World’s Running Out of Time to Prepare for New Libor, ISDA Warns

LAGOS (Capital Markets in Africa) – The global financial industry must move faster and prepare for the demise of the scandal-tarred interest-rate system that underpins $370 trillion in derivative, bond and loan contracts.

The London Interbank Offered Rate, or Libor, is expected to stop being the go-to benchmark by the end of 2021, Eric Litvack, chairman of the International Swaps and Derivatives Association, said on April 11 in Hong Kong. Changes needed to prepare for the deadline are “arguably the most challenging and complex task the industry has ever faced,” he said.

“It will require laser-like focus and all-out effort from every single part of the industry,” Litvack said. “And we don’t have the luxury of time.”

He joins officials including from the U.S. and Australian central banks in pushing for urgency. While there is general agreement on replacements to Libor and related rates, regulators are still debating how to calculate them and transition existing contracts to the new standards. The benchmark, used to set borrowing costs on financial products from mortgages to consumer loans, was discredited following revelations that traders had manipulated it for years.

Among replacements for Libor and its peers is the Secured Overnight Financing Rate and the Sterling Overnight Index Average. In Hong Kong, the Treasury Markets Association this month announced plans to change how its preferred replacement, the Hong Kong Dollar Overnight Index Average, was calculated.

Reserve Bank of Australia Deputy Governor Guy Debelle said at the ISDA meeting in Hong Kong that market participants would be prudent to have fall-back provisions in their contracts, not just those referencing Libor. Speaking at the Financial Stability Board Roundtable, Federal Reserve Vice Chairman for Supervision, Randal Quarles, also urged the industry to accelerate the transition to alternative rates.

U.S. and U.K., futures products and clearing services for swaps are already being linked to new risk-free rates, and the first cash bonds linked to replacement rates have been issued, Litvack said in his speech.

“Many market participants seem to have moved quickly through the stages of anger, bargaining and depression, and have arrived at some level of acceptance,” Litvack said. “Although some of you, admittedly, are still working your way through the depression stage.”

Source: Bloomberg Business News