As we move into the last nine months of transition away from sterling LIBOR, the regulators have written a ‘Dear CEO letter’ to CEOs of UK regulated firms
The process to transition linear derivatives (FRAs, Swaps) to a new RFR rate is now well understood. The issue of the transition of non-linear interest rate products, like options, is slightly more complicated. We can recognise this by observing that option prices are driven by more factors than just the underlying rate. For vanilla options, there are three main factors that drive the price, all of which will affect the fair transition process.
The Financial Conduct Authority (FCA) today formally announced the future cessation or loss of representativeness of the 35 LIBOR benchmark settings currently published by the ICE Benchmark Administration (IBA), which is regulated by the FCA.
Andrew Hauser, Executive Director for Markets, spoke at the recent Risk.net LIBOR Telethon. He said that following the announcements of recent weeks and subject to the ICE Benchmark Administration’s consultations, there can be little doubt that the LIBOR panels for sterling, yen, Swiss franc, euro and the less heavily traded dollar tenors will cease at the end of 2021.
ISDA has recently published its proposed IBOR transition to adjusted fallback risk-free rates (RFR’s) for the derivatives markets in the form of a new Supplement and a Protocol.
In summary, LIBOR’s days are numbered and conversion to the new benchmarks, like SONIA, is a necessity - this will inevitably and unavoidably bring some challenges for corporates, but there is plenty of skilled assistance available to be called upon as the choppy waters are navigated and the calmer SONIA waters can be reached.
