Everyone knows about the end of the London Interbank Offered Rate and other IBORs by the end of 2021 but is anyone doing anything about it? Apparently not. With support potentially ending for global IBORs in just three years, and with a broad array of market participants indicating some awareness of initiatives to adopt a new risk-free benchmark, only tiny percentage have done anything about it.
The International Swaps and Derivative Association, along with a handful of other major US and European trade associations, released results of their long anticipated “IBOR Global Benchmark Transition Report” in late June. IBOR refers to the Interbank Offered Rates worldwide, with Libor as the dominant benchmark rate for floating-rate debt.
The report, derived from a survey of primarily banking institutions and institutional investors, asset managers, as well as a reasonable contingent of multinational corporates, found that 87% of respondents are concerned about their exposure to the IBORs. Corporates by far made up the largest percentage of institutions unconcerned about their exposure to IBORS, at 29%, followed by finance end users at 18%, and commercial and investment banks at 6%.
In addition, most are familiar with the work of the various working groups to establish the risk-free rate (RFR) replacements, which include the Secured Overnight Funding Rate (SOFR) in the US, and Sterling Overnight Index Average rate (SONIA) in the UK.
The survey indicates respondents are gearing up for the transition, given 76% have at least started internal discussions about it. However, only 11% of respondents have allocated budget to the initiative and 12% have developed a preliminary project plan, while nearly a quarter of respondents have yet to initiate a program to support the transition. This is the case, the report’s authors note, despite survey participants saying they may have been more aware of the transition to RFRs more than the market as a whole, given its “core” consisted of trade-association members, and 30% are members of RFR working groups.
NeuGroup members’ responses to queries by Bloomberg executives leading a session on the issue at a late May meeting suggested most corporates fall in the quartile that has yet to initiate a program. Half of the 20 corporate attendees acknowledged that their companies held debt or derivatives maturing past 2021, but none mentioned any definitive plans to prepare for the transition.
In the ISDA survey, 25% of respondents said they did not know what would happen to their contracts if the reference IBOR ceased to exist, and 21% believed existing contractual fallbacks could ensure the trade/position would continue to function as intended—an unlikely outcome. Corporates likely populate those percentages, given the survey also found that most corporate respondents, 70%, have done nothing so far to prepare for the transition. The remaining 30% have initiated internal discussions, the lowest percentage among other market participants. Unsurprisingly, infrastructure providers, who no doubt view the transition to risk-free rates as a major business opportunity, have by far done the most to prepare.
“We have not assessed the impacts of this issue yet,” noted one corporate survey participant. “The first stage is to go out internally and make sure that each of our business units understand the issues.”
The survey found that roughly 86% of survey participants believe term reference rates are required, with corporates and financial end users having the strongest views.
“Survey participants noted that term rates are most critical for cash products, mortgages and securitizations, while derivatives could generally reference overnight rates,” according to the survey.