Regulation

The news of my death has been greatly exaggerated…LIBOR ending before 2021?

On 23 June we saw two major headlines get reviewed in the market; Treasury gives FCA1 more power and an article in the press that "LIBOR2 death notice could be served this year - FCA".

25 Jun 2020 . 3 min read

We think many were confused by the latter and here's why. Tuesday (23 June) was certainly a busy day on the LIBOR front and off the back of the article we were not only inundated with questions as to what this statement meant, but we also witnessed the market start to move as it assumed the fallback level could be set ahead of 2021.

The Market

There has always been much debate on the announcement date of LIBOR ending and the cessation date.

It’s this part that has got the market excited:

It is therefore entirely plausible that you could see announcements about discontinuation in the final week of this year

FCA

If one were to interpret that announcement as triggering the calculation of the ISDA³ fallback spread and run the numbers as of say 15 December 2020 the basis that is impacted the most is 6s3s⁴ where it is significantly wider than an early 2022 calculation would imply (around 5 to 7 bps⁵ difference between them on a rough calculation). This basis has widened a couple of bps since the article was published.

Some digging

This isn't the first time an announcement or speech like this has been made, in fact the FCA covered the same ground in January 2019. One extract worth highlighting:

"One scenario is that Intercontinental Exchange (ICE) Benchmark Administration, or IBA, ’the administrator‘ of LIBOR, announces in advance that it will cease the publication of particular currency-tenor combinations. Such a process has been followed before. For example, for the now discontinued LIBOR reference rates once published for various other currencies. By way of another example, publication of the 2-month Yen Tokyo Interbank Offered Rate (TIBOR) rate will cease on 1 April this year, having been announced in February 2017. But cessation is easier for currency-tenor pairs that are little used. For the most commonly-used LIBOR rates, there may be loud demands to continue publication from those who were slow, and in some cases, unable, to transition away from LIBOR in their outstanding contracts. That demand for continued publication may be increasingly difficult to satisfy after 2021 as the number of panel banks willing to contribute to determining the rate declines. With every bank that leaves the LIBOR panels, the problem of capturing enough transactions to underpin robust calculation of the rate becomes more severe."

Conclusion

While many are excited that the announcement for LIBOR ending may come at the end of 2020 triggering the calculation of the 5 year adjustment, it's our view that this would only be the case for less used benchmark currencies or tenors, if at all. For the majors like GBP6 we still see pre-cessation being triggered in 2022 after the compulsion for panel banks to contribute ends. We wouldn’t be shocked to see some announcements around the “intention” to stop contributing to the index at some future time, but do not see this as enough to trigger the pre-cessation process – as they say “it’s not over until the mockingbird sings”.

In the words of Mark Twain, “the news of my death has been greatly exaggerated.” News of LIBOR’s demise this week has been somewhat premature.

1 - FCA: Financial Conduct Authority

2 - LIBOR: London Inter-Bank Offered Rate

3 - ISDA: International Swaps and Derivatives Association

4 - 6s3s: 6month LIBOR to 3month LIBOR Basis Swap

5 - bps: basis point – equivalent to 0.01%

6 - GBP: British pound/sterling

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The news of my death has been greatly exaggerated…LIBOR ending before 2021?

The Market

Some digging

Conclusion

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