Regulators may be reasonably happy with the progress being made on alternative reference rates to Libor, but the need to clarify exactly what will happen to instruments referencing Libor once the benchmark no longer exists is becoming hard to ignore.
This issue underscores the uphill battle that they face in replacing Libor: issuers and investors still like it.
Much has been made of the $170 trillion of derivative contracts that are linked to Libor, even though many of these will roll off long before the benchmark is due to cease in 2021.
However, in June the Bank of England’s financial policy committee noted that the stock of Libor-linked sterling derivatives maturing beyond 2021 was continuing to grow.
There are also $864 billion dollar-denominated floating-rate notes outstanding that reference Libor and mature after 2021. What happens to investors in them after this date is a big question.
It is a problem the regulators are acutely alive to. Issuers and investors, however, not so much.
Risks
In September, the UK’s Prudential Regulation Authority and Financial Conduct Authority (FCA) wrote to around 30 of the country’s largest firms giving them a deadline of December 14 to submit detailed and board-approved analysis of the Libor-related risks they are running.
