Progress report to the G20 on LIBOR transition issues: Recent developments, supervisory issues and next steps
The publication of the majority of LIBOR settings will cease in less than half a year
With the end of 2021 getting ever nearer, the transition away from LIBOR is a significant priority for the FSB. Continued engagement from the private sector, in conjunction with a significant commitment by the official sector, remains critical in order to support this transformational effort and to support financial stability on a sustainable basis.
The majority of LIBOR panels will cease at the end of the year, with a number of key US dollar settings continuing until end-June 2023 to support the rundown of legacy contracts only. With clear cessation dates now confirmed, progress needs to accelerate in order to achieve a timely transition. A smooth and orderly transition requires, at a minimum, steps to stop issuance of new products linked to LIBOR and efforts to transition away from LIBOR in legacy contracts wherever feasible.
Since its first benchmark transition report in 2014, the FSB has continually highlighted the structural post-financial crisis decline in liquidity in the interbank unsecured funding markets underpinning IBOR benchmarks. For example, published data show that LIBOR rates are largely reliant on judgement-based submission rather than on market transactions, demonstrating that interbank unsecured funding markets are an unsustainable reference source.
Loan markets remain an area of concern, with much new lending still linked to LIBOR, increasing the stock of contracts affected by its discontinuation. The report stresses that the tools necessary to complete the transition are currently available, and have been for some time. Market participants must not wait for the development of additional tools. Over the past several years, market participants have established mechanisms to use compounded risk-free rates (RFRs) not only in derivative markets, where use of RFRs was already common, but also in the cash markets. The FSB recognises that in some cases there may be a role for RFR-derived term rates.
On the international front, the report stresses that collaboration and coordination remain crucial in expediting transition progress. The FSB encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR, regardless of where those trades are booked or in which currency they are denominated.
The report points to the FSB’s recently updated Global Transition Roadmap, which, drawing on national working group recommendations, summarises the high-level steps firms will need to take now and over the course of 2021 to complete the transition away from LIBOR. Given the limited available until end-2021, the FSB strongly urges market participants to act now to complete the steps set out in the roadmap.