Grygo is the chief content officer for FTF & FTF News.
Some financial services firms are taking their sweet time to transition away from the scandal-ridden London Inter-bank Offered Rate (LIBOR) benchmark to the relatively new Secured Overnight Finance Rate (SOFR), according to a new report from consultancy Duff & Phelps.
Duff & Phelps last month released the results of a survey that finds nearly half of the financial services firms responding have not yet put a LIBOR transition plan in place.
That bit of troubling news is actually an improvement.
The report finds that while “50 percent of organizations still do not have a firm LIBOR transition plan in place” compared to similar survey results from September 2020 “the [new] results show that the overall percentage of firms without a plan has improved from 65 percent in September, to 50 percent in March.”
The latest survey also shows that “the number of respondents with plans to complete their transition before the December 31 deadline also improved from 30 percent to 45 percent.”
But, Marcus Morton, managing director in the Valuation Advisory practice for Duff & Phelps, says in a statement that while there are signs of improvement “other responses in the survey revealed that over 50 percent of respondents from financial services firms had not set a date to cease new LIBOR-linked issuance. In addition, 5 percent expected to be unable to meet the December 31 deadline which clearly shows there is much more work to do.”
Some firms responding to the survey are definitely not on track to be ready by the end of this year while other respondents (14 percent) have not yet begun their transition.
So, the actual lack of LIBOR replacement readiness is a concern as “34 percent of financial institutions stated that they were on track to be ready by the end of 2021, while 14 percent said that they would not be ready until at least Q1 2022,” Morton says. “This creates a wide array of where organizations stand in terms of when they will complete the transition away from LIBOR.”
That divergence may get more complicated as more firms consider using benchmarks competing against SOFR.
This is exemplified by Bank of America Corp. and JPMorgan Chase & Co., which recently “struck the first swaps trade tied to the Bloomberg Short Term Bank Yield index [BSBY] Friday, as Wall Street tests new benchmarks meant to help replace Libor,” according to a Bloomberg News report, dated May 3.
“The banks entered into a $250 million one-year basis swap with one side tied to BSBY, as the reference rate is known. The benchmark is constructed using aggregated and anonymized data based on transactions of commercial paper, certificates of deposit, U.S. dollar bank deposits and short-term bank bond trades, reflecting banks’ marginal funding costs. The other side of the swap is linked to the Secured Overnight Financing Rate,” according to the news story.
The story also notes that while many firms will turn to SOFR, other benchmarks will be in play such as Ameribor and ICE’s Bank Yield Index, in addition to proprietary BSBY, which is run by Bloomberg Index Services Ltd., a subsidiary of Bloomberg LP.
Despite the competition, most industry observers say that SOFR will still be the go-to benchmark for most industry participants.
For now, the only certain aspect of the LIBOR transition is that key U.S. regulators last year warned financial services firms not to use U.S. dollar (USD) LIBOR as a reference rate after Dec. 31, 2021 to avoid “consumer protection, litigation, and reputation risks.”
A Nov. 30, 2020 statement from the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) makes clear that they want firms to “transition away from USD LIBOR as soon as practicable … in order to facilitate an orderly — and safe and sound — LIBOR transition.”
The Duff & Phelps report can be found here: https://bit.ly/3emyV7G .
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