In LIBOR transition I have always thought it most appropriate to listen first to the FCA and Edwin-Schooling Latter. There are a lot of opinions out there, but this is the regulator of the LIBOR Benchmark, and one with enhanced powers. When thinking of the USA and the USD, it is easy to point out the different speed and frameworks in the UK. But the FCA regulates all the large, international banks with operations in London, and that is a lot of US Dollar activity, as well as being the lead on most LIBOR issues with the other domestic regulators – in our case, the Federal Reserve.
ES-L’s speech last week was very clear on several issues that are still being actively debated here. We countenance that financial institutions are better served following the FCA’s clear guidance, rather than delaying to debate, we prefer following the roadmap and implementing
Here are a few clarifying statements. On alternatives to SOFR: “We don’t want to see transition to new so-called ‘credit sensitive’ rates such as Bloomberg’s Short Term Bank Yield Index (BSBY).” “They share many of the same flaws as LIBOR.”
Our BPL view is that one should prepare for SOFR, across all products. Sure, there is room for some AMERIBOR or BSBY in the Loan market in the US, but less than 5% of market share, combined. Solve for the 95%.
On Term Rates: “We were told that cash products need forward-looking rates, not overnight rates.” “It turns out that most of these products did not need forward-looking rates. Overnight rates worked well.”
Our view is that ARRC and ISDA chose protocols for Swaps with overnight SOFR. That has and will drive all products. Solve for using overnight SOFR, don’t wait for term rates. Adjust elsewhere in your risk management process to compensate.
On SOFR liquidity: “85% of outstanding uncleared sterling LIBOR derivatives have 2-sided adherence to ISDA protocols AND IN US DOLLAR markets that figure is a little over 90% (into the UK trade repository).” And Interdealer brokers will be replacing USD LIBOR Swaps with SOFR as of July 26, 2021. Liquidity in SOFR will happen.
On the order of transition: “In Sterling – Bonds, Securitizations, Linear Swaps, then Loans and non-linear OTC derivatives.”
In the US there are some distinct domestic issues, that would make this order similar, but not the same – Linear Swaps; Consumer Mortgages, Securitizations; Commercial Mortgages; Syndicated Loans; Bi-Lateral Loans; Non-Linear Swaps; Bonds.
On procrastination: The delay extended for transition in USD products is “only for use in legacy transactions.” “US authorities have published clear supervisory guidance on stopping new use of dollar LIBOR – across all asset classes – by the end of 2021.” “I doubt you really want to be crossing the finish line on Christmas Eve.”
We note that some financial institutions have eased up the schedule and urgency of change, especially on loans. Don’t. Proactive client dialogue and scheduling are critical. We can help.”