Will LIBOR Retirement Be Delayed?
ICE plans to extend the transition away from dollar LIBOR till mid-2023, but regulators are still encouraging banks to move ASAP.
The administrator of the pivotal dollar London interbank offered rate (LIBOR) benchmarks is looking to push back, by 18 months, the timeline for abandoning some of the discredited interest-rate settings.
The ICE Benchmark Administration Ltd. (IBA) said it is consulting on plans to extend the retirement date for 3-, 6- and 12-month LIBOR on dollars until late June 2023, although regulators are still pushing for banks to move away from the benchmarks as soon as they can. The announcement, which also paves the way for an extension on the overnight benchmark, follows fierce speculation that such a move might be on its way and eurodollar futures trading volumes jumped in its wake.
The move reflects flexibility by those overseeing dollar LIBOR, said Anne Beaumont, partner at Friedman Kaplan Seiler & Adelman. “They really want everyone to stop using LIBOR, but they can’t make them,” she said. “They don’t want to be so doctrinaire about it that they blow up the financial system. It reveals them to be pragmatists.”
LIBOR is part of the bedrock of the global financial system and still underpins hundreds of trillions of dollars in financial assets even as regulators have made a concerted effort to wind it down by the end of 2021. The Federal Reserve and others have been vocal in pushing market participants toward alternatives in the wake of major LIBOR manipulation scandals and the drying up of trading data used to inform the rates.
Yet that drive has been stymied this year by the fallout from the coronavirus pandemic, with fears mounting that markets weren’t ready for the seismic shift.
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The potential delay in the most-used dollar LIBOR tenors—most notably, the three-month benchmark—is a concession to market concerns, but regulators remain adamant that dollar LIBOR shouldn’t be used for new contracts after 2021. And they have warned banks that they face scrutiny if they do, noting it would create potential risks to “safety and soundness,” according to a statement from the Board of Governors of the U.S. Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Waiting until June 2023 to end many key LIBOR tenors should allow for the majority of contracts tied to dollar LIBOR to expire naturally and avoid having to shift them to a new benchmark, a senior Fed official said.
Regulators are encouraging banks to transition away from dollar LIBOR “as soon as practicable,” U.S. regulators said in their statement.
“This should reduce the probability of a disruption for legacy LIBOR contracts that may not have been able to transition to new risk-free rates,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York. “In effect, the regulators continue to encourage the transition but allow some reprieve for legacy contracts.”
For Scott Buchta, head of fixed-income strategy at Brean Capital, the key takeaway is that regulators will have more time to facilitate an orderly transition in cash instruments, such as securities and loans.
The announcement is not one of the hotly anticipated cessation events that can set off changes within LIBOR-linked contracts, according to the International Swaps and Derivatives Association (ISDA). The U.K. Financial Conduct Authority (FCA) said it would coordinate with U.S. authorities and other jurisdictions to consider whether to limit the new use of dollar LIBOR.
The IBA will consult on plans to cease publishing one-week and two-month LIBOR by the end of 2021—in line with the original timeline, meaning little will change for those maturities. The IBA has also already announced that it will consult on its intention to cease at the end of 2021 the publication of all LIBOR settings for the British pound, the euro, the Swiss franc, and the yen.
The market for eurodollar futures contracts related to the end-of-2021 transition period has seen elevated volumes over the past couple of weeks, and Monday’s announcement prompted another burst of activity.
Volumes in March 2022 eurodollar futures surpassed previous daily highs, with a rally of more than 5 basis points seen across contracts maturing from March to September 2022 as prices adjusted to being referenced against a LIBOR rate rather than a fallback rate.
Action was consistent with traders covering positions that stood to benefit from a hard stop to three-month dollar LIBOR at the end of 2021. The move also supported Treasuries across the shorter end of the yield curve, with maturities out to five years outperforming.
—With assistance from Silla Brush.
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