Changing the world’s most important number

For more than three decades, LIBOR has been integrated in financial markets, serving as the benchmark for borrowings, loans and derivative contracts. LIBOR has hence been called the “world’s most important number” as it is hardwired in all financial activities, such as treasury, risk management, accounting including hedge accounting, valuation and commercial contracts. Following the global financial crisis, regulators discovered that the banks entrusted to set the rates underpinning hundreds of trillions of dollars of financial assets had been manipulating them to their advantage, raising questions about the future sustainability of LIBOR).

In July 2017, the Financial Conduct Authority (FCA), UK declared that after 2021 it would no longer compel panel banks to submit the rates which is required to calculate Libor. In March 2021, FCA further announced the timing for the cessation or loss of representativeness of all 35 LIBOR settings at once, giving firms a clear set of deadlines across all currencies and tenors. FCA issued that all seven tenors for both euro and Swiss franc LIBOR, overnight, one-week, two-month and 12-month sterling LIBOR, spot next, one-week, two-month and 12-month yen LIBOR and one-week and two-month US dollar LIBOR will permanently cease immediately after December 31, 2021. Overnight and 12-month US dollar LIBOR settings publication will cease immediately after June 30, 2023.

The transition out of LIBOR will lead many products to switch to alternate Risk-Free Rates (RFR). This complex journey of switching from LIBOR to RFR may cause significant market disruption, as a forward-looking LIBOR and backwards-looking RFRs create an economic value transfer problem in a post-LIBOR world.

In this context, in 2019, we had issued a publication that gave an overview of the transition process, its impact on businesses and the RFRs available for adoption. We have now issued our publication that is a follow on of the previous publication. This publication provides a technical overview of the challenges ahead of the transition and in particular related to risk management and accounting domain. We have articulated as to how the whole transition journey will require significant efforts from all the stakeholders, across market bodies, regulators, governmental agencies and financial entities.

Links to both the publications are given below:

  • Alternatives to LIBOR – transition to risk free rates
  • Changing the world’s most important number

Alternatives to LIBOR - transition to risk free rates

Currently, LIBOR underpins USD350 trillion worth of financial contracts. By the end of 2021, LIBOR will be replaced by new risk free rates as the benchmark rates. The magnitude alone means that banks, financial institutions and corporations must retool their employees and clients, rethink their strategies and review their infrastructure.  This marks one of the biggest structural changes in the financial world which will have major consequences for the functioning of banks, financial institutions and corporations with respect to financial risk management, regulatory and legal compliance, operations and accounting. In this thought leadership, we have examined the mechanics of the transition, its potential effect on banks, financial institutions and corporations and the way forward to pro-actively address the transition.