Monday, 25 January, 2021
BoA- Libor update
BoA- Libor update
This Monday (25 January), will see ISDA’s IBOR Fallbacks Supplement and Protocols formally come into effect, with all new derivatives that reference the definitions adopting the fallbacks. Some have suggested that we may see these fallbacks triggered immediately (or almost immediately) thereafter, fixing Libor-Sonia spread adjustments. Although possible, BoA think this unlikely.
The “permanent cessation trigger” event the market is waiting for is the IBA’s determination following the conclusion of its consultation into terminating GBP, EUR, CHF and JPY Libor benchmarks on 31 December 2021. It is also running two separate USD Libor consultations. BoA continue to think it likely all conclusions will be published simultaneously sometime in Q1. They think the authorities will see value in aligning determinations to effect a smooth transition (even though the formal end-dates for USD Libors will be later).
An issue which might be a trigger timing consideration, as far as the UK is concerned, is the Financial Services Bill currently making its way through the UK Parliament. If enacted, this will give the FCA additional powers to resolve so-called “tough legacy” issues with Libor’s demise. Progress thus far has been smooth, with the Bill getting its second reading in the House of Lords next Thursday, 28 January, having already cleared the Commons. The authorities may see some value in having these powers in place when the trigger event occurs, if they are confident in a swift passage.
As was the case in December, by BoA’s calculations, the forward surfaces of the different GBP bases look fairly priced in the event that fallbacks are triggered by the end of January. Any slippage in the timing and market pricing for the spreads starts to look a little wide to them.
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