The Global Transition Away From Libor: Industry and Market Sentiment

Throughout the world, the progress underlying the transition away from LIBOR on December 31st, 2021, will meet scheduled deadlines.  The broader efforts, which initiated years ago with an aggressive governance effort aided by regulatory and official sector pressure in almost all geographies have been effective. Our interviews from April through late June confirmed substantive progress to meet milestones long in place for risk assessments, contract review and remediation, necessary infrastructure and system investments, and the necessary transition away from LIBOR-based contracts to new reference rates. The US Dollar LIBOR transition received a reprieve in the finalizing of delays for certain LIBOR Tenors for legacy agreements to roll off until June 2023 which has provided essential operationalizing assistance for many firms.

The US Dollar LIBOR Transition from LIBOR to SOFR and other Reference Rate Alternatives has categorically not moved at the pace necessary for success. With less than six months to go in the transition, our participants agreed that the volume of LIBOR contracts on the derivatives side was well below liquidity requirements and on the cash and lending side, markedly smaller.  Regulators have initiated a “SOFR First” effort in June (mirroring a ‘SONIA First’ effort in the UK earlier) to provide structural support for the transfer. In April the ARRC gave impetus to ‘Term SOFR’ and selected the CME as the vendor to push this effort forward. Additional initiatives have been undertaken at multiple regulatory bodies and the ARRC (Alternative Reference Rate Committee) to stimulate growth in the interdealer derivatives market and hopefully also grow commensurately in Q3 and Q4 liquidity in the lending market which is critical for this effort to be meaningful and effective.

The past several months have seen a long-anticipated effort by multiple providers aligned with critical lending institutions (both G-SIBS and Regional Banks) to introduce an alternative to SOFR for Credit Sensitive Rates. Our paper addresses the issues associated with the purpose of these alternatives and the necessity laid out by the proponents for their use. To date, there has yet to be a meaningful indication that these products will be purchased by the corporate and institutional community but the interest is clearly broad for initial and ongoing discussions.  Providers have included Bloomberg (BSBY Index), AMERIBOR, IHS Markit, and AXI who have moved aggressively to get needed recognition and approval for market acceptance. To date, the ARRC and regulatory bodies have not provided any support for these efforts reflecting their current strong preference for SOFR as their preferred LIBOR reference rate replacement.