The benchmark LIBOR, the reference rate for trillions of dollars of financial transactions, will be phased out at the end of 2021. Financial markets were given fair warning and have had time to prepare, with much work completed to facilitate the shift to alternative rates, such as risk-free rates. As the end nears, what more needs to be done?
Secured Overnight Financing Rate (SOFR)
By the end of 2021, LIBOR, the reference rate for tens of millions of financial contracts worldwide, will be replaced by SOFR and other “risk-free” replacement interest rates. BNY Mellon’s Joon Kim, Global Head of Trade Finance Product and Portfolio Management, Treasury Services, explains the impact that this move away from LIBOR will have on the trade finance market and discusses how banks can prepare to navigate this change while continuing to provide a smooth service to their trade finance clients.
For many treasuries, LIBOR (London Interbank Offered Rate) is one of their most critical benchmarks. Together with the exchange rates of major currencies it is an essential piece of data, underpinning contracts worth trillions of dollars. This long-standing centrality of LIBOR is why well-publicised global moves to end it are giving corporate treasurers and their teams major data headaches.
Transitioning from the London Interbank Offered Rate to the risk-free rate alternatives such as SONIA and SOFR was at one time a recommendation but is becoming a requirement, as the FCA’s LIBOR support will cease at the end of 2021. Transitions spell challenge, and this is true of the bond market as it faces LIBOR’s demise. What are some potential solutions that bond issuers should consider, especially for legacy bonds?
The death knell for the global benchmark interest rate LIBOR has rung, and the impact of its demise will be widely felt. The time to prepare for the switch to alternative risk-free rates has arrived; the back book will need to be transitioned, and products based on the new rates will need to be launched. What are the three main risks during this period, and what is the major opportunity?