What Does Replacing LIBOR Mean for Financial Services Firms? The London Interbank Offered Rate (LIBOR), is a series of benchmark interest rates and has been called the “world’s most important number.” It is a globally recognized base rate for pricing loans, debt, and derivatives. As a key part of the financial services infrastructure, more than $240 trillion in products reference LIBOR. As its underlying transactions have diminished, regulators have announced a target date to replace LIBOR and begun the process of identifying and creating alternative rates. However, these rates are structurally different from LIBOR and it is unclear how existing products referencing it will change, and what new products will emerge. There is the possibility of significant customer and economic impact and uncertainty over how this will develop. While this may not be the final word, LIBOR’s ubiquity and potential sunset means it is time for institutions to focus on the LIBOR replacement timeline, a potentially very significant program of activity. Progress has been made for the transition, however there is still much to do. Our new report on replacing LIBOR outlines why the speed of change needs to accelerate ahead of 2021, before laying out actions for banks, regulators, and market infrastructure to take.
Oliver Wyman has published a report on the transition from LIBOR outlining why the speed of change must accelerate and detailing actions required by banks and regulators. The report argues that, while banks with large LIBOR-based exposure have used the time since the FCA’s announcement in 2017 to develop transition plans and begin the shift to RFRs, additional risks and complexities have emerged. It claims smaller banks with less exposure appear to be planning to rely predominantly on the existing fallback clauses in contracts—an approach regulators have explicitly advised against. The report states activity needs to shift from fallbacks to new product development and transition, and that this requires action by both market participants and regulators to avoid a major market disruption.