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US$30 Trillion Swaps Enigma Awaits LIBOR Transition

US$30 Trillion Swaps Enigma Awaits LIBOR Transition

(7 December 2021 – Global) US$30 trillion in LIBOR linked interest rate swaps are switching to alternative rates such as SOFR on 10 December, commencing another major step in regulators’ lengthy wind down of the London Interbank Overnight Rate (LIBOR).

On March 5, 2021 the Financial Conduct Authority (FCA) announced the future cessation or non-representativeness of the 35 LIBOR benchmark settings. Interdealer trading conventions changed from LIBOR to SOFR for USD linear interest rate swaps on July 26. This completed Phase 1 of the SOFR First initiative. The completion of the conventions shift along with continued growth in the SOFR cash and derivatives market led the Alternative Reference Rates Committee (ARRC) to formally recommend the CME’s forward-looking SOFR term rates.

The Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency has previously issued supervisory guidance encouraging 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.

“For several decades, London Inter-bank Offered Rates (LIBOR) have been a widely used benchmark for global interest rates, underpinning derivatives, loans, bonds and other financial products. The UK Financial Conduct Authority (FCA) estimated in January 2021 that LIBOR underpinned around US$260 trillion of derivatives contracts globally.[1] However, LIBOR has notable deficiencies as a benchmark. Given this, regulators globally determined that LIBOR cannot be relied on beyond 2021 and markets need to transition to more robust and reliable market-determined interest rate benchmarks” the Reserve Bank of Australia outlined in a statement as part of its Financial Stability Review release for April 2021.

“Given these sizeable exposures, financial regulators strongly encourage and support the transition away from LIBOR. In the remaining months of this year, firms should work intensively on ensuring a smooth transition away from LIBOR by the end of 2021”

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