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.