What's happening with LIBOR?
The London Interbank Offered Rate (LIBOR) is a measure of the average rate at which banks are willing to borrow wholesale unsecured funds. It is administered by ICE Benchmark Administration and supervised by the Financial Conduct Authority (FCA).
It is calculated based on submissions from selected panel banks and is published in 5 currencies and a range of tenors. It is a major interest rate benchmark which is referenced in a broad range of financial contracts including, derivatives, bonds and loans.
The underlying markets that LIBOR measures are not liquid. LIBOR has been used to hedge the general level of interest rates, for which it is inefficient given it includes a term bank credit component.
On Friday 5 March, the FCA confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:
- immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
- immediately after 30 June 2023, in the case of the remaining US dollar settings. The extension to US dollar LIBOR publication post 1 Jan 2021 will only apply to existing transactions.
The FCA further stated that it does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out above. Representative LIBOR rates will not, however, be available beyond the dates set out above. Publication of most of the LIBOR settings will cease immediately after these dates.
The International Swaps and Derivatives Association (ISDA) confirmed separately, that the ‘spread adjustments’ to be used in its IBOR fallbacks were fixed as a result of the FCA’s announcement, providing clarity on the future terms of the many derivative contracts which now incorporate these fallbacks.
The announcements confirm the importance of transition preparations for all users of LIBOR.
Australian regulators have also stated the importance of a timely transition away from LIBOR and the expectation that no new LIBOR-referencing contracts be entered into after 31 December 2021. The Australian Securities and Investment Commission (ASIC), Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA), support the guidance and expectations set by the FSB and the US Banking Supervisors.