IBOR Transition Update (Sept 2023)

IBOR Transition Update (Sept 2023)

James Eves

30 years: Equity capital markets

In this video, James examines the successful global transition from LIBOR to new Risk-Free Rates (RFRs) across various currencies, highlighting key shifts like SARON in Swiss Francs and the complexities of the US Dollar LIBOR moving to SOFR. He also discusses Sterling's transition using 'Synthetic sterling LIBOR,' extensions granted by the Financial Conduct Authority, and the future of other IBORs like Euribor and CDOR.

In this video, James examines the successful global transition from LIBOR to new Risk-Free Rates (RFRs) across various currencies, highlighting key shifts like SARON in Swiss Francs and the complexities of the US Dollar LIBOR moving to SOFR. He also discusses Sterling's transition using 'Synthetic sterling LIBOR,' extensions granted by the Financial Conduct Authority, and the future of other IBORs like Euribor and CDOR.

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IBOR Transition Update (Sept 2023)

11 mins 5 secs

Overview

The end of LIBOR was largely successful after six years of preparation. This transition involved replacing 35 LIBOR rates across five currencies with new, more transparent Risk-Free Rates (RFRs) like SARON, SONIA, and SOFR. Key transitions include Swiss francs moving to SARON, Sterling to SONIA with temporary synthetic LIBOR, and US Dollar LIBOR to SOFR, with varied regional adaptations and legal frameworks. Despite minor disruptions, this shift marks a significant change in financial benchmarks, moving away from bank credit risk-inclusive rates to more stable, transparent alternatives, though debates over perfect replacements continue.

Key learning objectives:

  • Understand how well the various LIBORs transitioned to their new risk-free rates

  • Understand how well the US transitioned to SOFR

  • Understand the global implications of the US transitioning to SOFR

  • Understand the future of Euribor as well as other IBORs

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Summary
How well did the transition from LIBOR go?
Swiss Francs: The transition was smoothest in Swiss francs. Swiss franc LIBOR ceased at the end of December 2021, seamlessly replaced by SARON (Swiss Average Rate Over Night) without significant reliance on other variants.

Euro LIBOR: Euro LIBOR also concluded at the end of 2021. However, its impact was lesser compared to Euribor, which continues to be used.

Sterling: Sterling's transition from LIBOR to SONIA (Sterling Overnight Index Average) also concluded at the end of December 2021. The Financial Conduct Authority (FCA) allowed the use of 'Synthetic sterling LIBOR' for certain tenors until March 2023, and for 3-month LIBOR, this was further extended to March 2024. Synthetic LIBOR, derived from the derivatives market for the new RFR, closely resembled LIBOR as a forward-looking rate but was restricted to existing instruments only.

Japanese Yen: Euroyen LIBOR concluded at the end of 2021, with synthetic yen LIBOR introduced for 1 year, but only until the end of 2022.

US Dollar LIBOR: The most complex transition was for the US Dollar LIBOR, which concluded at the end of June 2023. The shift to alternative rates varied depending on geography, legal framework, and financial instruments, leading to a range of alternatives and much debate.

How was the transition to SOFR in the US?
The transition to SOFR (Secured Overnight Financing Rate) in the United States was a significant and complex undertaking. It was driven by the need to move away from the panel-based dollar LIBOR, which concluded at the end of June 2023. The transition was facilitated by the Adjustable Interest Rate (LIBOR) Act, which provided legal safe harbour for instruments shifting from LIBOR to SOFR. The Alternative Reference Rates Committee (ARRC) recommended SOFR, initially advocating for daily SOFR to be compounded or averaged over an interest period.

Despite this, the ARRC also suggested that new issues should include a fallback to TERM SOFR if available. TERM SOFR, being a forward-looking rate like LIBOR, was considered more user-friendly but depended on a robust daily SOFR market. This led to a tug of war between using daily SOFR and TERM SOFR, with the derivatives market largely transitioning to daily SOFR, while the loan market and most outstanding bonds that used LIBOR moved to TERM SOFR. This debate over TERM versus daily SOFR highlights the complexities in achieving a balance between a rate that mimics LIBOR's forward-looking aspect and one that is grounded in actual transactions.

What are the global implications of the US transitioning to SOFR?
The US's shift to SOFR impacts global markets using US Dollar LIBOR. The UK's FCA extended synthetic Dollar LIBOR until September 2024, delaying the need for many international loans and bonds to switch to SOFR. This interim period covers the maturity of several instruments, while others can renegotiate terms or seek consent for changes. However, "tough legacy" bonds, especially pre-2018 issues without fallbacks, face challenges. Their typical solution is using the last LIBOR rate until maturity. For long-dated bonds, issuers negotiate with investors, sometimes opting to call the bonds despite additional costs, highlighting the nuanced global repercussions of the US transition.

What is happening with other ‘IBORs’ that were not ‘London’ rates?
Other IBORs that were not based in London are also undergoing changes. Euribor, for instance, remains operational with ESTER as its recommended fallback. The Canadian Dollar Offered Rate (CDOR) is set to be replaced by CORRA by June 2024, and Singapore's SOR is transitioning to SORA by the end of 2024. In Australia, a dual-rate approach is being promoted, maintaining the Bank Bill Swap Rate (BBSW) alongside the Australian Dollar Overnight Index Average (AONIA), highlighting diverse regional responses to the global shift away from traditional IBORs.

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James Eves

James Eves

Career banker with over 25 years working in investment banking. James has worked in many aspects of banking including equity capital markets, origination, IPOs and hybrid capital.

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