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Both market participants and regulators are optimistic the transition to risk free rates (RFR) can be implemented before the December deadline of new issuances of USD Libor.
“I remain very optimistic”, said Tom Wipf, vice chairman of institutional securities at Morgan Stanley and chair of the Alternative Reference Rates Committee (ARRC), while speaking at this year’s Isda annual general meeting.
“With the clarity that we’ve gotten at the end of [last] year, from the IBA, FCA and the US official sector of financial regulators, it’s very clear that with [the December] deadlines in mind most programs around the globe have adapted to that and they’re really moving towards those deadlines.”
Edwin Schooling Latter, director of markets and wholesale policy at the FCA, was equally optimistic but added there was some unevenness in the transition across certain sectors.
“The completeness of transition in some markets is more extensive than others. But across the board, I see either transition that’s getting close to completion or a very strong growth trend towards getting that done.”
A survey published in April by Duff and Phelps found that 50 percent of firms do not have a Libor transition plan in place, a marked improvement from 65 percent six months prior. The survey also found 45 percent of firms would be ready by the December deadline up from 30 percent.
While December will be the end of new USD Libor issuances, USD Libor will continue to be published by IBA until June 2023, which will allow for many contracts to mature without the need to negotiate fallback rates.
“We’ll be in a position to see a good majority of existing contracts mature naturally and not have to go through fallbacks,” said Wipf. “It’s an opportunity for the market to maximize that but I think the no new Libor at the end of 2021 is actually the critical announcement.”
However, there would remain a large percentage of contracts that would mature beyond June 2023. Arthur Yuen, deputy chief director for the Hong Kong Monetary Authority estimated that about a third of outstanding Libor legacy contracts in Hong Kong would fall under that category.
“That’s not an insignificant amount,” he said. “I think the market will still need to soldier on in terms of migrating legacy contracts.”
Synthetic Libor and Libor legislation
The FCA is considering publishing synthetic Libor for sterling and yen. The consultation for this is expected to begin shortly and Schooling Latter said it would be based on a specific proposal; whether one-, three- and six-month tenors for sterling and yen should be published on a synthetic basis. In the case of yen that would only be for an additional year, while for sterling there is no defined time period.
“We think the fair way to approximate the value Libor would have had is a combination of a forward looking RFR plus the ISDA spread,” said Schooling Latter.
Following consultations this quarter, a final decision would be made by the FCA at the end of the third or early fourth quarter.
The US on the other hand is looking to take a legislative approach. Last month, New York State passed legislation that provided a “safe harbour” for Libor contracts past June 2023, where once Libor ceases to be representative, Sofr automatically becomes the reference rate. The ARRC supported its passage.
“The New York state legislation was a great model in place for a legislative path to address tough legacy in the US,” said Wipf.
“Our goal here is to have federal legislation that would look near identical to the New York state legislation, that would really complete the work as it relates to the US jurisdiction. The ARRC is obviously behind it as are all the industry groups supportive of this.”
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