Libor Exit Race for Derivatives Awaits ‘Starting Pistol’

LONDON (Capital Markets in Africa) — The global derivatives market looks set to accelerate its exit from Libor with the impending release of standardized contractual terms designed to ease the transition to new rates.

The International Swaps and Derivatives Association, the trade group for the industry, will publish its hotly anticipated Libor protocol on Oct. 23 after receiving approval from the U.S. Department of Justice, ISDA said in a statement on Friday.

The publication “will effectively fire the starting pistol on the last stretch of the Libor transition,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York. “These protocols have been a long time coming so I’m somewhat excited!”

The terms, which will take effect Jan. 25, will enable banks and asset managers to incorporate fallback language into contracts so that they can make the switchover — even if they haven’t made detailed plans.

It’s a key part of efforts to prevent a cliff-edge scenario when the discredited London interbank offered rate expires at the end of 2021. Regulators began the process of phasing out the Libor benchmark after European and U.S. banks were found to have manipulated rates to benefit their own portfolios.

Watershed Moment
The stakes for the derivatives industry are high. An estimated $200 trillion of financial contracts reference dollar Libor alone, with 95% of this exposure in derivatives, according to the Federal Reserve Bank of New York. The Financial Stability Board, which monitors the global financial system, urged companies to sign up early.

“The ISDA announcement will be a major step forward in the Libor transition process, easing the logistical burden of switching over to SOFR,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

Attorneys have said the ISDA contractual terms could provide a watershed moment and trigger a shift into replacement benchmarks including the Secured Overnight Financing Rate in the U.S. and the Sterling Overnight Index Average the U.K.

It will help firms avoid complicated renegotiations — yet there are concerns about whether boilerplate language will serve companies’ individual best interests. Regulators including the U.K.’s FCA have said the derivatives protocol will play a key role in retiring Libor by the end of next year.

In addition to the U.S.’s DOJ, ISDA said it kept competition authorities in Australia, Canada, and the European Union fully informed and doesn’t anticipate “adverse action.

Source: Bloomberg Business