LIBOR Transition Plans and the Impact of COVID-19

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Although regulators have kept the target end-date intact for the LIBOR transition, they have acknowledged that due to the headwinds linked to COVID-19, a few segments of the UK market would not be able to meet some of the interim transition milestones and that all timelines would be kept under review. “The central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed,” stated the joint statement on the “Impact of the coronavirus on firms’ LIBOR transition plans” by the FCA, Bank of England and members of the Working Group on Sterling Risk-Free Reference Rates on March 25th 2020. For all intents and purposes, it is business as usual for teams managing the LIBOR transition, with the UK being the furthest along in this process.

Businesses across the marketplace have been working extremely hard over the last few months to deal as best they can with the effects of COVID-19. Clearly, a paramount focus was on making sure all employees and their families were safe, as well as the adjustment and set-up of staff working from home. In tandem, at Tradeweb, we ensured that our platforms were available so our clients could reliably continue to access liquidity and execute their trades, especially during the periods of high volatility.

Regarding the impact of COVID-19 on the LIBOR transition timeline, the general feeling across industry is that the interest rates and LIBOR deadlines will still be there when we come out the other side of the pandemic. The focus on achieving LIBOR targets has not diminished and will remain a priority. In our view those who are prepared sooner rather than later will be in the best position to make the transition seamlessly. The key of course is clarity of those targets, although admittedly this is difficult to achieve in the current market due to the many unknowns. Nevertheless, it has been helpful to have been provided a certain level of exactitude on the LIBOR end-date by the regulators with some flexibility if things change. There is an assumption across the industry that dollar LIBOR will potentially be delayed. Looking back, the industry has historically been able to successfully adapt quite quickly if needs be, as seen by previous transitions such as the Derivatives Trading Obligation where certain instruments have been mandated to trade on electronic venues.

Indeed in terms of reference rate switch activity, from a Tradeweb perspective we are seeing a lot of activity before the switchover deadline date of end-Q3 2020. Usage of our portfolio reference rate switch tool has seen an increased take up in recent months. Developed in close collaboration with and in response to the needs of our clients, the tool helps to automatically switch out LIBOR into the new risk free reference rates including SONIA, EURIBOR, ESTR, SOFR USD and EONIA.  We evolved our existing NPV list trading tool to ease the transition to new risk free benchmarks, so clients can now easily move positions from one legacy reference rate to a new benchmark (e.g. GBP LIBOR to SONIA) in a single competitive NPV list.

Most of this switching activity is happening in products linked to Sterling LIBOR, growing liquidity in swaps referenced to SONIA (which uses the rate paid by banks on overnight funds). In fact, we continue to see meaningful growth in this activity.

What will be important is eventually achieving comparable sterling LIBOR and sterling SONIA forward-looking term rates. These volatile times have shown that when only relying on the central limit order books the pricing is not always there, as was illustrated recently when the dollar ICE swap rate failed to publish any of the 13 dollar maturities during March. Our priority should be about setting up alternatives for pricing so people can better understand the impacts of the different approaches and have more confidence in the switching choices open to them. As regulatory focus is unlikely to wane, it would be advisable to switch sooner rather than later, even if interim deadlines are being deferred.

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