, but can it promote more use of PvP?
Talking Heads 2023: A turf war in credit markets
Banks are looking to reclaim territory they previously ceded to market-makers and private funds
FX-style crypto platforms could bridge gap with TradFi
Emergence of execution-only ECNs, prime brokers and clearing houses brings new confidence in crypto
Skew this: taking the computational burden off basket options
Dan Pirjol presents a snap formula for estimating implied volatility skew in an instant
Shhh, don’t tell: the struggle to keep skew under wraps
Liquidity recycling by clients has made it more difficult for banks to keep skews quiet
How a machine learning model closed a hidden FX arbitrage gap
MUFG Securities quant uses variational inference to control the mid volatility of options
The AOCI elephant in the DFAST room
After March’s banking crisis, Fed stress tests should adopt harsher and wider ranging rate scenarios