“There is time if you start now”: regulators push greater urgency on benchmark transition
The Bank of England and Monetary Authority of Singapore are among the global regulators appealing for urgency with next year’s transition away from the Ibor benchmarks – even as nearly two thirds of firms at a recent event dedicated to the transition admitted they still do not have plans in place.
In an 18 September speech at a webinar hosted by the Bank of England’s working group for the transition, its executive director for markets Andrew Hauser compared Libor to London’s Hammersmith Bridge, a 19th century construction over the river Thames.
“To the naked eye, it seems in the prime of health – beautiful to look at, safe as houses. Well, no actually, it’s completely unsafe,” he said. Hauser described the “big and growing cracks” in the bridge’s pedestals. “Sooner or later, if nothing is done, someone driving over it is going to fall headfirst into the Thames.”
Like the bridge, Libor is an essential, but crumbling, piece of infrastructure. “It’s been around since the 1960s. Every company has got to know it inside out, and built it into their daily routines,” he said. “And it’s popular – very popular – almost US$400 trillion of financial instruments, across every part of the global economy, are tied to Libor in some way. But just like that bridge, it isn’t safe.”
The kind of term unsecured lending between banks that used to underpin Libor “has virtually disappeared”, Hauser said, leaving “little more than uninformed guesswork” in its place. “Sooner or later, a benchmark based on such shaky foundations will collapse.”
Hauser said firms that hadn’t done so should begin their transition plans to the “new bridge” the Bank had constructed for sterling borrowers, the Sterling Overnight Index Average (Sonia), based on around £60 billion (US$76.6 billion) of actual daily transactions. “There is time if you start now,” he said.
Although firms might be discouraged from transitioning amid the economic uncertainty of the covid-19 pandemic, Hauser said that crisis had actually showed up the Libor benchmark’s shortcomings even further, as its rates rose even as regulators cut their official interest rates, at a time when the transactions underpinning those measures were near-zero.
There are already some passengers on the new bridge, he noted, with UK institutions already using it as the basis for some loans. One company, pharmaceutical producer GlaxoSmithKline, has even taken out a multicurrency refinanced credit facility linked both to Sonia and its US equivalent Sofr.
“It really is time to get off that failing bridge before it closes for good,” he urged.
“This is a lot more complex than you think”
But at a 17 September webinar hosted by consultancy firm Duff & Phelps, 65% of attendees said they had not completed their Libor transition planning, and one in five said they had not even begun thinking about the process.
The survey comprised 108 responses, including a fairly even spread of private equity firms, corporate entities, service providers and hedge funds.
It also found that nearly half the participants surveyed had assigned responsibility for the transition to their chief financial officers, and that most said the covid-19 pandemic had little to no impact on their transition planning.
Despite speculation that the pandemic might delay the end-2021 deadline for the transition, Duff & Phelps managing director Marcus Morton said the deadline does not seem likely to move. “The regulators have said many, many times they do not want to move that deadline. People need to be planning with that deadline in mind”.
Fellow managing director Charles Parekh said the transition would inevitably see winners and losers – which would in turn spawn litigation. He said counsel, and litigation support firms such as his own, would need to determine those losses against a “but-for” world.
“There’s lots of financial turmoil going on right now and certainly courts are not going to view every dollar lost as due to a bad act as part of the Libor transition,” he said. “What is due to bad act, and what is due to bad luck?”
Morton also warned that “the jury’s still out” on how the transition would affect financial statement disclosures. “Given that some of the cash products and banking products are still in relatively early days in terms of how the transition’s going to work, it’s something people are still looking at, waiting to see exactly what happens,” he said. “But the fact there’s going to be some value changes caused by the transition does say there should be some accounting impact.”
“This is a lot more complex than you think – really understanding where the contracts are and what they say is not as easy as you think,” said managing partner Rich Vestuto. “You can’t assess the risk if you don’t know the exposure, because you don’t know which legal agreements are referencing Libor.”
“Knowing what you own is really where is starts,” said managing director Jennifer Press, who chaired the webinar. “Understanding what your exposures are is critical to really getting start on the Libor transition project.”
MAS threatens “more intensive” supervision for slow transitions
The Monetary Authority of Singapore (MAS) has also been urging market participants to keep pace with their Ibor transitions, with deputy managing director Jacqueline Loh saying the regulator would be “stepping up” its supervision, in a speech at a 9 September roundtable on the transition organised by the Association of Banks in Singapore (ABS).
Singapore has used the Singapore Interbank Offered Rate (Sibor) and Singapore dollar Swap Offer Rate (Sor) benchmarks for decades, and the ABS has recommended a transition to the Singapore Overnight Rate Average (Sora), which will be managed by MAS and which like Sonia is underpinned by actual overnight transactions.
Loh said banks that did not keep pace with timelines for the transition “can expect to have more intensive supervisory engagement at the senior management level”. She promised forthcoming guidance by October with specific deadlines for ceasing use of Sor in financial products.
“With the end-2021 deadline approaching, it is not prudent for banks and end-customers to enter into new Sor contracts that mature beyond end-2021,” she warned. “Doing so only compounds the problem that banks and customers will eventually have to deal with.”
She said S$1.4 trillion (US$1.02 trillion) worth of outstanding Singapore dollar derivatives contracts would need to be transitioned by end-2021, as well as contracts in cash markets worth around S$95 billion (US$70 billion).
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