Even though substantial progress has been made toward weaning the global financial system off of LIBOR, markets have undervalued the risk that a zombie version of the vital benchmark will continue on, according to JPMorgan Chase & Co. strategists.
Its overseer, the U.K. Financial Conduct Authority (FCA), said two years ago that banks won't have to submit the data used to calculate LIBOR starting in 2021. However, because there's no explicit ban on submissions, JPMorgan suspects a smaller panel of firms may keep feeding it numbers, leaving the index in a problematically undead state.
"Though average zombie LIBOR levels may not differ much from a broader panel, there is a substantial risk of much higher volatility," strategists led by Joshua Younger wrote in a Sept. 6 note subtitled "Too weird to live, too rare to die."
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