Don’t risk progress made with LIBOR, says BoE governor
12 May 2021 UK
Image: Andrew Bailey
The transition from LIBOR was always going to be challenging, but Andrew Bailey, governor of the Bank of England, says to those looking for an easy descent by substituting LIBOR for credit sensitive rates, “risk much of the good progress that has been made”.
In his speech at the Alternative Reference Rates Committee (ARRC) SOFR Symposium, Bailey explained that although these rates may offer convenience as a short-term substitution, they present a range of complex longer term risks.
“While they may remove the reliance on expert judgement, they veneer over the fundamental challenges of thin and incomplete markets through the extrapolation of data,” Bailey commented.
The ability of such rates to maintain representativeness through periods of stress, Bailey suggested: “Remains a challenge to which we have not seen adequate answers.”
In March, the Financial Conduct Authority (FCA) confirmed that all the London Interbank Offered Rate (LIBOR) settings will either cease to be provided by any administrator or no longer be representative immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the one-week and two-month US dollar settings.
LIBOR settings will cease immediately after 30 June 2023, in the case of the remaining US dollar settings.
Over the years, the Bank of England and the FCA have explained the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it.
Both have worked with market participants and regulatory authorities around the world to ensure that robust alternatives to LIBOR are available and that existing contracts can be transitioned onto these alternatives to safeguard financial stability and market integrity.
In April, Tal Reback, principal at KKR, and Matthew Hays, global head of asset finance and securitisation practice at Dechert, hosted a discussion where they shared concerns around the amount of work yet to be carried out with regards to the LIBOR transition.
Discussing concerns around the transition process and whether the market is going to be ready, Reback said: “I think there's a lot of work to do. You know, if we all do our part now going forward and are diligent about how we paper deals, we're thinking about how this change affects organisations, borrowers start to understand what it means for them should-be lenders, and we have those dialogues.”
Reback highlighted that the market could be in a position to ensure a smooth transition, but says that would be based on everyone doing their part.
With regards to the timeline for LIBOR, Reback says: “I think the timeline is pretty set at this point. I don't think we're going to see another extension. I do think this enables market participants across the board to really move forward with execution and planning.”
According to Reback, the BTE shifted the transition from being something more theoretical or conceptual in people's minds to being really defined. She also suggested that with the US dollar going out till 30 June 2023, there's clarity.
“I think you need to be prepared to live in a non-LIBOR world by year-end, which, in my mind, net-net is kind of the same place where we were pre-extension, in terms of being prepared, understanding your fallbacks, operationalising the change, thinking about asset liability management. There's just a ton of stuff to do. And I think the market knows that now. And now we can kind of really stomp forward,” she affirms.
In his speech at the Alternative Reference Rates Committee (ARRC) SOFR Symposium, Bailey explained that although these rates may offer convenience as a short-term substitution, they present a range of complex longer term risks.
“While they may remove the reliance on expert judgement, they veneer over the fundamental challenges of thin and incomplete markets through the extrapolation of data,” Bailey commented.
The ability of such rates to maintain representativeness through periods of stress, Bailey suggested: “Remains a challenge to which we have not seen adequate answers.”
In March, the Financial Conduct Authority (FCA) confirmed that all the London Interbank Offered Rate (LIBOR) settings will either cease to be provided by any administrator or no longer be representative immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the one-week and two-month US dollar settings.
LIBOR settings will cease immediately after 30 June 2023, in the case of the remaining US dollar settings.
Over the years, the Bank of England and the FCA have explained the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it.
Both have worked with market participants and regulatory authorities around the world to ensure that robust alternatives to LIBOR are available and that existing contracts can be transitioned onto these alternatives to safeguard financial stability and market integrity.
In April, Tal Reback, principal at KKR, and Matthew Hays, global head of asset finance and securitisation practice at Dechert, hosted a discussion where they shared concerns around the amount of work yet to be carried out with regards to the LIBOR transition.
Discussing concerns around the transition process and whether the market is going to be ready, Reback said: “I think there's a lot of work to do. You know, if we all do our part now going forward and are diligent about how we paper deals, we're thinking about how this change affects organisations, borrowers start to understand what it means for them should-be lenders, and we have those dialogues.”
Reback highlighted that the market could be in a position to ensure a smooth transition, but says that would be based on everyone doing their part.
With regards to the timeline for LIBOR, Reback says: “I think the timeline is pretty set at this point. I don't think we're going to see another extension. I do think this enables market participants across the board to really move forward with execution and planning.”
According to Reback, the BTE shifted the transition from being something more theoretical or conceptual in people's minds to being really defined. She also suggested that with the US dollar going out till 30 June 2023, there's clarity.
“I think you need to be prepared to live in a non-LIBOR world by year-end, which, in my mind, net-net is kind of the same place where we were pre-extension, in terms of being prepared, understanding your fallbacks, operationalising the change, thinking about asset liability management. There's just a ton of stuff to do. And I think the market knows that now. And now we can kind of really stomp forward,” she affirms.
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