A growing chasm between IBOR and its Replacement Rates

Recently, the gap between IBOR rates and the rates intended to replace them have widened. The new ‘Risk-Free Rates’ (RFRs) are, as the name suggests, (mostly) risk-free, whereas IBOR rates (by design) contain information about bank credit risk. In normal times, this spread is small, but in times of stress the gap between these two benchmarks widens.

IBOR SOFR spread graph.png

SOFR (Secured Overnight Financing Rate) is the US Risk Free Rate that is due to replace USD Libor.

This growing chasm triggered by the coronavirus pandemic is relevant as IBOR rates are due to transition to RFRs by 31st December 2021. This transformation will be done with the derivatives market (and probably loans and bonds too) calculating a median spread from long-term data. Therefore, the reliance on historical trends will produce a number which is lower than the current market spread. Consequently, this could mean institutions migrating from Libor to SOFR will see their P&L negatively impacted.

Start planning now

Banks:

  • Have you assessed how IBOR transition will affect your asset and liability management?

Corporates:

  • Have you started talking to your banks about IBOR transition and assessing the expected impact on your IBOR-linked loans?

FMCR is a specialised technical consultancy and our team have extensive experience in providing IBOR services across a broad range of products and business areas, including Trading, Sales, Risk, Technical Training and Operations.



FX, Trading, Risk ManagementMark TaylorFX, trading, Hedging, Risk Management