The LIBOR interest rate benchmark will be phased out by the end of 2021. Where can banks and borrowers get the data and insight they need for managing the LIBOR transition to alternative risk-free reference rates?
- The phasing out of LIBOR by the end of 2021 and replacement by alternative risk-free rates will have far-reaching consequences for banks and borrowers.
- Firms should actively develop a transition plan, remain abreast of ongoing developments, and analyze the impact of the LIBOR transition on their operations.
- Refinitiv Eikon incorporates an Interest Rate Benchmark Reform page, with data and insights to help market participants with managing the LIBOR transition to risk-free rates.
LIBOR (the London Interbank Offered Rate) was launched by the British Bankers’ Association in 1986 and underpins about US$300 trillion of financial contracts, including derivatives, bonds and loans.
Changes in the underlying funding models for banks significantly reduced liquidity in the interbank lending market and exposed the vulnerabilities in LIBOR calculation. This facilitated the manipulation of the benchmark, which came to light in 2012.
The Financial Stability Board also issued specific recommendations in 2014 which aimed to introduce measures to strengthen existing benchmarks and other potential reference rates based on interbank markets, as well as developing alternative nearly risk-free reference rates.
As a result, LIBOR is expected to be phased out by the end of 2021, with far-reaching consequences for myriad market players.
Alternative risk-free rates
According to the UK’s Financial Conduct Authority (FCA), “it has become increasingly apparent that the absence of active underlying markets and the scarcity of term unsecured deposit transactions [has] raised serious questions about the future sustainability of the LIBOR benchmarks.”
The FCA further cautions that “all banks and other market participants need to have removed dependencies on LIBOR by this date if they are to avoid disruption when publication of LIBOR ceases.”
LIBOR will need to be replaced with alternative risk-free rates (RFRs). Two examples are the Secured Overnight Financing Rate (SOFR) — a rate that banks use to price U.S. dollar-denominated derivatives and loans — and the Sterling Overnight Indexed Average (SONIA), the overnight interest rate paid by banks for unsecured transactions in the British sterling market.
Preparing for the LIBOR transition
With a little over two years to go before LIBOR is expected to end, financial service firms need to ensure that they remain abreast of and fully understand ongoing developments.
Furthermore, they need to be able to analyze the impact of the transition on their operations.
The Working Group on Sterling Risk-Free Reference Rates was set up in 2015 “to implement the Financial Stability Board’s recommendation to develop alternative RFRs”. The group considers SONIA to be its preferred alternative to LIBOR.
The Working Group recommends that firms implement a three-pronged approach to the LIBOR transition, as follows:
- Fully understand exposures and risks as they relate to LIBOR
- Seek to reduce reliance on LIBOR; and
- Engage in transition efforts.
In reality, the complexity of the transition is likely to lead to a range of challenges.
These include, but are not limited to, how to: price contracts; communicate the changes to customers; adopt fall-back language; adjust IT processes; adopt new benchmarks in risk management procedures; ensure that legacy exposure is minimized; and manage potential risk.
Tools for managing the LIBOR transition
To help firms navigate these and other challenges associated with the LIBOR transition, Eikon’s Interest Rate Benchmark Reform page has been developed to deliver data and insights to help market participants monitor developments, including the transition to RFRs.
Eikon’s Interest Rate Benchmark Reform page also provides a dedicated section to cover EU jurisdictions and the recently launched Euro Short Term Rate — €STR and the re-calibrated EONIA, that ECB published for the first time on 2 October 2019.
With over 25 years’ experience designing, calculating, governing, and publishing financial benchmarks that lie at the heart of the global financial system, Eikon is best-placed to offer critical LIBOR transition data, including current and breaking benchmark news.
Eikon has been built on innovative, open platform technology, and delivers trusted news, data and analytics, filtered to exact requirements. The platform also connects users to markets and professional networks.
Eikon’s unrivalled breadth and depth of data is collated from a range of trusted sources, and is available via desktop, over the web, and on mobile devices. Moreover, the mobile experience automatically synchronizes with the desktop experience.
As the move away from LIBOR begins to gather momentum, being able to access robust, trusted data, insights and tools will become an invaluable necessity for a smooth and effective transition.
Eikon’s ever-growing suite of innovation tools ensures that we remain a catalyst for innovation in the global financial services industry. Innovating around the LIBOR transition is no exception.