We are only five short months away from the final sunset date for US LIBOR – June 30, 2023. It is hard to believe that this moment, which the market has been preparing for, is finally becoming a reality. But is it really?
According to the swap review by ISDA covering the week ending on Dec 9th, 62% of the swap trading activity in the US referenced SOFR as a benchmark. The dominance of SOFR seems to finally be established, though 38% of the market still trades LIBOR or other non-SOFR alternatives (Annex 1). By year-end, however, ISDA acknowledged that the traded volumes for vanilla interest rate swaps year-over-year have decreased by 10% (traded notional) and 15% (change in trade count), in other words, market liquidity has somewhat decreased. (Annex 2).
Annex 1
Based on the above statistics, one could have hoped that 2022 should have been the epilogue of a very long book. Alas, this is far from being “fait accompli.” In fact, the transition is far from over, especially for some of the USD denominated loans. Here we can distinguish three affected types of loans:
- Pre-2018 vintage loans with “non-representative benchmark” trigger;
- Post-2018 vintage loans with a fallback substitute benchmark, but no “non-representative benchmark” trigger, and
- Loans with a fallback benchmark and a “non-representative benchmark trigger.”
The above became a very important differentiation after the Financial Conduct Authority’s (FCA) November announcement that it will compel the ICE Benchmark Administration (IBA) to continue publishing a “non-representative” Synthetic USD LIBOR with tenors of 1-m, 3-m and 6-month from July 1st 2023 through September 30, 2024.
Annex 2
So, what is a synthetic LIBOR? Essentially, it’s a rate which will be based on CME Term SOFR adjusted for the respective ISDA Fallback tenor spread.
Bloomberg has developed a comprehensive suite of solutions to support clients globally on their LIBOR transition efforts. Please contact your sales representative or a member of the Bloomberg team to:
- Help clients with the LIBOR transition process and available replacement benchmarks;
- Discuss the differences between various SOFR variant conventions and how these impact valuations, liquidity and market transparency;
- Review Fallback language and respective Fallback benchmarks and credit adjustments;
- Assist with modeling and pricing derivatives based on LIBOR replacements.
Annex 3
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