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USD LIBOR news gives market indigestion after Thanksgiving

Any still dozing after too much turkey during Thanksgiving were given a jolt yesterday (30 November) with the apparent news that USD LIBOR[1] would carry on until 30 June 2023. 

No. Or at least that’s not the whole story...

That’s a year and a half later than current expectations for GBP LIBOR. In You wait for ages... we noted USD’s omission from the previous ICE announcement on GBP, but we weren’t expecting quite such a delay.

BUT all is not quite as it seems. Both the Fed and FCA made accompanying statements to the ICE one, and this is what you really need to focus on. Basically the Fed (+ FDIC & OCC) said they do not expect any new trading in USD LIBOR after 31 December 2021. The Fed was emphatic that they believe “entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and [we] will examine bank practices accordingly”.

The FCA[3] welcomed the US measures “limiting new use of US$ LIBOR after end-2021”. And the ARRC[4] applauded the “major milestone in transition from USD LIBOR”. So the authorities are very much emphasising the point about no trading LIBOR after December 2021, not the final $ cessation date in June 2023.

So what are the key takeaways?

 The 2023 date is about managing down ‘tough legacy’ exposure, not extending the life of USD LIBOR

  • this shouldn’t come as a surprise...Randal Quarles in his testimony to the US Senate Banking Committee in early November said “We need to consider a mechanism that would allow so-called legacy contracts, the great bulk of them, to mature on their existing basis without having to be renegotiated and shifted to a new rate without allowing the continuation of the writing of new contracts.”
  • the measures across GBP & USD are actually quite aligned...same timing for ICE consultations (end Jan 21), same timing to stop referencing LIBOR in new trades (end 2021)...and we think likely same timing for announcement of ‘X’, the fixing of the spread adjustment (Feb-Mar 21)
  • there is no impact on the GBP LIBOR timelines

The point about when ‘X’ will be announced is causing some discussion in the market. We don’t see why the delay on the final cessation of USD LIBOR should mean that the announcement date will be any later than for GBP. The spread can still be snapped early 2021 (the 5 year median lookback), there will just be a longer time until it is triggered in fallbacks.

So it’s still end 2021

The main point we think is most worth calling out is the powerful joint supervisory message that there will be no new LIBOR business from the end of 2021. 

This means that firms need to be ready, banks need to be ready, markets need to think that a Feb next year announcement snap is likely and maybe the June 2023 date is really just focusing on another way of delivering the tough legacy solution.

Yes the US market needs to get going, building liquidity, creating a term rate for the few not the many, the legislative solution needs more pace and more importantly the wider community need to wake up from a heady Thanksgiving to the fact the things are moving faster than their head may have felt ready for. 

[1] LIBOR - London Interbank Offered Rate

[2] ICE - Intercontinental Exchange, Inc.

[3] FCA - Financial Conduct Authority

[4] ARRC - Alternative Reference Rates Committee

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