Industry On Track for Successful Libor Transition: Survey

Just as the ISDA Clarus risk-free rate adoptions indicator has demonstrated increased use of RFRs in place of Ibors, a new survey from Bloomberg finds that following the cessation or non-representation designation of sterling, Swiss and Japanese yen Libors at the end of 2021, financial services firms and corporations are largely on track for a successful transition.

These firms do, however, continue to navigate challenges related to operations, selection of alternative rates, and re-papering of existing contracts, the survey, which was conducted in February 2022 with 130 executives, finds.

According to the findings, the transition away from USD Libor is well underway, with 51% of firms no longer trading USD Libor-indexed products, including floating-rate notes, cross-currency swaps and Eurodollar futures. The delayed cessation for key USD Libor tenors until June 2023 has given firms additional time to make transition decisions around instruments such as non-centrally cleared USD Libor derivatives and tough legacy contracts.

In terms of how to handle non-centrally cleared derivatives, firms are split on strategy, the survey finds, with 28% indicating they are “not sure” how to address these derivatives before the cessation date, while a further 13% are still formulating a transition strategy. In addition, 20% are planning a mixture of re-papering to RFR equivalents and ISDA fallbacks, and 11% plan to let these derivatives run to maturity via the ISDA fallbacks.

Firms still have work to do in the transition away from Libor as 50% of respondents noted they are facing challenges related to systems and operational readiness, however, Bloomberg says it is clear that firms have made significant progress in their transition efforts as a similar June-August 2021 survey by the firm and the Professional Risk Managers’ International Association (PRMIA), found that 82% stated that systems and operational readiness were a hurdle at the time. The February 2022 data shows that the markets have likely learned from the sterling, Swiss Franc and Japanese yen Libor transition, Bloomberg says, and have moved forward in critical areas since the previous survey, but technical issues remain.

Repapering of existing transactions and agreements continues to be a challenge for 36% of respondents, while 45% indicated difficulty around choosing new alternative rates and conventions. Fifteen percent of those surveyed noted that customer outreach and negotiation remained a challenge.

The loan markets also continue to see the effects of the transition. For Libor-indexed term loans, 63% of firms indicated that they would continue the Libor transition process throughout 2022 and potentially into early 2023. Fifteen percent said their timeline for term loan transitions is “undecided,” and only 9% said their transition process was already complete.

“The data clearly shows that while the LIBOR transition is proceeding well overall, there is more work to be done,” says Jose Ribas, global head of risk and pricing solutions at Bloomberg. “We work closely with clients on their transition needs, and continue to provide reliable solutions, robust data and analytics, and the right tools to ensure their transition efforts can move forward smoothly.”