Interview
The End is Near: Understanding the Transition from LIBOR
- U.S. dollar LIBOR rates will remain publishable until June 30, 2023, after which they will be declared officially non-representative and unusable, while non-U.S. currency LIBOR rates will cease publication as representative market data at the end of the current year.
- An 18-month wind-down window is established to transition legacy products, with U.K. regulators considering the potential publication of certain non-U.S. rates in a synthetic manner if required to assist in winding down legacy securities.
- Ongoing discussions between U.K. and U.S. regulators may result in the production of specific post-June 2023 rates to support legacy securities, contingent on the scale of the transition challenges.
- The finalized timeline and economic clarity are expected to facilitate a reasonably smooth transition execution, though regulators emphasize that market shifts must occur quickly.
- The transition may generate residual basis positions between bonds, loans, and derivatives due to differing market conventions, specifically regarding mismatches between simple averaging for loans and compounded averaging for derivatives.
- Industry working groups are actively defining standards for remaining basis risk positions and engaging in legislative efforts at state, federal, U.K., and European levels to mitigate residual risks.
- Market participants must prepare for a large-scale operational process to align with regulatory directives and manage global differences in schedules and methodologies.