LIBOR –THE END IS NEAR
PREPARING FOR 2022: What you need to know about LIBOR transition?
Since its formalization in 1986, the London Interbank Offered Rate (LIBOR) has been providing financial institutions with benchmarks for setting interest rates. However, LIBOR is being replaced and shall ultimately phase out by the end of 2021 for some settings and by 30 June 2023 for all remaining settings, due to changes in United Kindom regulations. The “LIBOR transition” will encompass the movement of the financial markets away from using LIBOR as the interest rate benchmark to using alternative benchmark rates.
Why is it being phased out?
Since the financial crisis in 2007/2008, LIBOR is no longer sustainable and has put its future viability in doubt. Interbank lending and borrowing started to decrease as banks searched for other alternatives to acquire financing. With inaccurate reporting of interest rates by some banks to Intercontinental Exchange London Interbank Offered Rate (ICE),LIBOR became vulnerable to rate manipulation and hence financial participants’ trust eroded.
LIBOR –THE END IS NEAR – Counting down to end 2021
When will LIBOR be phased out?
Immediately after 31 December 2021, all LIBOR settings will be phased out.
- Immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc, and Japanese yen settings, and the 1-week and 2-month US dollar settings.
- Immediately after 30 June 2023, in the case of the remaining US dollar settings. The sole purpose of this extension is to deal with trickier historical transactions in US LIBOR settings. Additionally,
HEAD OF TREASURY
BRINGING DOWN THE CURTAIN ON THE WORLD’S MOST IMPORTANT NUMBER – THE LONDON INTERBANK OFFERED RATE (“LIBOR”)
With more than $400 trillion worth of contracts related to the London Interbank Offered Rate (“LIBOR”), the task to replace it, is no less decisive. Loans, derivatives and all sorts of exotic products erstwhile pinned to LIBOR will be now priced using an alternative benchmark. This will in turn have a broader impact on IT systems, contract modifications, accounting treatments and valuations which will also need to be managed. At ABC Banking Corporation, we have already kick-started the transition process and the bank is getting ready to shift to the new alternative benchmark by the end of 2021.