analyst report

LIBOR Risk Q2 2021

Libor Transition Nears Its End – Five Topics You Need to Know

Libor Transition Nears Its End – Five Topics You Need to Know

The complex transition from LIBOR to alternative reference rates (ARRs) has been slowly in the works for about four years, but has now gained full steam as at the end of this year all LIBOR settings for the issuance of new derivatives contracts will cease to be provided. As the time span between now and the official 2021 phaseout keeps shortening, there is a series of related market themes that warrant close inspection.

In an article he contributed to, Numerix’s LIBOR transition expert, Liang Wu, examines 5 top issues you need to know as the capital markets industry takes the major step away from LIBOR. These include:

  1. LIBOR will not completely cease in 2021. The end date of key U.S. LIBOR tenors was extended from December 31, 2021 to June 30, 2023. Despite this reprieve, market participants should not be under the illusion that this will allow them to execute new trades of LIBOR-based derivatives until June 2023.

  2. A forward-looking SOFR term rate is unlikely to be published in 2021. How useful would such a term rate be? The answer may be found in the fact that a forward-looking SOFR term rate would be very much like LIBOR.

  3. New IBOR fallbacks are now in effect. This may force market participants to pursue technology upgrades to ensure their fallback mechanisms can be triggered.

  4. Trading volumes for cross-currency markets are trending upward. While the cross-currency markets have yet to fully embrace ARRs, trading using ARRs in these markets may soon become standard practice.

  5. There is demand for a credit-sensitive rate that is an alternative to SOFR. It’s time talk about Ameribor.

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