Traders keep eye on Libor transition

By Emma Olsson | 31 July 2020

Derivatives traders are on track to adopt new benchmark fallbacks ahead of the London Interbank Offered Rate (Libor) transition, with the pandemic bearing little impact on preparations.

“We have personally not seen any slowdown because of coronavirus from our clients, whether it’s on the fallbacks per se or even other solutions they were pursuing, “says Umesh Gajria, global head of index linked products at Bloomberg.

“We have other non-fallback solutions that people are looking at for the Libor transition and we have not seen any slowdown on that side.”

Many market participants have reported a shift to focusing resources on business continuity during the pandemic. According to McKinsey research, these internal moves could increase systemic risk as markets move from Libor to alternative benchmarks.

But early adoption of new benchmarks can provide traders with a greater ability to analyse their portfolios and build up operational readiness for the transition, says Gajria.

On July 21 the International Swaps and Derivatives Association (Isda) announced that Bloomberg Index Services Limited (BISL) has begun calculating and publishing fallback rates, which Isda will later implement for certain key bank interbank offered rates (IBORs).

The fallback rates are adjusted versions of risk-free rates (RFRs), overnight rates differing from IBORs which operate under term structures. The fallback rates are intended to reduce systemic risk as market participants move away from established IBORs.

“[Bloomberg’s publication of the IBOR fallback calculations] is for market continuation purposes. People want to make sure the derivative contracts between two counterparties continue to perform when these Libor cessations will be announced,” says Gajria.

“The market can use this data to look at the impact to their trades, to their portfolios, and it’s really all about knowing and preparing up front. Having these rates available to market participants, transparent to them, is aimed at helping them to prepare for the transition that they’re about to see.”

The eventual cessation of Libor was announced by the UK’s Financial Conduct Authority (FCA) and the Bank of England (BoE) in 2017, with an end date for Libor submissions slated for December 2021.

“We see varying degrees of feedback about people’s readiness … from a client readiness point of view, we’re seeing some people are quite ahead and then there are others that are catching up,” says Gajria.

“A lot of the effort in the RFR or the fallback on RFR space is really about educating the market and making them understand how it’s done, how it’s used – a little bit of handholding in that front – and making sure that we provide them with what we need to be operationally ready.

“I think the awareness is there now that people have to get ready and they have to do the work. The urgency obviously varies according to how many resources the firm has been able to dedicate to this process.”

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