20 years: Interest rate benchmarks
In this video, John outlines how LIBOR transition will work with individual types of assets. He takes us through cash, fixed income, loans, and derivative instruments.
In this video, John outlines how LIBOR transition will work with individual types of assets. He takes us through cash, fixed income, loans, and derivative instruments.
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13 mins 52 secs
It is very likely that in the latter half of 2021 there will be regulation, guidance, protocols and other advice made available to firms with exposure to IBOR linked products. This includes cash, fixed income, loans, and derivatives instruments.
Key learning objectives:
Understand how the LIBOR transition will work with Cash and loan products around the world
Understand how the LIBOR transition will work with Fixed Income Products
Understand how LIBOR Transition will work for Derivative products
Describe non-linear derivatives
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There is explicit regulatory advice in the UK and US that market participants should not be entering into any new cash instruments that reference LIBOR as of now.
Where there is retail or commercial lending linked to LIBOR, these agreements will need to be novated to a new rate. This might be a Risk Free Rate, but we are also seeing increasing acceptance of rates that have a credit sensitivity element. Such rates include the ICE Bank Yield, the Bloomberg Short-Term Bank Yield, or BSBY, index, and SOFR add-ons, such as the SOFR Academy AXI or Across the Curve Index.
The Governor of the Bank of England has recently spoken of over 50 bonds with a value of around £40 billion actively transitioned from GBP Libor to SONIA. This was achieved by negotiation and agreement between the bond issuer and all the bondholders, and the examples so far are all of relatively small bonds by value, and whose holders are small in number.
The difficulty arises as contractual language in bonds that are linked to LIBOR or otherwise reference LIBOR often does not envisage the absence or unavailability of the rate. In many cases, there is also a requirement for all bondholders to agree unanimously to changes in the language. This is time consuming and logistically challenging in large, widely held issues.
However, regulators and central banks in the UK and US continue to ratchet up pressure on this issue. Regulators on both sides of the Atlantic have said that they expect to discuss with firms their plans to transition away from LIBOR in fixed-income products.
These are complex financial products that are not offered to retail customers or even many corporations. Nevertheless they make up a significant part of the landscape of LIBOR-linked products. The transition for these products to Risk Free Rates is not straightforward. Swaptions, caps and floors and other non-linear instruments that reference Risk Free rates are available.
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