The UK’s Financial Conduct Authority (FCA) has announced proposals requiring the Libor administrator IBA to continue publishing synthetic US dollar and sterling Libor rates until September 2024 and March 2024, respectively, with the final Libor publication occurring at the end of September 2024. The decision follows feedback from the industry that a number of US dollar cash contracts, particularly outside the US, would benefit from a continued publication.

The US dollar Libor was originally due to cease in June 2023, but the FCA has used its powers under the Benchmarks Regulation (BMR) to temporarily extend publication under an unrepresentative synthetic methodology in order to assist with legacy transitions.

“While we consider synthetic LIBOR a fair and reasonable approximation of what LIBOR might have been, it will no longer be representative for the purposes of the BMR. It is not for use in new contracts. It is intended for use in certain legacy contracts only,” emphasised the regulator.  

Many US dollar LIBOR contracts have provisions which trigger their conversion to alternative rates (eg risk-free rates) when publication on a representative basis ends after 30 June 2023. Others, particularly many contracts under US law, are covered by legislative provisions that will enable their conversion to appropriate alternative rates at this point. However, the FCA noted that responses to a June consultation highlighted a significant number of contracts in cash markets, particularly outside the US, that would benefit from a period of publication of US dollar LIBOR on a synthetic basis. 

The three synthetic yen Libor settings will cease at the end of 2022, as planned, while the one and six-month synthetic sterling Libor rates will end in March 2023. The overnight and 12-month sterling rates will cease in June 2023, while the three-month sterling Libor will end in March 2024 and the one, three and six-month synthetic US dollar Libor settings will end in September 2024.  

The FCA is currently also seeking views on proposals to use the CME Term SOFR plus the relevant ISDA fixed spread adjustment as the methodology for a synthetic US dollar Libor, and whether or not to permit all legacy contracts (other than cleared derivatives) to use the synthetic rate. A final decision is expected to be made in late Q1/early Q2 next year.  

“Any synthetic LIBOR settings are only a bridge to appropriate alternative risk-free rates, not a permanent solution. As such, market participants should continue to prioritise active transition and focus on converting their legacy contracts to risk-free rates as soon as possible,” said the regulator.  

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CME Group has confirmed plans to convert its giant Eurodollar pool to SOFR equivalents by 14 April, 2023 – a good two months ahead of the 30 June deadline for the final death of Libor, reflecting industry preference for an early (and orderly) exit.

The 14 April deadline was not unexpected, but has now been confirmed by client validation, with all eligible Eurodollar futures and options to be converted to SOFR equivalent contracts.  

April 2023 (serial), May 2023 (serial) and June 2023 (quarterly) Eurodollar futures and options will be excluded from the conversion and will stop trading on their standard expiration dates.  

From 1 November this year, CME Group will also waive all trading fees for SED spreads and LS spreads to reduce frictional costs for clients who want to move their positions to SOFR in advance of conversion, yet another step to encourage a smooth transition.  

All Eurodollar options already have an equivalent three-month SOFR option listed, with inter-commodity spreads (ICE) including SED and LS (reduced tick size) available to encourage market-led switching. The exchange also offers a lower block threshold for SOFR vs Eurodollar options spreads, providing that each leg of the spread meets the smaller of the two threshold requirements. 

The conversion plan remains subject to regulatory review. 

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The survey was conducted last month and polled 130 executives from financial services firms and corporations worldwide.

The survey found that more than 50% of firms no longer trade USD Libor-indexed products including floating-rate notes, cross-currency swaps and Eurodollar futures – suggesting that the transition away from USD Libor is well underway.

“The US dollar markets are the biggest financial markets in the world, and everyone will be impacted by the June 2023 deadline; whether you are a multi-national firm with exposure in many currencies or a smaller company that only focuses on dollar investments, you will be significantly impacted,” said Steffan Tsilimos, global head of interest rate derivatives products, speaking to The TRADE.

Transition decisions around instruments such as non-centrally cleared USD Libor derivatives and tough legacy contracts have been able to be made due to firms being given additional time because of the delayed cessation for key USD Libor tenors until June 2023.

In respect to how non-centrally cleared derivatives are handled, firms are split on strategy. 28% of firms said they were “not sure” how to address these derivatives before the cessation date, while an addition 13% said they were still formulating a transition strategy.

Elsewhere, 20% said they are planning a mixture of re-papering to RFR equivalents and ISDA fallbacks, while 11% said they plan to let these derivatives run to maturity via the ISDA fallbacks.

The survey also found that some challenges do exist, relating to operations, selection of alternative rates and re-papering of existing contracts – with 50% of respondents noting they are facing challenges related to systems and operational readiness.

This does, however, show progress in transition efforts compared to a previous survey by Bloomberg and the Professional Risk Managers’ International Association (PRIMIA) last year, which found that 82% of firms viewed systems and operational readiness as a hurdle at that time.

36% of respondents have noted re-papering of existing transaction and agreements as a challenge, while 45% of respondents highlighted difficulty around choosing new alternative rates and conventions. In addition, 15% noted that customer outreach and negotiation was still a challenge. 

According to Bloomberg, the loan markets also continue to see the effects of the transition. In respect to Libor-indexed terms loans, 63% of firms said they would continue the Libor transition process throughput 2022 and possibly into early 2023 as well. Meanwhile, 15% said their timeline for term loan transitions is “undecided” and 9% said their transition process was already complete.  

“The data clearly shows that while the Libor transition is proceeding well overall, there is more work to be done,” said Jose Ribas, global head of risk and pricing solutions at Bloomberg.

“While larger banks, institutions, and many non-US entities already have a blueprint as a result of the first major wave of Libor discontinuations at the end of last year, not all global financial participants were impacted. Some US regional banks and smaller institutions with only US dollar investments may still have a ways to go,” added Tsilimos.

“As they prepare for the US dollar transition, firms should focus on making sure they are operationally ready to exit their Libor exposure (directly or through fallbacks), migrate their systems and benchmarking to non Libor based rates, and also fully understand the impact of the Libor transition on US markets such as mortgages and munis.”

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The Financial Conduct Authority (FCA) confirmed that Libor settings for sterling, euro, Swiss franc, Japanese yen, and the one-week and two-month US dollar settings will cease on 31 December 2021.  The remaining US dollar settings will cease after 30 June 2023. 

“Today’s announcements provide certainty on when the LIBOR panels will end,” said Nikhil Rathi, CEO of the FCA. “Publication of most of the LIBOR benchmarks will cease at the same time as the panels end. Market participants must now complete their transition plans.”

Market participants across the value chain have been transitioning to alternative benchmarks, including SONIA for UK sterling derivatives and SOFR for US dollar derivatives, in the last year.  

The end date comes alongside a feedback statement published by the ICE Benchmark Administration (IBA) on its Libor consultation, which it launched in November.  

The IBA said the “vast majority of respondents” were in support of the cease of publishing Libor settings at the end of 2021 and of the ceasing of other US settings in 2023. 

“Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system,” Bank of England governor, Andrew Bailey, commented. “With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.”

Research from the UK’s Investment Association last year suggested that asset managers had upped efforts to switch from Libor to alternative benchmarks, with 70% of its members reveling they had reduced their exposure to Libor in the last year. 

The FCA confirmed in July 2017 that it would no longer be supporting banks using Libor settings after the end of this year following years of allegations that the benchmark had been manipulated.  

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ICE Benchmark Administration (IBA) has 

In a statement, IBA said the consultation will discuss its possible ceasing of the publication for sterling, euro, Swiss franc, and Japanese yen Libor settings after December next year.  

IBA added that discussions with the UK’s Financial Conduct Authority (FCA) and other official sector bodies and panel banks are ongoing regarding the future of US dollar Libor.    

“IBA expects to be able to make further announcements regarding USD LIBOR when the discussion process concludes. There can be no certainty or guarantee that IBA will be able to publish any USD LIBOR settings after December 31, 2021,” IBA said

The FCA confirmed in July 2017 that it would no longer  support banks using Libor after 31 December 2021, following years of controversy and allegations that the benchmark had been manipulated. Around 20 major banks have been caught up in investigations or fined for rigging Libor.

Market participants across the value chain have begun transitioning to alternative benchmarks SONIA and SOFR. In August, Eurex cleared its first SOFR swaps with JP Morgan and LBBW.

Similarly, in September, LCH registered its first SONIA/SOFR cross-currency swap between Bank of America and Lloyds Bank. More recently in October, ICE outlined plans to launch SONIA options through ICE Futures Europe later this year.

Earlier this month, the first electronic SOFR versus EFFR basis swap compression was executed via Bloomberg’s list trading tool on CME group.

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The no-action letters will offer swap transaction and pricing data reporting relief to DCOs that will help transition certain cleared swaps from discounting using the effective federal funds rate (EFFR) to the SOFR.

The relief provides a delay in the reporting of transaction and pricing data for swaps executed as part of the upcoming discounting transition auctions that will be held by LCH or CME, added the CFTC.

The delays will be extended until 19 November later this year.

“This discounting transition is an essential part of the industry-wide initiative to transition from swaps that reference the London Interbank Offered Rate (LIBOR), and other interbank offered rates, to swaps that reference alternative benchmarks,” said the CFTC in a statement.

The CFTC issued its first set of no-action letters in December last year. The US derivatives watched then issued a further set last month that reassured participants that it would not take enforcement action against firms failing to comply with certain regulatory requirements.

The September no-action letters outlined potential time relief for counterparties from other regulatory requirements, including uncleared swap margin rules and swap clearing requirements, when amending swaps referencing LIBOR, or other interbank offered rates.

LIBOR is being replaced by the sterling overnight index average (SONIA) as the alternative benchmark in the UK, and the secured overnight financing rate (SOFR) for US Dollar derivatives and contracts.

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The data arm of interdealer broker Tradition said it will publish spreads between AMERIBOR, SOFR, and the Effective Fed Funds Rate (EFFR) this month via vendors including Refinitiv and Bloomberg, as well as through its own global reference rate data feeds.

“Properly managing the transition away from Libor is integral to the financial markets and the economy. Tradition is positioned at the heart of these markets giving us the opportunity to provide data and information to those who need it,” said TraditionDATA’s global head of product, Jeffrey Maron.

Maron added that unlike SOFR, the US replacement for Libor, AMERIBOR contains a credit component that adds another dimension to the firm’s suite of alternative reference rate and risk-free rate data products.

“It demonstrates that we are looking at this market shift from every perspective,” he added. “As this transition takes effect, the markets will not only decide how that happens but spread markets between the various solutions will evolve and our clients will need a reference point for this valuable price information.” 

The US derivatives watchdog confirmed recently that it has extended its no-action relief to swaps dealers and market participants for the transition to alternative reference rates from the Libor benchmark. The relief includes certain trade execution and clearing requirements, as well as swap dealer and uncleared margin requirements.

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The US Commodity Futures Trading Commission (CFTC) issued several revised ‘no-action letters’ outlining the conditions under which counterparties can qualify for additional relief for certain trade execution and clearing requirements, as well as swap dealer and uncleared margin requirements.

“Today’s relief will help smooth the transition away from interbank offered rates (IBORs), particularly with respect to older, legacy swaps that are sitting on the books of dealers and their clients, and in particular end-users around the world,” said chairman of the CFTC Heath Tarbert.

The latest no-action relief from the US derivatives regulator follows initial temporary relief handed to market participants active in the swaps market in December. The documents ensure that the CFTC will not take enforcement action for firms failing to comply with certain regulatory requirements.

Counterparties could qualify for time-limited relief from other regulatory requirements, including uncleared swap margin rules and swap clearing requirements, when amending swaps referencing Libor, or other interbank offered rates.

“This relief will remove regulatory obstacles to the adoption of potential protocols updating robust fallback procedures in the event that an IBOR ceases or becomes non-representative,” the CFTC’s Tarbert added. “Also, the relief will help market participants continue managing their swap portfolios as clearinghouses implement their planned transition of discount rates towards new reference rates, another vital step in moving the derivatives markets away from IBORs.”

Libor is being replaced by the sterling overnight index average (SONIA) as the alternative benchmark in the UK, and the secured overnight financing rate (SOFR) for US Dollar derivatives and contracts.

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Eurex has confirmed it has cleared its first SOFR swaps transactions with JP Morgan and LBBW submitting the initial trades.  

 The central clearing counterparty (CCP) said the development underlines its clients’ increasing commitment to clearing over the counter (OTC) products with Eurex and marks an important addition to its liquidity pool. 

“Making it possible for clients to combine EUR and USD swap clearing attracts even more clients to our EU27 based, EMIR compliant liquidity pool. It is another vital step in our vision to become home of the euro yield curve,” said Phil Simons, global head of fixed income sales, derivatives, funding, and financing at Eurex Clearing. 

SOFR overnight index swaps and SOFR basis swaps having been clearable at Eurex up to 50-year maturity since 29 July. 

SOFR was introduced in 2018 as an alternative benchmark to Libor for US dollar derivatives and other financial products. It is now considered best practice as an alternative reference rate, following years of controversy and manipulation shrouding the Libor benchmark.

“Being the first to clear USD SOFR swaps at Eurex Clearing demonstrates our commitment to provide liquidity and support our European clients with their multi-currency derivatives clearing needs,” said co-head of EMEA Rates at JP Morgan, Tom Prickett. “This is another important milestone in the benchmark transition process and we’re delighted to be leading our clients through this positive industry change.” 

Last month, new data from the UK’s Investment Association suggested that asset managers have upped efforts in the switch from the Libor benchmark to alternative reference rates. A poll of Investment Association member firms showed that 70% had reduced their exposure to Libor throughout last year.

“Clearing the first USD SOFR swaps at Eurex Clearing demonstrates our commitment to the development of an alternative European based liquidity pool,” added head of FICC markets at LBBW, Dr. Thilo Roßberg. 

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