Question

Conduct research on the replacement of LIBOR. Write an essay to discuss your findings.

Answer 1

The London Interbank Offered Rate (LIBOR) is the reference interest rate for tens of millions of contracts worth more than USD 240 trillion, ranging from complex derivatives to residential mortgages. LIBOR is also hardwired into all manner of financial activity, such as risk, valuation, performance modelling and commercial contracts. It has been called the “world’s most important number”.

But however in 2017 the UK’s Financial Conduct Authority (FCA) announced that after 2021 it would no longer persuade or compel panel banks to submit the rates required to calculate LIBOR. Our report looks at the implications introducing different LIBOR replacements could have for financial firms, and outlines why it’s wise to start planning now.

Publication of LIBOR rates will not necessarily end after 2021. Nothing prevents banks from continuing to submit the relevant data and ICE Benchmark Administration from publishing the rates.

The transition from LIBOR will bring considerable costs and risks for financial firms. Since the proposed alternative rates are calculated differently, payments under contracts referencing the new rates will differ from those referencing LIBOR. The transition will change firms’ market risk profiles, requiring changes to risk models, valuation tools, product design and hedging strategies.

Renegotiating a large volume of contracts would be difficult, especially when one party has a contractual right to a windfall gain. If contracts are left to convert to fall-back provisions if LIBOR becomes unavailable, a vast number of price changes would occur in a short period. The associated financial, customer and operational impacts would be difficult to manage.Financial firms will also face a serious communication challenge with retail customers. For example, most variable rate mortgage customers in the US may understand that their rate is LIBOR+200 basis points (or similar) but have little understanding of LIBOR itself. Unless appropriately communicated, they are likely to think that a proposed alternative rate of the Secured Overnight Financing Rate (SOFR) +230 basis points is a worse deal, even if SOFR is on average 30 basis points lower than LIBOR

please refer the some of the currencies have the possibilities analysed.

Currency	Reference rate	Proposed alternative rate	Features	Forum
USD	USD LIBOR*	SOFR (Secured Overnight Financing Rate)	Secured, overnight	The Alternative Reference Rates Committee
EUR	EUR LIBOR Eonia	€STR (Euro Short-Term Rate)**	Unsecured, overnight	Working group on euro risk-free rates
CHF	CHF LIBOR	SARON (Swiss Average Rate Overnight)	Secured, overnight	The National Working Group on Swiss Franc Reference Rates
JPY	JPY LIBOR TIBOR	TONAR (Tokyo Overnight Average Rate)	Unsecured, overnight	Study Group on Risk-Free Reference Rates