Transition in the US market
As discussed in our previous communication, the FCA has announced that USD LIBOR will continue to be published until 30 June 2023 for all tenors other than 1-week and 2-month.
US regulators have stated that "extending the publication of certain USD LIBOR tenors until June 30, 2023 would allow most legacy USD LIBOR contracts to mature before LIBOR experiences disruptions”. The US regulators also stated that the extension of these quotes will only be available for legacy contracts. Specifically that “entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks…Therefore, the agencies encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021”.
Subsequently, the US Federal Reserve issued a letter recommending that examiners consider other supervisory actions if a supervised institution is not ready to stop issuing LIBOR-referencing contracts by 31 December 2021.
Term rates and other LIBOR alternatives
In the USD market, a number of LIBOR alternatives that are forward looking rates and that encompass a credit component have been developed. For example, Ameribor and BSBY are reference rates that function similarly to LIBOR, and may be a suitable alternative in some cases. This means that in the USD market, you may have a choice of LIBOR alternatives that is not available in other markets. However, some regulators have voiced concerns that these alternatives may have some of the same flaws as LIBOR.
To date, the ARRC has not formally recommended a SOFR term rate. However, with the CFTC recommending, as market best practice, that interdealer brokers switch USD linear trading conventions from USD LIBOR to SOFR on 26 July 2021, the ARRC expects that it will be in a position to recommend a SOFR term rate shortly thereafter. The ARRC plans to recommend ‘best practices’ for the use of the term rate in the near future.
In contrast, the RFRWG, the Bank of England, and the FCA have made clear that they anticipate that the large majority of Sterling markets will be based on SONIA compounded in arrears, to provide the most robust foundation for the overall market structure.
Things you should know
As nothing in this document should be taken to be advice, we encourage you to seek independent advice on these matters and you should reach your own conclusions and decisions, in consultation with your own advisors. The information in this document might change and we are not undertaking to update it.
This information is published solely for information purposes. It is not to be construed as a solicitation, an offer or recommendation by the Commonwealth Bank of Australia (CommBank). As this information has been prepared without considering your objectives, financial situation or needs, you should before acting on the information, consider its appropriateness to your circumstances. It must not be relied upon as investment research. CommBank believes that the information is correct and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its compilation, but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made. Commonwealth Bank of Australia ABN 48 123 123 124. AFSL and Australian Credit Licence 234945.