In July last year, Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA), announced that by the end of 2021, the FCA would no longer seek to persuade or compel panel banks to contribute to the London Interbank Offered Rate (LIBOR).
One year later, Andrew Bailey, US regulators and the Financial Stability Board released statements that sent the strongest signal yet on the need for firms to abandon LIBOR and plan for transition to alternative risk free rates (RFRs) - see our blog on these developments.
For transition to succeed, RFR markets need to be sufficiently liquid. Progress has been made, but regulators are keen for firms to start moving new contracts to RFRs as soon as possible. In the US, the selected RFR is the Secured Overnight Financing Rate (SOFR) and in the UK it is the reformed Sterling Overnight Average Index (SONIA) — both of which started being published in April this year.
As Andrew Bailey noted in July, SOFR futures "are off to a faster start than the start to eurodollar futures" and, on average, there is already about "US$5 billion in daily volume of trading, with open interest recently reaching over 12 thousand contracts"; furthermore, at the end of June, SONIA-referencing Overnight Index Swaps had an 18% share of the overall cleared sterling interest rate swaps market on a duration adjusted basis.
Firms need to monitor market developments closely and consider the commercial and strategic implications of transition — for example, whether they want to position themselves as a "first mover" — alongside the significant operational impact. More generally, as LIBOR alternatives gain liquidity, regulatory pressure for a swift transition will grow.
The heir presumptive to dollar Libor is gaining traction with debt issuers and banks may be ready to sell floating-rate notes linked to it within months. That’s the view of Toronto-Dominion Bank, which was involved with managing the first two bonds ever tied to the new secured overnight financing rate. Those note sales, which both took place within the past month, raised $6 billion for the government sponsored enterprise Fannie Mae and $1 billion for the World Bank.