What has happened so far

Since the FCA announced it wanted to phase out banks’ reliance on Libor in summer 2017, there’s been a lot of talk: and not much action. Our team of reporters have spoken to banks, asset managers and industry groups to establish what has happened so far, what still needs to be done, and why progress has been so slow.

What's inside

1. Libor reform: cash markets brace for ‘inevitable’ imperfect hedges

The global transition from Libor to risk-free rates will disrupt both corporate and banks’ hedge accounting practices, with broken hedges inevitable, according to senior bank figures. While sources across markets agree that that cross-product consistency would smooth the process, it’s also accepted that different replacement rates work better for different instruments. The lack of term rates in key replacements such as the UK’s sterling overnight index average (Sonia) and the US’ secured overnight financing rate (Sofr) makes it near-impossible for a corporate [...]

2. Libor fallbacks not yet referencing new rates

Despite new risk-free rates now being published in the UK and US, the market is yet to begin referencing them in contracts – even as a fallback. Some legacy bond documents contain vague references to an unspecified time in the future when Libor may not be available, known as screen rate language. But these only envisage its temporary cessation, and are little use in the case of permanent discontinuation. Newer deals often do include more specific language, though the approach so far has been inconsistent [...]

3. Why no bank has done a Sonia-based loan

Banks claim that the commercial lending market is further behind other products in its post-Libor work because of a lack of client demand. Regulators have made it clear that the market should begin the process of transitioning to replacement rates as soon as possible. But despite significant progress in derivatives, and a couple of benchmark bond issues, there’s not yet been a commercial loan based on a risk-free replacement rate. The banks themselves say it’s down to a number of reasons [...]

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