The LIBOR Policy Surge
On Monday -- the last day of November -- ten different policymakers in Asia, Europe and the United States took action to accelerate the transition away from LIBOR. No press release announced a cross-border policy coordination effort. Nor did the announcements reference each other. The actions each were slightly different from each other. The only thing they held in common was a strong push at the national level to accelerate the transition away from LIBOR.
PolicyScope Platform users became aware of activity on Monday morning, when the Banking lexicon (where LIBOR issues are registered in our Platform) showed unusually high activity both in general and for a Monday.
A quick look at the detailed moment chart showed the only activity in the last 24 hours had been on LIBOR transition issues.
Intraday activity then delivered cascading activity as different regions of the world opened for business. Our PolicyScope Risk Monitor readers received a quick analysis of global policy activity and likely coordination as markets opened for trading in Asia on December 1.
Even with shifts in certain implementation deadlines (see below) no doubt exists that policymakers around the world continue to intensify their commitment to this policy shift as articulated earlier this year by the Financial Stability Board and the G20, as the time series data below illustrates:
The specific actions taken within a roughly 18 hour window (listed in roughly chronological order):
Australia: ASIC issued regulatory guidelines spelling out its expectations regarding risk management for conduct risk regarding the LIBOR transition.
Bank of Japan: Released a summary of feedback received from an early consultation regarding the benchmark transition. Less than 30 entities submitted formal comments, the majority of which largely supported the proposal that policymakers first work on term reference rates and overnight compounding risk free rates, followed by committee-recommended rates, the ISDA fall backs, and rates suggested by issuers.
European Parliament and European Council: Announced agreement on their amendments to the Benchmarks Regulation that will authorize the European Commission to designate a replacement for LIBOR. They also agreed to permit EU financial institutions to use "third country" benchmarks until 31 December 2023. This timing shift sets up a conflict with the UK's deadline of 2025.
European Commission: Issued a statement welcoming the agreement between the Council and the Parliament.
Financial Conduct Authority (UK): Issued a statement welcoming the next phase of the LIBOR transition (proposals by the LIBOR Administrator, due in December) and pledging to work closely with US regulators regarding USD LIBOR contracts specifically.
USA: Federal Reserve, OCC, FDIC together + Federal Reserve solo: Issued a joint statement not only supporting the extended deadline for legacy contracts but also making clear that writing USD LIBOR after December 2020 will constitute a safety and soundness issue. The move is intended to serve as a red flag for compliance officers. The next step will be enforcement actions and fines during 2021 if/when they find contracts being written that reference USD LIBOR. U.S. policymakers also chose a different end date (June 2023) from the UK (2025) and the EU (December 2023).
Those that saw the big picture on Monday night are already thinking strategically about the implications regarding the LIBOR transition. Financial firms doing business in multiple jurisdictions -- and their compliance officers -- who use our PolicyScope Platform or who subscribe to our Risk Monitor are already thinking concretely about their next steps. LIBOR-related policy activity will continue to escalate as December 2021 approaches, with readily identifiable inflection points already visible within the next 6 months.
The PolicyScope Platform and companion Risk Monitor help you get ahead of the momentum, facilitating your ability to acquire data-driven insights that support better decisions. Our APIs can deliver customized widgets, dashboards and alerting functions directly to your desktop or cloud-based platform.