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JUST DROP out of the key. Yes, it means breaking a complicated but rewarding long-term relationship: derivatives, loans and bonds worth $ 240 million LIBORthe interbank rate offered in London; $ 200trn-odd are in dollars only. But this key rate is about to die. Almost two years ago, Andrew Bailey, director of the Financial Conduct Authority of Great Britain (FCA) LIBORThe regulator has indeed announced that it will expire at the end of 2021. In recent days, US and British control authorities have again urged banks: get on the bus.
Few years ago LIBOR undermined by a scandal of tariff fraud that brought to light evils that could in any case prove fatal. In particular, this is the rate at which banks can borrow from one to the other, up to one year, in dollars, pounds sterling, Swiss francs, yen and euros. . It is calculated from daily panel submissions of 11 to 16 banks. But banks are now barely exploiting interbank markets. On June 5, Sir Dave Ramsden, Deputy Governor of the Bank of England, said that in the first quarter of 2019, on average, only nine deposits amounted to £ 81 million ( $ 105 million) per day. LIBOR.
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Regulators want the markets to move to new benchmarks based on day-to-day rates and a much richer transaction series. Alternative US benchmark rate (ARRC), a group of market participants convened by the US Federal Reserve, opted for the guaranteed overnight rate (Sofr), derived from daily transactions valued at $ 1.1 billion, primarily cash repurchase transactions. British supervisors promote the Sterling Overnight Index Average (SONIA), an unsecured rate dating back to 1997 but reformed last year. Its average daily base is 40 billion pounds sterling.
The change began. But as a new report from the consulting firm Oliver Wyman says, there is still much to be done, especially in the dollar markets, where Sofr must start from scratch and spot markets (for example, business loans and mortgages). So SONIAThe share of sterling swaps is 40%, but liquidity is limited in the long term; Sofr represents less than 0.5% of the dollar LIBOR exchange volumes. In the dollar futures market, nearly $ 1 billion worth of Sofr contracts were liquidated in March, but this represents only 1% of LIBOR score. In the spot market SONIA Floating rate bonds accounted for over three-quarters of the total in the first quarter. Around 80 Sofr dollar bonds were issued, but mainly by government agencies.
Virtually no loans related to the new rates have been contracted. Oliver Wyman explains in cash markets:LIBORContracts based on contracts are still concluded at a slightly reduced rate starting in 2017. "Little has been done to move existing contracts, many of which continue beyond 2021 LIBOR.
Several factors have slowed progress. One is the lack of adequate "fallback" conditions in contracts, indicating what rate should apply when LIBOR disappears. Existing contracts may indicate that if LIBOR is not published, the rate of the previous day should be used, but it is only a temporary solution. Using LIBORThe last value could mean significant gains and losses; but could thus move to a new landmark. A second factor is that day-to-day rates do not have the term structure – one, three, six and twelve month rates – intrinsic to LIBOR. It is not difficult to calculate retrospective averages, but it is a big change from LIBOR. Borrowers are used to setting interest payments in advance, rather than waiting until the end of the period to know the exact rate they are facing.
Regulators say it's not necessary to be shy. Recently ARRC new proposed replacement wording; Anyway, Randal Quarles, the deputy chairman of the Fed for supervision, told a ARRC conference in New York on June 3, the "easiest way …" is simply to stop using LIBOR". As familiar as the old tariff is, it will disappear. Stick to it, and "history may not see this decision with kindness." Although forward forward rates are not ready by the end of 2021, David Bowman, a Fed official, urged banks not to wait. Same Mr. Bailey in London two days later.
Banks point to a third problem: unlike LIBOR, Sofr, based on repurchase agreements, does not reflect their financing costs. In times of stress Sofr could fall as these costs increase. Simply adding a fixed spread will make banks vulnerable if they are too thin and customers are upset if they are too big. (These difficulties help to explain why European regulators have prolonged the lives of EURIBOR, base of many mortgages in the euro zone)
ICE Benchmark Administration, which calculates LIBOR, think that the data on transactions on international bank bonds could be used to add a gap to a Sofryield curve based on the resulting index would do the same job as the dollar LIBOR while using the prime rate of the Fed. In addition, the American Financial Exchange, an interbank lending market with 150 members (and indirectly serving 1,000 banks), has AMERIBOR, a reference rate for regional and community banks. Until now, a couple has used it to fix the price of loans. He plans to launch AMERIBOR future this summer.
To expedite the transfer, Oliver Wyman recommends that regulators remove the disincentives, such as margin requirements and taxes, to LIBORderivatives based; and get an idea of credit-sensitive benchmarks. Clearing houses should act more quickly to base their rules on Sofrwhich would favor the demand for derivatives. And the banks should stop procrastinating. Free yourself.◼
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